In a time where almost everybody in this country needs a practical and concrete voices on how to solve the country’s mounting problems derived from the current economic crisis, the voice of popular economist, Dr Sri Mulyani Indrawati (Jakarta Post 22 /2) comes as a bit of a dampened, yet a very useful one that often one forget to realize it in the first place. She shrewdly reiterated in her comment on conversion rate that, I quote, " uncertainty may affect the conversion rate’s development because implementation of the full reform measures cannot guarantee the achievement of the target…the fact show implementation of economic reforms and the situation of dollar supply and demand contribute only about 70 percent to the exchange rate development…(the rest) is determined by the subjective perceptions of market players". Fair enough. For all we know that economist, like her and myself, are known as an expert who can predict tomorrow what’s not happening according to what they’re predicting to be happening today. It suggests excitements and challenge, where, up to the extent where Karl Popper’s ideas being translated by financier George Soros into a kind of skepticism, that the greatest danger to our freedom is the conviction that we can possess rational certainty. Should we or should we not embrace this idea is certainly beyond the control of even the best economist on earth. What to do, then? What is the relevance to the current crises? One way of looking at the issues, I think, can not be separated from a ‘big wave’ in which the future direction of it currently a hot debate that is: globalization’s discourse, the crises affected countries in the world, and some ideas advocated on how best to deal with the idea of uncertainty which lingers in the world economy and affecting every single corner of our daily modern life.
Globalization: a discourse.
Start with this discourse and then you might find how the interconnectedness of the global economy intensified from time to time and affected every single national economies differently, up to the point that discussing the prospect of any national economy will be seen as a yesterday’s thing. However, globalization has increased the vulnerability of domestic and international financial systems to potential shocks, including to shifts in market sentiment and to contagion effects from policy weaknesses in other countries. The answer to this challenge is manyfold and varies from one country to the other country. As we understand that this phenomena brings us the fact that there will be looser and winners arising from the increasing rate and pace of competition among nations especially in attracting foreign flow of funds and also a fierce battle to be more competitive. In current situation, the focus of attention is shifting from preserving or maintaining sustainability of growth, competitiveness, and so on, into a question of how best we can manage volatility in our economy caused primarily by a shock in financial sector. One way of dealing with this is reflected in measures advocated by the international monetary funds (IMF) to its member countries in crises.
In a way, globalization also brings us a picture that shows a superiority of the financial sector, often refereed to as ‘non-real’ or ‘non-production’ sector as opposed to the ‘real’ or ‘production’ sector. In an increasingly wired world and reduced transaction costs, the amount of daily transactions in the financial market across the globe surpassed and can only be met by years of activities in the production sector. And yet the real sector, things like: Dads go to work, factory’s Union meetings and all that, is obviously and increasingly prone to a movements in the non-real sector. And in the end of the tunnel, we don’t see the usual light, but instead, the endless debate concerning mostly about the root of causes of financial crises and the lessons to be learned from that. In other words, there has been a lot discussion of causality arising from the integration and interdependence of global economic activities. In shorter expression, globalization is a multifaceted fact that must be faced and challenge by every nation, government, society, ethnicity, culture, and most probably, corporations, big and small. But most of the explanations that have been put forward, I think are fairly unconvincing, in the sense that if you want to use the word ‘cause’, if "X" is a cause, then countries that have more of "X" are the countries that are going to have a crisis, and if you don’t have "X", you don’t have crisis. They are necessary and sufficient in some sense. The world is more complicated than that, but those are the things that you look for as determining factors.
Factors that cause the crisis? Well may be, it’s depends.
Experts from all over the world gathered in UN-IMF meeting Washington last week certainly overwhelmed by the Asian crisis must eventually admit the fact that understanding, let alone resolving, the crisis is very difficult and they are forced to be in defense of ‘contingency’ approach, things like. It’s all depends on this, and in other countries...on that. Even the real effects within a country is differ quite substantially such as: eliminate the subsidy on energy might be a cure in some country nut certainly not in Texas where you can make it even more serious and escalating the crisis into a mega-crisis as it would have taken away the capital value from existing assets and really made them undermine them and weaken the financial system and weaken the remaining corporation before making the whole economy crippled as Wall Street would responded negatively.
