John A. Prasetio, Jakarta – A decade ago, almost without warning, the Asian economic crisis arrived to challenge the "East Asia Miracle" thesis of the World Bank. Indeed, in the spring of 1997, the Organization of Economic Cooperation and Development (OECD) predicted that East Asia could continue to average 7 percent annual growth for decades. Ratings on Asian debt by international agencies were rock solid, and financial analysts were extremely bullish on Asia.

Following the meltdown, some commentators were quick to reverse their earlier description of East Asian policies as market friendly, and identified crony capitalism, dubious business practices as well as poor corporate governance as being responsible for the crisis. Asian values, which were previously praised as the driver of the rapid growth in East Asia were also blamed as a source of critical weaknesses in governance.

By early 1999, however, as the contagion infected Russia and Brazil, the focus of analysis increasingly shifted to external factors, particularly the role of short term and speculative financial flows, as well as the herd behavior of fund managers.

Up to the first half of 1997, foreign banks aggressively increased their lending in Indonesia, Thailand and Malaysia, but in the second half of 1997, in a short span of time, they pulled out an estimated US$34 billion, almost 10 percent of the afflicted countries' GDPs.

Indeed, the IMF bailout packages are also said to have turned a market correction into a full blown meltdown. Not less than Joseph Stiglitz, former chief economist of the World Bank, had come to argue that IMF conditions for financial assistance were counterproductive, and it was a mistake to jack up interest rates in the crisis-hit countries, insofar as this strategy had pushed highly leveraged companies into bankruptcy, and triggered a massive capital exodus by terrified foreign lenders and investors. In addition, pushing the authorities to close faltering institutions had the impact of sparking panic and massive bank runs, instead of restoring investors' confidence.

The Susilo Bambang Yudhoyono-Jusuf Kalla administration, installed at the time Indonesia was on its way to recovery in 2004, has defined its agenda of moving Indonesia to the new space of a stable nation, united and peaceful, with a pro-growth, pro-job and pro-poor economic strategy. And yet today, Indonesia has not completely abandoned its old, pre-crisis world of high cost economy with red tape, complex regulations and incoherent policies.

Despite policy reform packages which have begun to gain momentum, Indonesia is not quite yet inside the new zone of strong governance, increased competitiveness and robust economic fundamentals. While the rule of man has been swept away, the rule of law has yet to become firmly established. While the banking sector has been strongly capitalized, and corporations have improved their balance sheets, access to credit has become profoundly difficult.

Following the crisis, the regulatory environment provided disincentives for the banking sector to lend "recklessly." Banks have also become more conscious of not getting into a "moral hazard" situation, and thus the willingness of commercial banks to aggressively book loans has become very much restricted.

In fact, banks have been cutting back on lending except to the best borrowers. As a result, the role of commercial banks as financial intermediaries has been limited with a big portion of the excess liquidity in the banking sector being invested in Bank Indonesia bills as opposed to being channeled to the real economy.

In addition, in the post-crisis period, half of the banking sector in Indonesia is foreign owned, and these banks impose stringent global governance standards not only on their operations, but also on the corporations that do business with them.

At the height of the crisis, when the asset bubble burst, new investors snapped up distressed firms, including recapitalized banks, at attractive prices. In early 2005, Altria consummated its deal in which Sampoerna was valued at US$5 billion, as opposed to less than $500 million at the time of the crisis. This transaction was praised as a fair deal.

By the same token, many other acquisitions before 2005 are now perceived to have been conducted at far below the true worth of the assets. While this has become very much a politically sensitive topic, the fact is that many of the new investors have injected leading edge technology, and stronger managerial skills as well as technical competencies that enabled a strong turnaround of those acquired firms.

Since 2003, the benchmark index of the Jakarta Stock Exchange (JSX) has bounced back. The return of foreign funds, and excessive domestic liquidity have pushed the JSX index to a record high that surpassed the 2000 mark in April 2007. Nevertheless, when foreign portfolio capital left in mid-2005, the JSX index declined, and Indonesia experienced a mini currency crisis.

Subsequently, a surge in foreign funds resumed in October 2005, following the government's decision to make a move on oil prices. Today, our equity market is 70 percent controlled by foreign investors, and there are renewed debates on how to prevent possible destabilizing episodes of massive flow in portfolio capital.

Obviously, mishaps can always happen, but Indonesia today is less prone to a sudden reversal of inflows than a decade ago: we have stronger banking systems, flexible exchange rates, and respectable balance of payments. We have also built record high foreign reserves as insurance against future financial crisis.

On the other hand, Indonesia continues to show a poor record in improving the business conditions necessary for attracting foreign direct investment. In fact, the May 2007 edition of IMD's World competitiveness Yearbook put Indonesia's competitiveness performance near the very bottom of the 55 economies surveyed. It is obvious that a relentless reform mindset will need to take hold for capital flows to our economy to be stronger, and less volatile.

Ten years after the crisis, Indonesia's corporate sector is still finding its way to a stricter governance regime. Securities laws and listing requirements have actually been strengthened, and the media are more inquisitive and probing. Yet, many companies remain ambivalent to the value of good governance in the face of underdeveloped judicial systems. In some companies, board practices follow the letter rather than the spirit of governance codes.

Nevertheless, some corporate captains have come a long way: Not only have they restructured their business to make it more transparent, they have also changed their mindsets. These corporate leaders are now focused on their core competencies, and they no longer relentlessly pursue market share without regard to profitability and shareholders' value.

To sum up, for Indonesia, the journey to renewal has been long and painful. Much progress has been made, and yet much work remains to be done to strengthen our capacity to withstand another crisis of globalization, and to accelerate growth. The banking sector has cleaned up their balance sheet, but a big share of their lending is going to consumers rather than corporations.

Indonesia was a central destination for FDI before the crisis; today, our records for FDI inflows are not outstanding. While portfolio inflows have bounced back, our stock exchange is still relatively small, and many mid sized companies are not really motivated to list their shares. Widespread cronyism is probably a thing of the past, but for the moment, the search for effective governance looks like a long road indeed.

[The writer is chairman of CBA Asia and vice president of the Indonesian Chamber of Commerce and Industry.]