Q&A: Asia and the Markets

Indonesia's economy crashed spectacularly in 1998. Ten years later, the country's finance minister, Sri Mulyani Indrawati, says Washington could learn a thing or two from Jakarta's past policy mistakes as it formulates a response to this month's stock-market correction and fears of an imminent U.S. recession. Her advice: act decisively. Failure on the part of policymakers in Washington to do so, she argues, could lead to stagflation in the United States and a global economic slowdown. Mulyani spoke with NEWSWEEK's George Wehrfritz by telephone. Excerpts:

NEWSWEEK: What lessons from the 1997-98 Asian financial crisis apply to the America's subprime-mortgage mess today?
Sri Mulyani Indrawati: There are similarities. The inability to assess risk has disguised risk. Credit and liquidity have expanded in such a way that they no longer reflect actual exposure. And there is a reluctance to recognize losses when they occur. The lesson from the Asian financial crisis is that when [corrective] decisions are made fast and the [policy] prescriptions are potent, a severe or prolonged crisis can be prevented. What happened in South Korea shows that economies can pick up again very fast. Their severe adjustments lasted just one year. Yet the Indonesian economy remained sluggish for five to seven years because [corrective policies were] too long in the making and too weak. The U.S. is the world's biggest economy, and one that's more complex than Thailand, South Korea or Indonesia. But the lessons are the same. We do hope that decisive action will not be delayed so the damage to the global economy is minimized. The case of [British bank] Northern Rock shows that [indecisiveness] creates uncertainty. So whether we are talking about one financial institution or the United States as a whole, policymakers need to get things moving again quickly.

What effect has the turmoil on global financial markets this year had in Indonesia?
First, it affects our psychology, which can be seen when sentiment [about the global economy] drives stock and bond markets. Second, a U.S. slowdown would lessen price inflation for energy and food, which is positive. Third, Indonesia's exports have diversified quite significantly in the past 10 years. We're selling more to ASEAN countries, as well as to East Asia, South Asia and Europe. But even though our direct exports to the United States are less as a percentage of the total, our Asian markets are linked to the U.S., so sooner or later [a U.S. recession] would weaken demand for commodities from various countries, including Indonesia.

You don't buy the theory that Asia's economies have decoupled from the American consumer?
From a trade point of view I don't think decoupling is really there yet. If we look at capital flows, the regions are not decoupling at all but becoming more linked to each other. For example, when we issued [government] bonds in early January, buyers from the U.S. were quite dominant. I don't think there has been any diversification in the way the United States finances its deficit with funds from Asia, or any increaded ability in Asia's to invest our reserves [elsewhere] that would constitute decoupling. I think the financial links are very close and very strong. [That is why] various sovereign wealth funds have come to the rescue of U.S. [financial] institutions that are in trouble. Because of technology and more efficient transportation, the world is becoming more interlinked.

What about the global economy scares you the most?
I don't want to reveal my worries. That could impact confidence in our economy [laughs]. In this case, it is certainly the prospect of stagflation in the United States. A recession combined with high inflation would create a very difficult policy challenge, especially at a time when the U.S. budget is not in very good shape. A mild recession can be corrected by interest-rate cuts and fiscal stimuli. But if this is stagflation, the room to maneuver will be very limited. My hope is certainly that Asian countries can rely more on domestic demand, and that the rest of the world can move forward [economically] while not being dragged along by the United States.