Analyses of the nature of debtrelying on the theory of rational expectations conclude that the burden of public debt need not fall on future generations if the present one anticipates the higher taxes needed in future for debt servicing. However, there have been many instances where increases in budget deficits were followed by a decrease in the savings propensity of the private sector. Foreign exchange earnings also have to be set aside. The main problem for countries in an early stage of economic development is that, often, the borrowings are not productively employed resulting in c. Foreign lenders become increasingly reluctant to lend further amounts to a country which has been a net capital importer. This article puts forth, a methodology for testing a new theory of economic growth in Indonesia as it represents a case of faltering economic growth and financial instability resulting in a huge increase in foreign debt, depreciating currency and a dramatic increase in the percentage of population below the poverty line. The theory emphasizes on the key factors determining the success or failure of policies that change the underlying economic structures, leading to an intrinsic monitoring of over-borrowing.
Caprio
and Klingebiel (1999, 2003) have identified 117 systemic
banking crises (defined as the exhaustion of bank capital)
occurring in 93 countries since the late 1970s. Indonesia
appears to be one of the worst cases, where the 1997 Asian
crises halted a period of unprecedented growth. From May
1997 to May 2002, Bank Indonesia closed 70 banks and nationalized
13, of a total of 237. Non-performing loans for the banking
system were estimated at 65 to 75% of total loans at the
peak of the 1997 crisis decreasing to about 12% in February
2002. Fiscal costs were estimated at 55% of GDP, but financial
instability continued in 2005 with fraudulent lending at
the largest reconstructed state owned bank, Bank Mandiri,
and with the Bank Indonesia entering the market in May 2005
to support the currency. |
