Sri Mulyani, Indonesia’s reformist Finance Minister, will take up a very senior position at the World Bank in June. The Bank’s President, Robert Zoellick, said that she 'brings a unique set of skills and experience to the World Bank Group'. She does indeed, but Indonesia's loss may be far greater than the World Bank's gain.

Sri Mulyani has shown a rare, perhaps unique, capacity to push reform through in the face of powerful opposition. She has fought these battles with a widely-admired combination of toughness and intellect.

She will be missed as an energetic can-do individual but there is also a sobering wider message about the workings of governance in Indonesia. No doubt there is a variety of reasons behind her departure, but one that must loom large is the highly publicised (and highly politicised) Bank Century case.

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Having criticised journalists' efforts on Indonesia, I should record that Tom Allard has produced some gems recently for the SMH, most of which fit Geraldine Doogue's suggestion of writing about things that the two countries have in common — Jakarta has its revheads too.

I take this as evidence that Indonesia has enough interesting stories to match John Garnaut's prodigious output on China. Write it and they will come!

Photo by Flickr user yohanes budiyanto, used under a Creative Commons license.

The powerful voice of Fred Bergsten, head of the influential Peterson Institute in Washington, has joined the chorus demanding revaluation of the RMB: by 25-40 per cent. 

Appearing before Congress, Bergsten hit all the hot-issue buttons. He accused China of 'blatant protectionism' and of being a clear 'manipulator'. But the winning argument was that an appropriate revaluation would add 600,000–1,200,000 'mainly high-paying manufacturing' US jobs. This, he noted, would be a cost-free way of addressing the US unemployment problem.

Bergsten's Action Plan for prompting China to revalue its currency seems more confrontational than persuasive. Step one: the US formally declares China to be a manipulator. Step 2: the US harnesses enough votes in the IMF (where the governance is still so Euro-centric that Holland and Belgium alone have more votes than China) to get the IMF to lean on China. Third, to do the same in the WTO, seeking 'remedial action' in the form of countervailing tariffs imposed on Chinese exports.

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Fergus notes the luke-warm feelings Australians have for Indonesia (reciprocated by Indonesians). One of the explanations of this attitude is the carping, condescending and critical tone of Australian journalistic commentary on Indonesia.

President Susilo Bambang Yudhoyono's problems with parliament have been consistently reported here as being about corruption in the rescue of the mid-tier Bank Century while Indonesia was caught up in the backwash of the Global Financial Crisis in late 2008.

In fact, the story is one of pure politics. One parliamentary faction wants to unseat the reformist Vice-President so that they can have his job. Another faction wants to roll the Minister of Finance, because her success in reforming corporate taxation and governance is threatening their commercial interests.

After four months of pernickety inquiry, parliament has found nothing more than a couple of minor administrative peccadilloes in the rescue of Bank Century. No hint of corruption on the part of the Vice-President or the Minister has been found. Nevertheless, for purely political reasons, the parliament (where the President's party has nowhere near a majority) has called (subscription required) for their dismissal 'over a corruption scandal that has tarnished the President's reformist image'.

If this were happening in the Australian parliament, it would be reported for what it is: pure politics. Not pretty, very distracting for the President, but part of the messy process of democracy. The Australian press, however, either doesn't know or finds the corruption story fits its prejudices better.

Photo by Flickr user patrikmloeff, used under a Creative Commons license.

The Global Financial Crisis has triggered a remarkable self-examination by the International Monetary Fund of its received wisdom. A couple of weeks ago the Fund softened its in-principle advocacy of pure floating exchange rates, acknowledging that most emerging countries are more comfortable with a managed float. Then their Chief Economist committed central bank heresy by advocating raising inflation targets from 2 per cent to 4 percent, to make more room to ease monetary policy during a crisis.

Now another core belief is being abandoned: that international capital flows should be unconstrained by any restrictions. This is a big shift in thinking. Just over ten years ago, the Fund attempted to have free flows of international capital given the same status as free trade flows, with a very strong presumption that all countries should allow unrestricted flows. The timing was particularly poignant: this was immediately after the 1997-8 Asian crisis, which was in large part caused by excessive and volatile foreign capital flows.

