FINANCIAL LIBERALIZATION IN CHILE AND INDONESIA : A COMPARATIVE STUDY

KARMONO, MUDRAJAD KUNCORO, Spv.: Prof. Maxwell J Fry

2014 | Disertasi | S3 Economics

The major objective of this study is to scrutinize the similarities and differences between Chile and Indonesia in their various aspects of financial liberalization. First, we review the initial conditions facing each country on the eve of the reforms and the sequencing of reforms in each country. Second, to what extent the reforms have changed the financial sector will be discussed. The most crucial question would be addressed, then, is whether financial reforms influence the real economy. Furthermore, the impacts of financial liberalization on national saving and economic growth will be examined critically by using a simultaneous equation model and I3SLS (Iterative Three-Stage Least Square) method of estimation.

The study fids the following evidences. First, the sequencing and speed of the reforms have influenced the successful outcomes of the liberalization measures. Second, there is no doubt that the reforms have contributed to financial deepening. Third, in contrast to the earlier studies, the study demonstrates the channel of financial liberalization to economic growth is through quantity of investment rather than quality of investment. Fourth, the Granger-causality tests for Chile and Indonesia show: the "supply-leading" (finance-led growth) phenomenon has occurred in Chile; while Indonesia seems to support the "demand¬ following" (growth-led finance) phenomenon. Lastly, the "old" narrow concern for raising real interest rates to positive levels should be followed by a broader concern for improvements in the financial system as a whole and greater consistency between financial and macroeconomic policies.

What then is the nature of economic explanations? Insofar as these explanations consists of definite theories, what is the structure of these theories, and in particular, what is the relationship between assumptions and predictive implications in economic theories? If economists validate their theories by invoking factual evidence, is that evidence pertinent only to the predictive implications of theories, or to the assumptions of theories, or both? Besides, what is it that counts as factual evidence for economists? How is it that economic theories that purport to explain what is are also employed in almost identical form to demonstrate what ought to be? In other words, what exactly is the relationship between positive and nonnative economics or, in more old fashioned language, the relationship between economics as a science and political economy as an art?"

MARK BLAUGH, The Methodology of Economics or How Economists Explains, Cambridge University Press, Cambridge, 1980.
" ... existing Keynesian macro econometric models are incapable of providing reliable guidance in formulating monetary. fiscal, or other types of policy. This conclusion is based on the spectacular recent failures of these models, and in part on their lack of a sound theoretical or econometric basis. "

ROBERT E. LUCAS, JR. and THOMAS J. SARGENT (eds.), Rational Expectation and Econometric Practice, vol. 1 , University of Minnesota, Minneapolis, 1978, pp. 295-319.

The major objective of this study is to scrutinize the similarities and differences between Chile and Indonesia in their various aspects of financial liberalization. First, we review the initial conditions facing each country on the eve of the reforms and the sequencing of reforms in each country. Second, to what extent the reforms have changed the financial sector will be discussed. The most crucial question would be addressed, then, is whether financial reforms influence the real economy. Furthermore, the impacts of financial liberalization on national saving and economic growth will be examined critically by using a simultaneous equation model and I3SLS (Iterative Three-Stage Least Square) method of estimation.

The study fids the following evidences. First, the sequencing and speed of the reforms have influenced the successful outcomes of the liberalization measures. Second, there is no doubt that the reforms have contributed to financial deepening. Third, in contrast to the earlier studies, the study demonstrates the channel of financial liberalization to economic growth is through quantity of investment rather than quality of investment. Fourth, the Granger-causality tests for Chile and Indonesia show: the "supply-leading" (finance-led growth) phenomenon has occurred in Chile; while Indonesia seems to support the "demand¬ following" (growth-led finance) phenomenon. Lastly, the "old" narrow concern for raising real interest rates to positive levels should be followed by a broader concern for improvements in the financial system as a whole and greater consistency between financial and macroeconomic policies.

What then is the nature of economic explanations? Insofar as these explanations consists of definite theories, what is the structure of these theories, and in particular, what is the relationship between assumptions and predictive implications in economic theories? If economists validate their theories by invoking factual evidence, is that evidence pertinent only to the predictive implications of theories, or to the assumptions of theories, or both? Besides, what is it that counts as factual evidence for economists? How is it that economic theories that purport to explain what is are also employed in almost identical form to demonstrate what ought to be? In other words, what exactly is the relationship between positive and nonnative economics or, in more old fashioned language, the relationship between economics as a science and political economy as an art?"

MARK BLAUGH, The Methodology of Economics or How Economists Explains, Cambridge University Press, Cambridge, 1980.
" ... existing Keynesian macro econometric models are incapable of providing reliable guidance in formulating monetary. fiscal, or other types of policy. This conclusion is based on the spectacular recent failures of these models, and in part on their lack of a sound theoretical or econometric basis. "

ROBERT E. LUCAS, JR. and THOMAS J. SARGENT (eds.), Rational Expectation and Econometric Practice, vol. 1 , University of Minnesota, Minneapolis, 1978, pp. 295-319.

Kata Kunci : Liberalization, chile, indonesia, comparative study