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What sort of financial sector should Indonesia have?

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  • Stephen Grenville

Abstract

At the time of the 1997 Asian crisis, Indonesia's financial sector had serious weaknesses. This made it vulnerable to the key element of the crisis: massive reversal of foreign capital flows. Despite huge expenditures on restructuring, many of these weaknesses remain and the current strategy does not seem likely to overcome them. The alternative strategy explored here advocates the creation of 'savings banks', holding government bonds as their principal asset. With these safe assets, deposits in such institutions would be secure, even in the event of a major economic crisis. With this safe 'core', the rest of the financial system could develop on conventional lines (allowing removal of the current blanket guarantee, and making it more feasible to close banks without this causing a run on the system as a whole). The inherent risk to the taxpayer of another expensive bail-out would be greatly diminished.

Suggested Citation

  • Stephen Grenville, 2004. "What sort of financial sector should Indonesia have?," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 40(3), pages 307-327.
    • Handle: RePEc:taf:bindes:v:40:y:2004:i:3:p:307-327
    DOI: 10.1080/0007491042000231502
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    References listed on IDEAS

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    1. Ross McLeod, 2004. "Dealing with bank system failure: Indonesia, 1997-2003," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 40(1), pages 95-116.
    2. Ross McLeod, 2000. "Survey of Recent Developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 36(2), pages 5-41.
    3. David Cole & Betty Slade, 1998. "Why Has Indonesia's Financial Crisis Been so Bad?," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 34(2), pages 61-66.
    4. J. Soedradjad Djiwandono, 2004. "Liquidity support to banks during Indonesia's financial crisis," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 40(1), pages 59-75.
    5. Mr. Biaggio Bossone, 2001. "Should Banks Be Narrowed?," IMF Working Papers 2001/159, International Monetary Fund.
    6. Boorman, Jack & Lane, Timothy & Schulze-Ghattas, Marianne & Bulir, Ales & Ghosh, Atish R. & Hamann, Javier & Mourmouras, Alex & Phillips, Steven, 2000. "Managing financial crises: the experience in East Asia," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 1-67, December.
    7. Stephen Grenville, 2000. "Monetary Policy and the Exchange Rate During the Crisis," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 36(2), pages 43-60.
    8. Stephen Grenville, 2004. "The IMF and the Indonesian crisis," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 40(1), pages 77-94.
    9. Olivier Frecaut, 2004. "Indonesia's banking crisis: a new perspective on $50 billion of losses," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 40(1), pages 37-57.
    10. Anne Booth, 1999. "Survey of Recent Developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 35(3), pages 3-38.
    11. Stephen Grenville, 2000. "“Indonesian Monetary Policy”: A Comment," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 36(3), pages 65-70.
    12. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, vol. 19(1-2), pages 1-24.
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    Cited by:

    1. Stephen Grenville, 2010. "Central Banks and Capital Flows," Chapters, in: Masahiro Kawai & Mario B. Lamberte (ed.), Managing Capital Flows, chapter 3, Edward Elgar Publishing.
    2. Raghbendra Jha, 2004. "Macroeconomic stabilization and pro-poor budgetary policy in the globalized economy," CAMA Working Papers 2004-08, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    3. Aswicahyono, Haryo & Bird, Kelly & Hill, Hal, 2009. "Making Economic Policy in Weak, Democratic, Post-crisis States: An Indonesian Case Study," World Development, Elsevier, vol. 37(2), pages 354-370, February.

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