All that has now changed. The Fund recognizes that foreign capital flows, while usually beneficial (particularly 'greenfields' foreign direct investment) can also be excessive and volatile. The measures taken by various countries have been reexamined and found to be acceptable, in some ways beneficial. Even Malaysia, the butt of much derision for its capital controls during the Asian crisis, has been reassessed and given a pass mark.

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It's only a few weeks since the IMF renounced its advocacy of 'corner solutions' for the exchange rate: that countries should have either a rigidly fixed rate or a clean float.

Now, their Chief Economist is arguing for a far more radical change. Countries should aim for higher inflation (4 per cent rather than the conventional 2 per cent) so that when a crisis comes, there will be more room to ease monetary policy.

If inflation was routinely running at 4 per cent rather than 2, nominal interest rates would be correspondingly higher. Thus the room for dramatic policy easing in a crisis would be that much greater. Dropping the rate to near-zero (which the crisis countries did in 2008) would be a bigger shift of the monetary policy lever.

Advocating  4 per cent inflation is, however, serious heresy for central bankers, who have struggled for the past couple of decades to establish the framework that allows them to carry out the unpopular function of 'taking away the punch bowl just when the party is getting to be fun'.

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Just about everyone agrees that China has played a hugely positive role in keeping the world going through the GFC. In the process it has produced some extraordinary (and abnormal) economic statistics.

Credit has been growing at 30 per cent while the rest of the world was deleveraging. Government stimulus has amounted to 12-14 per cent of GDP (although this isn't all budget stimulus). Perhaps most amazing, investment is running at well over half of GDP. Despite a fall in exports of 30 per cent, GDP showed the briefest of slowing and has bounced back not far short of 10 per cent.

Economists, disciples of the dismal science, are agreed that this is unsustainable, although they disagree on just how it will come unstuck. Will the stimulus be too successful and create inflation (which has picked up already) and asset price bubbles? Alternatively, will the boost run out of steam and the economy fall in a hole? Will there be such over-investment that excess capacity will be ubiquitous and China will be criss-crossed by 'super-highways to nowhere'?

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Globalisation puts pressure on countries to adopt internationally uniform economic rules, so that international interactions are as frictionless as possible. This is Tom Friedman's 'golden straitjacket': sometimes inconvenient, but in the long run usually beneficial. From time to time, though, the straitjacket needs readjusting.

The Global Financial Crisis showed the deficiencies of the existing international rules on banking, formalised by the Basel Committee on Banking Supervision. But there are two problems. First, it took the Basel Committee a decade of vexed negotiation to put in place the last (relatively minor) upgrade of the rules, and that may be too long to wait for the next iteration (which in any case needs to be more thoroughgoing).

Second, not everyone needs exactly the same rules. For a start, not all banks were using 'The Bonfire of the Vanities' as their business plan: maybe there is something idiosyncratic about the financial systems in the US, UK and the other crisis countries. As well, the cross-border problems of prudentially supervising the hugely-complex global US and UK banks simply don't apply to most of the world's banks, whose main activities lie within one jurisdiction.

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Mervyn King, Governor of the Bank of England, has made good contributions over the years to the debate on international financial institutions (the International Monetary Fund, World Bank etc). But an aside in his latest speech is off-track.

King observes that the G20 is the best forum for international economic cooperation (addressing external imbalances, for example) but that it is unrepresentative. He suggests this could be fixed 'if the G20 were to metamorphose into a Governing Council for the IMF, and at the same time acquire a procedure for voting on decisions'.

If he is saying that the G20 should respond to the equal-weighted votes of the 186 IMF member countries, most of which have no 'skin in the game' and nothing to contribute to the debate, this makes no sense. Anyone who has spent time at meetings of the IMF's International Monetary and Finance Committee (the IMF's current governing body) knows that this sort of universal inclusiveness is a recipe for irrelevance. In a different context, Copenhagen has just demonstrated this again.

