One may wonder what a smart person does after reaching the peak of his/her career as a minister. The first guess is if he/she is a technocrat then he/she most of the times will go back to the academic world. Yes, Chatib Basri, the Indonesia's Minister of Finance 2013-14, went to Harvard Kennedy School right after he completed his assignment. Taking advantage of his experience as a decision maker, he wrote a research paper titled "The Fed's Tapering Talk: A Short Statement's Long Impact on Indonesia."
The paper mainly discusses
how Indonesia can release from Taper Tantrum (TT). TT is a phenomenon of capital outflow, exchange rate depreciation, and a tumbling financial sector in the emerging markets due to the Fed's plan to halt the Quantitative Easing (QE).
Indonesia and other emerging markets such as Brazil, India, South Africa, and Turkey enjoyed the impact of the Fed's policy of QE after the Global Financial Crisis 2008-09. Capital inflow, exchange rate appreciation, and an expansion of financial market were the important impacts. Therefore, the talk to reduce the QE policy caused a panic among emerging markets, known as TT. Apparently, different from the other four emerging countries, Indonesia could overcome the TT through several policies. Some were made by Basri as the Minister of Finance. In this paper, he shares five lessons learned from this TT period. First, investigate what pays the current account deficit. The risk is relatively high if portfolio investment, instead of export-oriented foreign investment, is the source of financing the current account deficit. Portfolio investment entails a risk of sudden capital outflow. Second, choose stability over economic growth. During the QE period, the government should tighten fiscal policy and the central bank should hold the rate of exchange rate appreciation. Taking these actions anticipate the discontinuation of QE policy. Third, do not rely on external financing. Instead, an economy should expand the domestic saving by deepening the financial market. Fourth, institutionalise reform before the crisis starts. Usually good policy measures are taken during bad times as politicians are not motivated for those measures during good times. Therefore, institutionalise those good measures beforehand so that they will have been applied even if the condition looks good. Five, urge a better global policy coordination. If the developing countries were better informed about the developed countries' policy plan, the former would hinder the negative impact of unclear information in the market.
Overall the paper is easy to read with its overflowing story from one of few decision makers in the country. It is a good paper to read to understand more about how to manage developing economy, particularly in its relation with global economic governance.
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