In that widely covered UN-IMF meeting, several factors were believed to be the cause of the Asian crisis. But the root of the causes is not sufficiently explored. Guilermo Perry from the World Bank begin by saying that they have seen that Asian crisis is that financial vulnerability understood has a high likelihood of successful currency attack, but also, somehow related to the degree of severity of the crisis, we saw four aspects of vulnerability clearly present in most countries—a traditional external sustainability risk emerging because of appreciation of real exchange rates, slowdown in the rate of export growth, export receipts, and even higher rising current account deficits, together with a high liquidity or rollover risk, because several countries had a very high short-term debt to reserve ratio; also widespread currency mismatch risk, unhedged currency exposures, in some cases of the financial sector, in others, of corporate sectors; and finally, risks toward any interest rate hike or slowdown because the corporate sector was highly indebted and because the quality of loan performance was weak after a prolonged credit and asset price boom.
These interacted, one with another, in the sense that vulnerability to an attack rose when this emerging external sustainability risk indicated the possibility of a currency adjustment sometime in the future, but then the liquidity risk invited herd-like behavior, and speculators knew that the authorities had their hands tied, so to say, because they could not or did not want to implement a timely devaluation due to the fact that there were great currency mismatches in both real and financial sectors, and because they were not in a position to defend a currency with an interest rate hike given the high indebtedness of corporations and poor long portfolios. And still, these careful long, yet very technical, explanations may vary between countries. Surely this world is asking a question: can you make it easier for others to understand?
If you raise the concern of transparency, you look around and ask where was the last set of financial crises—in Scandinavia, countries that have a good reputation for transparency. So, well agree that transparency is a good thing, and we ought to do it, but it is obviously not going to be the solution. Exchange rate imbalances. Clearly, it is bad to have the wrong exchange rate, although how you know it’s wrong until after the crisis is often a problem. But if we look at Korea, there is no evidence of substantial changes in exchange rate in Korea. So yes, it was part of the problem perhaps in Thailand, but not in Korea, and if you want to look for a general theory, you are going to have trouble looking at that.
The same thing happened in the case of trade deficits. At the time that Korea’s problems became really bad in December, they were already running a $2 billion surplus per month. If you have this gigantic amount per month, how much more you need to defend any countries in the world from severe contagion effects of any forthcoming economic crisis?
So, Okay, we come to a conclusion that this world is full of uncertainties and future crises are very possible if not unavoidable. And it seems that we will be having future crises one after another. Therefore, efforts at mitigating the adverse effects of this quick-widespread crises is: how to make the crises less frequent and how to minimize the real effects of such shortcoming especially to those who are not, may be in their entirely life they don’t know what a Dollar notes look like; people who live in subsistence level in this information-age, and surely they are not to be held responsible whatsoever for they have nothing to do with sophisticated, albeit volatile and cold-blooded, labyrinth of modern global financial system. This last issue brings us to the conclusion and I will try to relate it with the idea from Karl Popper articulated by George Soros as mentioned in the earlier paragraphs.
It is true that man is full of fallacies. True that nobody can have an absolute power over future events. Also true if somebody who had that belief might tend to forced others to obey him or her which eventually made him a dictator. Just like a would-be dictator, such as the Young Hitler when he’s only just begun to consolidated his power, the scholars, the press, the students, did not do any sufficient efforts to prevented it from happening. They are as confused as the would-be dictators itself by saying: "I know you are wrong but we also not quite sure whether we are right or wrong". This created loophole for the dictators to convert themselves into a real dictator.
There are times, of course, suggesting us not to rely too heavily on our obsession on possessing rational certainty. But there are times also, we need to have a person/s that can stand firm, and we ought to support him, to say: "we know you are wrong. So hands-off".
Jakarta, 25 April 1998.