A better way to go would be for regional bodies (such as ASEAN or the East Asia Summit) to discuss and digest the opinions of individual members. Then those members which also belong to G20 can bring these ideas to the G20 table. Mark Thirlwell and I argued this in a recent paper. Distilling diverse opinion at this more disaggregated level, then bringing the digested views to the global level, stands a chance of getting hard issues resolved.

Photo by Flickr user Downing Street, used under a Creative Commons license.

I'm glad Mark has put exchange rates on the Lowy blog agenda. With the severe damage that the Global Financial Crisis has done to the credibility of the efficient markets hypothesis, it's time to look at exchange rates again.

Even the International Monetary Fund (typically ten years behind in its understanding of how the real world works) has finally realised that something is wrong with its prescription that countries should adopt the so-called 'corner solutions' — either have a pure free float or an immutably-rigid fixed rate. It pushed this prescription in the aftermath of the Asian Crisis of 1997-8. But the Fund has noticed that almost no emerging market country has taken its advice, and it is now advocating the very thing it said was either wrong or impossible, or both, ten years ago.

The truth is that a rigid fix is almost never the way to go, unless, like Hong Kong, you have a Big Brother to give you endless support. As for a pure free float, exchange rates are not well anchored in emerging countries and are pushed around by volatile capital flows. Is it possible to conduct a middle-path policy, relying on the market most of the time but retaining the capacity and readiness to intervene when the market goes awry? Well, just about all the emerging countries of our region have done just that, and it has worked fine so far.

Of course, this is not the only issue on which the IMF might issue a mea culpa. It's hard to imagine, even in the different circumstances of the time, that the Fund would now offer the advice it gave Indonesia in 1997:

• Free-float the exchange rate.
• Raise interest rates until the exchange rate stabilises.
• Sharply tighten fiscal policy.
• Tightly restrict base money growth.
• Shut down troubled banks immediately.
• Don't offer universal deposit insurance to other banks.
• Embark on  politically-difficult major structural reforms in the middle of the crisis.

Photo by Flickr user Tony Bracjun, used under a Creative Commons license.

One view is that morality demands that the Australian Government do everything possible to seek justice for the journalists killed in Timor in 1975. To give the other side of the argument puts one in the position of the Jack Nicholson character in A Few Good Men: defending the indefensible.

But, just as Jack had some important points to make and dilemmas to expound, there are some arguments that should be heard before the moral grandstanding takes over:

• The Balibo Five were, to put it gently, foolhardy in the extreme. While we all feel very sorry for the outcome, they should have known that you can't film a covert invasion without getting shot. And the Australian editors who sent them into the field are, if anything, more culpable. 
• Of all the terrible and grossly unfair things that have happened in war zones in the past thirty years, the Balibo affair is sadly only a small example. If we are interested in improving conditions in war zones across the world, we should surely be more worried about the civilians being killed almost every day by Western armies. Civilians don't have much choice about being in war zones.
• If it's war crimes we wish to pursue, and if we have any sense of perspective, then we should be more vocal on the limp response to the genocide in Cambodia, again involving victims who had no choice about being there. 
• If we're thinking about consistency, why not take the Vietnamese Government to task for the similar killing of four journalists in Cholon in 1968? 
• The leaders of East Timor, who have more reason than we do to seek justice for past acts, have decided that their people's interests are best served by getting along with Indonesia and looking forward, not back.
• Foreigners (not least the Indonesians) might validly accuse us of hypocrisy, with so many unresolved atrocities in our own history.
• Any AFP inquiry will surely seriously damage the important relationship built up between the Australian and Indonesian police. For purely selfish reasons, I want the AFP to go on cooperating closely and successfully with the Indonesian police because it makes things safer for me (and a lot of others) in Indonesia. And this cooperation has also served the cause of justice: the cooperation facilitated the arrest of the Bali bombers, responsible for many more deaths of people who did not intentionally put themselves into mortal danger.
• An AFP investigation has no hope of achieving any 'convictions' or retribution. The Indonesians clearly will not cooperate. So any hope of setting an example to deter future acts is futile.

