What sort of financial sector should Indonesia have?

Stephen Grenville

    Research output: Contribution to journalArticle

    Abstract

    At the time of the 1997 Asian crisis, Indonesia's financial sector had serious weaknesses. This made it vulnerable to the key element of the crisis: massive reversal of foreign capital flows. Despite huge expenditures on restructuring, many of these weaknesses remain and the current strategy does not seem likely to overcome them. The alternative strategy explored here advocates the creation of 'savings banks', holding government bonds as their principal asset. With these safe assets, deposits in such institutions would be secure, even in the event of a major economic crisis. With this safe 'core', the rest of the financial system could develop on conventional lines (allowing removal of the current blanket guarantee, and making it more feasible to close banks without this causing a run on the system as a whole). The inherent risk to the taxpayer of another expensive bail-out would be greatly diminished.
    Original languageEnglish
    Pages (from-to)307-327
    JournalBulletin of Indonesian Economic Studies
    Volume40
    Issue number3
    DOIs
    Publication statusPublished - 2004

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