M. Chatib Basri, Former Indonesian Finance Minister, on the 2013 "Taper Tantrum"
Dr. M. Chatib Basri, former Minister of Finance and Chairman of the Investment Coordinating Board of Indonesia, shared his unique insights on the “taper tantrum” of 2013 - and described the Indonesian response to this shock, with clarity and wit - during a lunch and lecture at the Woodrow Wilson School on December 8th.
To give context to his role and response, Basri began by recounting that his term as Minister of Finance began exactly one day before Federal Reserve Chair Ben Bernanke made an announcement that was to have a major impact on the Indonesian economy. While testifying before Congress on May 22, 2013, Bernanke announced his intention to begin to taper off the Fed’s U.S. bond and mortgage backed securities buying program (quantitative easing). While this announcement was a response to positive news about the state of the recovering American economy, it had considerably negative consequences elsewhere in the world. The term “taper tantrum” was born to describe this fallout.
The financial sectors of five emerging economies were especially hard hit: They soon became known as the “Fragile Five.” Indonesia joined the ranks of India, Turkey, Brazil, and South Africa, all of which had large current account deficits and currencies that were especially vulnerable to bond market fluctuations. Indonesia’s economy in particular relied heavily on external financing.
The bulk of Basri’s lecture explained the structural features of the Indonesian economy and government and the difficult policy choices that allowed for its robust and successful recovery.
At the outset of his term, Basri’s major challenge was to convince his president to consider potentially unpopular policies that favored economic stability over growth just nine months before general elections. The odds of this were stacked in his favor, however, by a condition of Indonesian law that allows parliament to impeach the president if the country’s budget deficit rises beyond 3%. “Bad times make for good policies,” is a popular phrase Basri is known for repeating, as it encapsulates the fact that politicians loathe to take tough measures unless they are threatened by a major crisis, so crises present rare opportunities for reform.
Unlike other members of the fragile five, Indonesia took quick action. Key responses to the crisis included cutting the government’s fuel subsidy, tightening monetary policy, allowing the exchange rate to depreciate, opening up the import market to curb inflation, and creating tax incentives to stave off unemployment. These timely and painful policies had the desired effect of reducing the external imbalances and stabilizing the economy - with only a slight slowdown of economic growth.
Basri also emphasized clear and consistent communication as an important strategy for successful implementation of sound policies. The message, however, needed to be tailored to the different audiences: investors, the press, the general public and parliament. He described weekly conference calls with investors while implementing the changes described above and regular informal lectures during which he explained his vision and rationale to members of the press, as well as frequent testimonies before parliament. He also highlighted the importance of IMF meetings and G20 summits, which are especially crucial now when emerging market economists need be as prepared as possible to face the normalization of monetary policy in the U.S.
The lecture was followed by a lively Q&A session, and many students stayed behind to further discuss Basri’s ideas. Chuin Siang Bu, a second-year MPA student at the Woodrow Wilson School, was especially pleased to attend the lecture given his background in macroeonomics. “[Basri] did a great job of explaining the many linkages between the sectors and key players that influence fiscal and monetary policy,” he said. Chuin Siang had also attended a dinner with Basri the previous evening, and found him “a very energizing teacher, and also very eager to learn from us, which is a rare quality in such a prominent speaker.”