Content area
Full Text
DOI: 10.1355/ae24-2i Financial Fragility and Instability in Indonesia. By Yasuyuki Matsumoto. Oxon: Routledge, 2007. Pp 258.
With the global conversation on financial stability taking flight around Basel II, Financial Fragility and Instability in Indonesia by veteran banker Yasuyuki Matsumoto offers an astute response to the ongoing debate. This timely volume on the causes of the 1997 financial crisis in Indonesia recentres our attention from the common macroeconomic focus on the role of the Central Bank to the importance of microeconomic activities of capitalists and their institutions. As the country most severely hit by the financial crisis, Indonesia serves as an unambiguous expression of the destructive effects of financial fragility and instability. Using four Indonesian conglomerates as case studies, Matsumoto argues that the seeds of the financial crisis were sown during the years of rapid economic development from 1994 to 1997. Unsound financial structures, sharp increases in corporate leverage, reliance on external debt, and availing of riskier and more complicated financial instruments by Indonesian corporate empires rendered the financial system profoundly unstable.
Matsumoto's approach of examining the microeconomic terrain of Indonesia's large conglomerates is a departure from conventional approaches that attribute the root causes of the financial crisis to shaky macroeconomic fundamentals. In explaining contagion of financial crises in Southeast Asia, many accounts ascribe the financial meltdown to ineffective supervision and lax regulatory enforcement actions in the banking sector. This study reveals that the emphasis on the role of domestic banks in the precipitation of the financial crisis in Indonesia is misplaced. Prior to 1997, domestic banks' access to offshore funds was under firm prudential control and their external debt levels were sustainable. In fact, this volume demonstrates that "the rapid accumulation of external debt by the Indonesian corporate sector during this period was more important than debt build-up in the state and/ or banking...