Abstract

Liberalization of the Financial Markets and Savings in Indonesia

Especially for development countries who already have high external debts, it is urgently necessary to mobilize more domestic savings and to improve the efficiency of domestic development financing. At present, a growth-oriented adjustment to deteriorated, overall world economic conditions appears to be rendered difficult in many countries by the fact that conditions of financial repression prevail. The consequence is that the supply of investable funds remains inadequate and the savers give preference to very short-term forms of investment. The hypothesis that liberalization of the financial markets has a positive influence on savings is tested empirically, using the example of the Indonesian financial reform of June 1983. It is shown that the commercial banks reacted quickly to the changed overall financial conditions by making efforts to mobilize private bank deposits. The impact of improved interest-rate incentives on saving behaviour in Indonesia was determined with the help of trend estimates. The analysis makes it clear that the savers responded at short notice by switching their savings to a marked extent to longerterm time deposits. These structural effects have improved the efficiency of Indonesian development financing substantially. However, it was not possible to increase total financial savings. The aim, therefore, is to continue and perfect the financial liberalization course in order, in the long run, to overcome the dualistic structure of the financial markets in Indonesia.