Recalling the cataclysmic impact of the Asian Financial Crisis on Indonesia in the late 1990s, it came as something of a surprise that Indonesia weathered the storm of the Global Financial Crisis so easily in 2008-09. We in Australia were pleasantly surprised to find that our economy also suffered very little from the GFC.
The explanations typically put forward to explain Australia’s good fortune focus on the role of the strong Chinese economy as a key export market, and on the fiscal stimulus policies implemented by the government in response to the seemingly impending crisis.
In Indonesia’s case, however, it seems clear that the attempt at fiscal stimulus had little impact, mainly because of the inability of the bureaucracy to increase spending quickly. Rather, the explanation has been found in Indonesia’s relatively low reliance on export demand—which, it is argued, meant that there was not much of a reduction in aggregate demand as a consequence of the GFC. Even at a superficial level this argument is somewhat implausible, because the decline in export demand was very large—even if smaller relative to GDP than in other countries.
Moreover, as Mark Baird and Monica Wihardja point out in their new Survey of recent developments, this view suffers from its failure to take into account changes in the level of imports. The national income accounts data show that net exports were rising at the relevant time, because imports were falling more rapidly than exports. It was this that set Indonesia apart from its neighbours.
It turns out that the same is true of Australia, as pointed out by Tony Makin in an article just published in The Australian newspaper: ‘… it was a dramatic turnaround in Australia’s trade balance that mainly offset falling private investment… not extra government spending, or household consumption assisted by federal cash handouts at the time’.
Another parallel between the Indonesian and Australian experiences with the GFC relates to exchange rate policy. In both cases the exchange rate was permitted to perform its function of signalling changes in external circumstances. Both currencies underwent large depreciations, which helped to increase net exports and to prevent currency speculation from running wild. After all, such speculation is driven by the expectation of depreciation: once depreciation has occurred, it is too late to speculate. Sound monetary policy subsequently in the case of both countries has seen their exchange rates recover to previous levels.
All of this calls into question the recent decision of Bank Indonesia to introduce limited controls on so-called hot money flows (imposing a minimum one month holding period on its own certificates, SBIs). The central bank handled monetary and exchange rate policy remarkably well at this time of upheaval, as discussed in an earlier Survey, and the results speak for themselves. It seems astonishing that BI simply does not realise that it already has all the ammunition it needs to deal with an imminent balance of payments crisis.