chapter  12
16 Pages

Lessons from Indonesia's crisis

The objective of this chapter is to review Indonesia's experience during the current crisis, with a view to suggesting policy changes that might prevent a repetition. High international mobility of capital is taken as given. The defeatist Mahathir-Krugman approach of imposing capital controls is not considered here, as it is obviously not a first-best policy. Many countries with open capital accounts have not experienced financial crises. Why were they not susceptible to the contagion? What is it about their economic policies that is better than those of countries like Indonesia? Unfortunately, the list is long, and one problem of analysing the crisis is that one can focus on virtually anything that Indonesia did not do well and blame it for the crisis. For example, some find the explanation in Indonesia's high degree of corruption. Alternatively, one can attribute blame to everything Indonesia does not do well. Neither approach is very helpful. It is easy to point out poorly designed economic policies; it is another to demonstrate convincingly that one in particular can be blamed for the crisis.