Institutions for Healthy Assets Market and Economy: A Retrospect for Indonesia before 1997

The financial market is a subset of assets market. Its efficiency is very important for economic development, functioning as a screening institution for investments. The property sector is another group, comprising urban land. Urbanization is unavoidable, but very important for developing countries, including Indonesia. The process needs huge amount of investment, both private and public. There are many choices, and the financial market should be capable to channel the funds to the best overall investments. It should avoid any unproductive investment, including speculation. Banking is the most important of the financial institutions in Indonesia, which is later complemented by the capital market. As a dominant financial intermediation from the society, the commercial banks should channel the funds to the highest productive sector, reflected by its rate of returns, both the ROI and the ROE. As a rule of thumb, the two indicators should be higher than the deposit rates or lending rates. They should also be higher than the implied return for undeveloped urban land. If not, there is inefficiency. The study of the two indicators on a number of firms in the Jakarta Capital Market and the calculation of the “implied ROI” for urban land show that it is higher for the second. It leads to the conclusion of the inefficiency of funds allocations, and the banking system has failed to screen the best investments, while the capital market does not satisfy the EMH. Why? The answer lies in the absence of adequate institution in the assets market, namely the lack of investors and society’s participation on financial supervision, wide availability of adequate information on comparative investment alternative, freedom from favoritism in the banking system, independent institution for the valuation of the assets market.