The belief that the world ‘savings glut’ played a key role in the global financial crisis has become part of the received wisdom — excess savings are said to have pushed down world interest rates and encouraged excessive lending. First put forward by Ben Bernanke (now Fed Chairman) in 2005, it has been endorsed by top commentators (notably the FT’s Martin Wolf) and policy makers such as former US Treasury Secretary Hank Paulson.

The argument is routinely made specific by pointing the finger at China, with its huge external surplus and over-flowing foreign exchange reserves. The Chinese, not surprisingly, have resisted this conclusion, and now former WTO head and influential senior Thai official Supachai has joined the push-back with the blunt statement that 'the crisis originated from Wall Street'. 

Not everyone gives the savings glut such a prominent place in explaining the disaster. It may well be in China’s own interest to reduce its external surplus over time, but a well-functioning international capital market should be able to accommodate countries that have different saving/investment balances without threatening the entire international financial edifice.

As the amazing story of greed and incompetence in the financial sector unfolds, with its epicenter in the US, it would seem more fruitful to focus on problems closer to home (for those of you with Vanity Fair subscriptions, you can find Michael Lewis’ latest instalment here).

Former top US Treasury and Fed official Ted Truman, who spent his long career telling other countries that they should behave more like the US, seems to have nuanced his earlier view that we are all equally at fault. While maintaining that '(i)n my view, macroeconomic policies in the United States and the rest of the fully developed world were jointly responsible for the crisis', he does acknowledge that 'the proximate origins of the crisis were in the United States to a greater degree than with other crises.' Perhaps he has noticed that, right next door, Canada’s financial sector is functioning just fine.

Photo by flickr user massmatt, used under a Creative Commons license.

It's not often that we see interdisciplinary research actually work, but here is an example. Andrew Haldane, Executive Director at the Bank of England (and easily the most interesting central banker writing about the global financial crisis) draws on Bill Bowtell's Lowy Institute papers to show the parallels between the financial crisis and HIV/AIDS, not only in how they spread, but how policy can contain them. Target the 'super-spreaders' (systemically important financial institutions), use system-wide approaches, and use evidence-based responses rather than theology.

Perhaps the biggest winner from the London G20 leaders’ meeting was the IMF. Business has been slow for the IMF since the Asian crisis: it's been short of both customers and funds. Now, in one hit, its resources have been increased three-fold. This seems sensible, even essential, but other changes are needed.

There are two different classes of potential borrowers both needing help as a result of the Global Financial Crisis. First, the traditional ones: countries that have over-extended themselves and need a bail-out, triggered by the crisis. This includes traditional mendicants like Pakistan, but a new group from Eastern and Central Europe and the Baltic states face very large funding gaps.

Second, there are countries which can no longer borrow in overseas commercial markets because these markets have largely dried up: the limited volume of international funding is being tapped by countries like Australia using its high credit rating. This group of countries does not need the usual intrusive supervision that goes with IMF lending: what they need is a replacement for normal international capital flows.

One suggestion More...

For Australia, the main 'win' from the London G20 meeting is that the G20 leaders will meet again, together with the wide acceptance that this group has supplanted the G7 as the principal world economic forum. A top priority is to retain our place at the table.

The more successful the London meeting, the greater the pressure to tinker with the membership. The pressures come in both directions: those arguing that it is too big to be effective, and others arguing that it needs wider representation.

The initial 19 countries were supplemented by various international agencies and regional representatives, bringing the effective membership up to nearly 30, adding weight to the call for culling. Others are calling for more representation from the poor countries.

The most powerful counter-argument is that the current core membership reflects several years of vexed argument and deal-making after the Asian crisis in 1997-98, and even if a more perfect group could be formed, there are too many urgent substantive issues to justify spending energy, time and political capital on membership refinement.

If the G20 is to get beyond righteous policy platitudes and hollow pleading on selfless causes, it has to limit its agenda and restrict its membership to countries that can actually make a contribution to the debate. More...

The bank graph Sam linked to yesterday may be 'neat', but it caused a flood of complaints to FT's Alphaville blog because it uses one of the '101 Ways to be Misleading with Graphs'. In this case, the eye reads the area, whereas the data is proportional to the circumference of the circle (or the radius, for that matter). It should be a bar graph, but that would be less dramatic and stylish, and when they were caught out, they should have changed the format.

