Closed Market Will Not Save Indonesia

The Asian crisis, particularly the continuing problems in Indonesia, have fuelled predictable claims that globalisation and open capital markets are villains in the piece.  These claims, such as those by David Ray (Less Openness Offers A Way Out, Opinion 22/5), typically misconstrue the nature of the capital markets in the afflicted countries, the reasons for corruption and the causes of events.

Indonesia did not have open capital markets and a floating exchange rate.  It had a "dirty" peg -- the rupiah was only allowed to move in a narrow range -- with tight controls over banking and direction of funds to favoured firms and industries, often on the basis of out-and-out corruption.

Why did this corruption flourish?  Precisely because of official controls.  Give officials discretionary powers with little effective oversight or accountability and corruption flourishes.  The solution is two-fold -- eliminate the discretionary powers and create democratic accountability.

Yes, there were large amounts of short-term capital.  But that was a consequence of official policy.  As prominent monetary economist, Sir Alan Walters, pointed out, during his visit to Melbourne as my guest, pegged exchange rates backed only by official decree and limited reserves invite people to restrict their investments into a country to short-term capital -- in order to minimise exposure to the inevitable devaluation.

So official policies were to blame twice over.  First, they encouraged investment to be of a short-term, highly liquid, nature.  Second, the existence of widespread, and unaccountable, official discretions generated massive corruption and encouraged investment in terms of political guarantees, rather than genuine commercial soundness.

Those, like Dr Ray, who argue for controlled capital markets are, in fact, arguing for the very arrangements which generated the corruption in the first place, and will continue to do so.

What Indonesia needs is open and transparent markets and political processes.  Democracy and freedom, in other words.  Not new forms of official discretions to be hawked in the market place of corruption.

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