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Dealing with Bank System Failure: Indonesia, 1997-2002

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  • Ross H McLeod

Abstract

The crisis recovery program in Indonesia has failed badly in relation to the two key objectives of development economics policy-making: efficiency and equity. The economy went into a very severe recession within a few months of the IMF appearing on the scene, and five years later output was still only at approximately the pre-crisis level. The collapse of the banking system and the associated bailout of depositors by the government has had the effect of imposing a loss on the general public, and the poor in particular, of the order of 40% of GDP. This paper describes the collapse of the banking system and the policies the government has followed in response to it, under advice from the IMF. It then goes on to propose an alternative scheme that might have been followed-and that could be followed in future banking crises-the twin objectives of which are to maintain the integrity of the payments system while avoiding inequitable wealth transfers that result from government bailouts of banks and their depositors.

Suggested Citation

  • Ross H McLeod, 2003. "Dealing with Bank System Failure: Indonesia, 1997-2002," Departmental Working Papers 2003-05, The Australian National University, Arndt-Corden Department of Economics.
    • Handle: RePEc:pas:papers:2003-05
    as

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    References listed on IDEAS

    as
    1. Ross McLeod, 2003. "Towards improved monetary policy in Indonesia," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 39(3), pages 303-324.
    2. Hadi Soesastro & M. Chatib Basri, 1998. "Survey of Recent Developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 34(1), pages 3-54.
    3. Colin Johnson, 1998. "Survey of Recent Developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 34(2), pages 3-59.
    4. Charles Enoch & Olivier Frecaut & Arto Kovanen, 2003. "Indonesia'S Banking Crisis: What Happened And What Did We Learn?," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 39(1), pages 75-92.
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    Cited by:

    1. Oktaviani, Rina & Sugema, Iman & Ratnawaty, Anny, 2003. "Bank Restructuring and its Implication on Indonesian Macro Economy and Agricultural Sector," 2003 Conference (47th), February 12-14, 2003, Fremantle, Australia 58194, Australian Agricultural and Resource Economics Society.

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    Keywords

    banking crisis; lender of last resort; deposit guarantee; payments system.;
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