Ian Macfarlane and I addressed this general issue twenty years ago. We'll have to add this one to our examples when we revise this timeless gem.

So Indonesia has requested budget assistance from Australia. Whatever we might provide will be relatively small compared with the magnitude of the problem, so we have a choice: to go bilaterally and put our own 'label' on what will inevitably be seen as a modest amount, or join a larger group in the hope of leveraging our funds by influencing others to contribute more.

This is not a clear-cut choice, but here's an additional element favouring the second option. If offering some funding though the regional swap arrangements (the Chiang Mai Initiative) encourages China and Japan to put just a tiny part of their huge foreign exchange reserves into this support framework, we might give our money some substantial leverage and, as well, provide a demonstration of our interest in being treated as a serious regional partner.

Of course, for the Chiang Mai Initiative to be a viable assistance framework, it needs to shed the IMF conditionality that makes it politically unacceptable to those countries which need it most. See my new Lowy Institute Analysis paper for more.

There is a view that the creation of the G20 leaders meeting will diminish the role of APEC. There will be some resistance to this idea among Canberra’s long-standing APEC aficionados, but it might not work out too badly for Australia. Let’s leave to another day the debate about whether APEC has become a bloated, directionless and messy hodge-podge of disparate countries in search of something useful to do, and look at how this latest development might be turned to our advantage.

First, the main plus for APEC was the Leaders Meeting, and G20 could replace this, for Australia, without loss.

But what about the benefits of keeping the US engaged in Asia? If the East Asia Summit could become the principal regional debating ground. Its 17 members include six G20 members, so this could be the venue where Asian positions are sorted out (no easy task, but well worth taking as far as it will go), with the distilled position then being carried to G20. G20, in turn, is much better linked into the still-evolving global rule-setting framework than APEC: whatever new rules come out of the current financial crisis, they will be developed in bodies such as the Basle Committee on Banking Supervision and the Financial Stability Forum, which link more logically to G20 than to APEC.

This strong presence in G20 – almost one third of the members – gives the EAS a head-start over the slightly smaller Asian groups (ASEAN and ASEAN+3 include only four G20 members) which at present are seen by most of the region as the principal vehicles for regional cooperation. It would take some slick diplomatic work on Australia’s part to shift the action to EAS, but the logic of the EAS plus G20 is compelling.

Just what is World Bank President Robert Zoellick up to? He attended the G20 meeting in Brazil over the weekend, only to argue that this is the wrong grouping and should be replaced by a more exclusive gathering. To say the least, this is an unhelpful intervention, not just for Australia (which would be excluded from the Zoellick group) but also for the urgent need to address the current world situation.

Zoellick's attitude ignores the time-consuming negotiations of a decade ago which gathered a consensus around the G20 membership. A cynic might say that it just looks like a spoiling strategy to leave the anachronistic status quo in place, with G7 plus a few ad hoc new recruits who are allowed to sit in on the old club.

The problem with the Zoellick proposal is that it starts with the G7. More...

The US Treasury’s former attack-dog, Ted Truman, has now got his jaws around another Inconvenient Truth: that the world’s current financial problems not only have their epicenter in the US but can be largely sheeted home to US deficiencies.

Truman wants to argue that the blame is widely spread. One might almost conclude from his piece that the US was an innocent bystander, swept along by events beyond its control. He cites Japan as having had similarly loose monetary policy as the US, blames China’s exchange rate and reserve accumulation, says that housing problems were 'essentially universal' and that prudential regulators everywhere were 'consenting adults' in their misjudgments of the situation: 'The finance ministers and central bank governors should not blame Washington, they should blame themselves'.

Truman, now at the Peterson Institute, has always been a forceful advocate, even when defending the indefensible. But the counter-argument is pretty compelling: More...

There had been much eager anticipation that the G7 would come up with some coordinated action to fix the financial melt-down. Noted US economist Paul Krugman said 'now is the time for major action'. On Friday G7 met, agreed that 'urgent and exceptional action' is required, and…well, actually, they decided to go on doing what they had been doing beforehand, only more so.

