The Importance of Financial Liberalisation for Economic Growth: The Case of Indonesia

Abstract

Indonesia has been struggling to return to the levels of economic growth it achieved before the Asian financial crisis. The government has been working on more liberal investment policies to attract external finance, both through portfolio investment and direct investment, while also trying to control the risk premia that may be associated with financial liberalisation. This article examines the mechanisms of the policies to, among other things, improve access to finance and encourage productivity growth through more effective matching of capital with labour, as well as the use of global best practices. The potential gains for the Indonesian economy are shown using an extension of the Global Trade Analysis Project (GTAP) model that covers possible changes in the cost of capital. The results indicate that the Indonesian economy could benefit substantially if the government allows a short-term trade deficit.

Indonesia telah berusaha keras untuk bisa kembali kepada tingkat pertumbuhan ekonomi yang dicapainyainya sebelum krisis keuangan Asia. Pemerintah telah mengupayakan kebijakan investasi yang lebih terbuka untuk menarik pembiayaan asing, baik melalui investasi portofolio maupun modal langsung, sembari juga mencoba mengendalikan premi risiko yang mungkin datang bersama liberalisasi keuangan. Tulisan ini menelaah mekanisme bagaimana kebijakan-kebijakan tersebut, antara lain, memperbaiki akses finansial serta mendorong pertumbuhan produktivitas melalui upaya yang efektif mempertemukan modal dan pekerja, serta penggunaan praktik-praktik yang unggul di tingkat global. Keuntungan potensial bagi perekonomian Indonesia ditunjukkan melalui model GTAP dengan penyesuaian yang memungkinkan perubahan pada biaya modal. Hasil simulasi menunjukkan perekonomian Indonesia dapat meraih manfaat yang substansial jika pemerintah bisa menerima defisit perdagangan dalam jangka pendek.

Keywords:

• cost of capital
• financial liberalisation
• investment
• risk premia

JEL classifications:

• F17
• F21
• F32
• L60
• O53

Notes

1 Coordinated by the Center for Global Trade Analysis at Purdue University, GTAP is a global network of researchers and policymakers who analyse international policy issues.

2 IKR(r) is expressed as INVKERATIO(r) in the standard GTAP model. The variable name is changed in this article for convenience.

3 GNR(r) is GRNETRATIO(r) in the standard GTAP model.