Hot money and cold sweat

Soedradjad Djiwandono was the governor of Indonesia's central bank from 1993 to 1998. So when the Asian crisis broke in mid-1997, he was the man in the hot seat.

Not for long, though. In February 1998, he was sacked by President Soeharto. Typically, he didn't hear about it from official sources. His wife heard rumours and phoned him. The confirmation came while she was still on the line""in the form of the man who brought the news, so to speak, from Aix to Ghaint.

After that, he waited for an appointment with the President. But he was not able to see Soeharto for a week.

Why he was sacked is interesting. The Asian crisis had hit Indonesia harder than anyone expected. In fact, the economy simply keeled over. In the process, 16 banks had had to be closed down. It seems three of those were partly owned by members of President Soeharto's family.

The hot political question was: had Djiwandono informed the President of this when the banks were liquidated? Rumours said he had not. Anyhow, the family sued Djiwandono: just why, it is not clear.

Djiwandono, when he met the President, asked him whether he believed the rumours. He seems to have received an ambiguous answer.

"From his reaction it was clear that he acknowledged that I had reported everything to him... however, he indirectly also admitted that he approved the legal suit against the minister for finance and myself as that was within their legal rights as citizens."

Djiwandono's explanation is that the President was annoyed because he had caused embarrassment to the family. "In my opinion, it was this untimely dismissal that indicated his intention to show the public his determination to punish the official for violating the unwritten rule about not embarrassing his family."

Natwar Singh may kindly note. He is not alone in this predicament.

On the crisis itself, Djiwandono has a rather different view from the one that is the received wisdom. By themselves, neither the external shock in the form of rapidly depreciating currencies in the region, nor domestic weaknesses, would have led to the crisis. But in combination, the two proved deadly.

As befits a central bank governor, Djiwandono also offers an alternative view of macroeconomic fundamentals, which until the crisis did not include the health of the banking system. Banks were microeconomics. But happily for future governors of central banks, that has now changed. The health of banks has become an important "fundamental".

But the mystery is why it took economists so long to figure this out. Up until the Second World War, lenders always assured themselves that the banks through whom they were lending were kosher.

Could Indonesia have avoided going to the IMF? Was there an alternative?

Djiwandono, perhaps a little reluctantly, concludes that there is none. Indeed, he even says that it is the best option, even if the IMF does need to improve its stabilisation programmes.

The one-size-for-all prescription doesn't work, nor does the insistence on immediate action without taking into account country specifics. Timing is critical. And Djiwandono says that although Indonesia was right to close down so many banks, the timing was all wrong. The resulting payments problem started a run on the remaining banks, led by rich depositors without deposit insurance.

Djiwandono makes another very important, and to my mind, the most critical point. This is that countries cope better with balance of payments crises if there is a quick change of government than if not. In Indonesia, it took two years for a new government to come in. In Korea and Thailand, a new one came within six months. India, it might be recalled, also got a new government in the middle of the crisis and it was able to cope with the crisis far better than the old one had.

Finally, the subject that is causing great excitement in India""full capital convertibility. Can financially immature countries afford it? Djiwandono doesn't quite answer this question. But I suspect he thinks it is a bad idea to focus only on the technicals and ignore the intangibles like trust and networks etcetera.

When people feel threatened that their money may vanish, they will take it and run. Americans, for example, should be feeling threatened""but aren't running away. The reason is confidence.

Can developing country governments confidently say that they inspire similar levels of confidence? Can India? Do pigs have wings?

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BANK INDONESIA AND THE CRISIS
AN INSIDER'S VIEW

J Soedradjad Djiwandono
Institute for South East Asian Studies, Singapore
Price: S$ 29.90; Pages: 289