The crisis has certainly illustrated the connectedness of financial markets. Nowhere is this better demonstrated than in Australia: without the US financial collapse, it’s hard to see why the Australian stock market, with its strong banks and booming resources sector, would fall so dramatically, with all the confidence-sapping effects that follow.

But just about all the policy responses have been essentially domestic actions: supplying liquidity, guaranteeing depositors, recapitalizing banks, bailing out failing financial institutions and getting monetary and fiscal policy re-set for the subdued environment.

None of the rest of us can provide any real help to the US as it grapples with its problems. If the US succeeds in quickly restoring the health of its financial sector and avoids a recession (a big ask), our own collateral problems would be over. So where is the big role for international coordination? What is happening in Washington is largely a diversion: little more than an opportunity to swap war stories and show off battle scars. The real job awaits when they all get home again.

World Bank President Bob Zoellick seems well outside his allocated territory in his speech on modernizing multilateral economic institutions. When Wayne Swan meets him at the Annual Meetings in Washington next week, he might ask him who he speaks for in writing off G20 as 'unwieldy'.

Its precursor group during the Asian Crisis did a far better job than the Bretton-Woods institutions (IMF and World Bank) and showed what can be done with a group this size, given preparation and good chairmanship. If G20 has done less than it could have since then, it is because G7 and the IMF, while unable to adapt themselves to the needs of the current world economy, have at least been able to prevent a rival group from succeeding. More...

In a globalised world, financial markets are a potent transmission channel from the US to the rest of us. Indeed, our stock market responds more to the US than to our domestic fundamentals.

At first sight, last week’s policy mimicry might also suggest that the problems are the same. Australia followed the US and UK in banning short-selling of equities, and Australia’s $4 billion mortgage fund might look like a whimpish counterpart to the $US700 billion mortgage rescue package currently with Congress.

In the case of the provision of mortgage funding, it’s easy to differentiate the two countries. The US package will be used to buy existing housing assets. Whether these assets are 'toxic' or just temporarily undervalued by the market, there seems to be an acceptance that the authorities will pay more-than-market value for them, thus assisting the current holders, some of whom may not deserve help. In Australia, the plan seems to be to fund new housing borrowers: innocent bystanders in the troubles. It may be superfluous and populist, but it’s not a sign that 'this sucker could go down'.

Ross McLeod is surely right to say that the Indonesian anti-corruption push is home-grown, and has popular support. So much so that, if SBY showed decisive follow-though on current high-profile cases, he would probably bolster his chances considerably for victory in next year’s presidential election.

Of course, he has to work within the system while changing it – so he has to simultaneously placate and reassure. To do this, wholesale reform is not feasible; instead, he has to significantly shift the line between 'acceptable' and 'unacceptable', giving time and wiggle-room for these higher standards to be absorbed into changed behaviour. In the process, some will be punished unfairly, and many of the guilty will go scot-free. But the timing seems propitious: Megawati’s party has ejected an MP who admitted to receiving corruption pay-off; the Corruption Commission (KPK; pictured) has been given carriage of cases against the Attorney-general’s office; and no-one in the military has publicly come to the defence of the very senior general apparently implicated in the death of human-rights activist Munir. In each case this has created room for maneuver against individuals without bringing down the whole temple.

Is it even possible that the presidential candidates might begin to out-bid each other on this issue of corruption? Democracy works in strange ways. Maybe SBY needs a copy of Lampedusa’s 'The Leopard', in which the old aristocrat, confronted by the revolution of democracy, is told: 'If we want everything to stay the same, then everything has to change.'

Photo by Flickr user Shanghai Daddy, used under a Creative Commons license.

Kevin Rudd’s speech to the UN General Assembly set out some specifics for reforming the international financial system. It’s good to see him plugging the G20 as the centre-piece of this agenda.

He was diplomatic enough not to draw attention to the irrelevance of the UN’s own specialized institution – the International Monetary Fund – in the current troubles. The IMF’s 185-strong membership is too large and too diverse to have a sensible discussion on this topic. Its smaller governance groupings have been unable to reform their composition to reflect today’s realities rather than the power balance of fifty years ago.

Thus the G20 group would seem to be well suited to work out the Big Picture of what to do. More...

We can argue about whether or not the Australian financial system is 'light years' away from the US problems (is the relevant issue distance or dollars?), but it is certainly very different. If the key real-sector problem in the USA was home-loans to NINJAs (No Income, No Job or Assets), then that is a rare event in Australia. Here in Australia, no one was enticed to borrow by Greenspan’s unsustainably low interest rate. Nor has there been over-building in real estate. We don’t have a Fanny or Freddy here. Nor has our biggest insurance company been providing credit guarantees to anyone who asked for it.

Our mainstream banks fund a good part of their lending by borrowing overseas but, so far, the banks have had no trouble rolling over their funding and getting more, even if it is dearer: they borrowed twice as much in the early part of this year as they did in the same period last year. Other than the provision of extra liquidity through routine daily market operations, the authorities here have not had to lift a finger and, with interest rates still quite high and the federal budget in surplus, there would be plenty of room for policy maneuver if needed. Our macro problem is not (as in the US) a lackluster economy which has to go through a bleak period of adjustment. Instead, it is an economy where unemployment is the lowest in living memory and the terms of trade the most favourable for half a century.

All that said, we’re firmly linked into the world not just on trade, but in finance. And it’s not just America that has caught a cold: Continental Europe, UK and Japan all look pretty rheumy. The export-driven countries of Asia will have to adjust to this world (Singapore is showing the effects already), and there will be a knock-on effect for us. But China can slow a fair bit without causing a collapse in commodity prices.

Key aspects of the Indonesian legal process are being tested in ways that could have important implications for the operation of justice, for parliamentary process and for corruption. Will members of the Indonesian Parliament (including two of SBY’s Ministers) be brought to account for receiving 'facilitating' payments to encourage them to pass legislation? Will a senior judicial official, caught red-handed taking a $600,000 bribe, be tried? And will a very senior general in the official intelligence agency, currently on trial for involvement in the poisoning of a human-rights activist, be found guilty?

Tackling the pervasive deficiencies of the Indonesian legal process will inevitably have inconsistent and unfair outcomes. It’s not enough that, in the words of an old Jakarta newspaper headline, 'all guilty parties will be given a fair trial': the innocent have to be protected and the guilty have to be given a punishment commensurate with the crime. The corruption issues are examined in my article in the AFR today.

Indonesia’s quiet progress over the past five years has gone largely unnoticed. The economy is back on an even keel, security problems in Aceh have been largely resolved, and there has been an amazing transition to democracy. There has even been progress in tackling corruption, even if this has been inconsistent and a long way from complete. All this has gone largely unreported in the world press: the basket-cases of Africa pushes these low-key stories out of the news. So it is good to see the Paris-based OECD produce a balanced and comprehensive Economic Assessment, with a report card along the lines of 'good progress, but could try harder'. For more, see my op-ed in today’s AFR.

One of the curious characteristics of globalisation is that financial markets deliver much the same price judgments, despite widely differing circumstances between countries. So the Australian share market has mirrored US equities in responding to the US sub-prime problems and prospective recession there, despite the fact that the Australian financial sector is strong, there has been no commercial or domestic over-building, our export markets are going gang-busters, and the main macro problem is the expansionary effect of the highest terms-of-trade in living memory, impinging on a labour market with the lowest levels of unemployment for more than thirty years.

But policy-makers have to go on making policy for their own idiosyncratic environments. One thing is clear: if central banking seemed to be an effortless job in the 1990s, it isn’t now. I explore some of these issues in an opinion piece that appeared in the Australian Financial Review on the weekend.

With Kevin Rudd visiting Indonesia next week, thoughts are turning to what 'deliverables' he might achieve. As I argue in the AFR today, the visit won’t revolutionise our relationship, but it is important to shift it a notch higher, to reflect Indonesia’s return to being a 'normal' country. Downgrading  the scary Travel Advisory (as suggested in this blog before, including last week) seems an obvious move, and for Australia to delay after the US has downgraded its warning just begs the question, 'what do we know that the Americans don’t?'