Focus on Trade #23, part 6 of 8 (fwd)

[Robert Weissman <rob@essential.org>]

FOCUS-ON-TRADE #23, MARCH 1998
SPECIAL ISSUE ON THE IMF

Part 6 of 8

A regular bulletin produced by Focus on the Global South, Bangkok,
Thailand

Focus-on-Trade is a regular electronic bulletin providing updates and
analysis on regional and global trade and finance.  Although initially
concerned with APEC, the scope of the bulletin now extends to include
the World Trade Organisation (WTO), the International Monetary Fund
(IMF), the ASEAN Free Trade Area (AFTA), the Multilateral Agreement on
Investment (MAI) and any other acronyms that require critical
attention. Focus-on-Trade contains updates on trends in world trade,
with an emphasis on analysis of these trends from an integrative,
interdisciplinary viewpoint that is sensitive not only to economic
issues, but also to ecological, political, gender and social issues.
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IN THIS ISSUES

Taming the Tigers: The IMF and the Asian Crisis

by Nicola Bullard, with Walden Bello and Kamal Malhotra

This paper is published jointly by Focus on the Global South in
Bangkok and CAFOD in London for the Asia Europe Meeting (ASEM)being
held in London on 2 and 3 April 1998. The paper will be officially
released on 2 April in London by the two organisations. If you would
like a hard copy, please contact Focus on the Global South at
admin@focusweb.org or CAFOD at dgreen@cafod.org.uk.


The paper is in EIGHT parts:

Part 1: Executive Summary, Introduction
Part 2: The IMF and Thailand
Part 3: The IMF and Indonesia
Part 4: The IMF and South Korea
Part 5. The social impact of the crisis
Part 6. The social impact of the crisis/The role of the IMF
Part 7: The role of the IMF
Part 8: Conclusions and recommendations, footnotes

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PART 6
THE SOCIAL IMPACT OF THE CRISIS and
THE ROLE OF THE IMF

The rocketing price of all imported goods has hit all sectors of the
economy and services.  Medical supplies and equipment have become
prohibitively expensive. About half of the 120-plus health clinics in
one part of Greater Jakarta are reported to have closed due to rising
prices and fears that patients will sue them for not providing proper
services. Seventy per cent of medical drugs are imported and a
government source claims that there are only enough medical supplies
for four months, while the price of generic drugs, locally produced
and partly subsidised by the government, will rise dramatically owing
to the increased price of imported chemicals.  There is also a
shortage of contraceptives The poor will be hardest hit by this.
Hospitals in the rural areas have gone "back to the basics" using
cat-gut for suturing, and reusing all medical equipment.

World Health Organisation officials have expressed fears that the 
crisis will lead to rising levels of diseases such as measles and 
tuberculosis. Food production dropped by 4 per cent in 1997, and for 
the first time in many years Indonesia started to import rice. 
All Indonesia’s wheat is imported and 30 per cent of its sugar and 
soybeans – both staples. 

Paper prices have risen four to five-fold, leading some journals to 
cease operations altogether and others to increase prices, reduce 
staff and cut pages. There is also a dramatic loss in advertising 
revenue, leading to an overall reduction in public access to 
information, vital when the country is going through such deep 
turmoil. In a short-term effort to increase export revenues, the 
government reduced the log tariff from 200 to 10 per cent, leading to 
increased exploitation of forest timber, rising exports of 
unprocessed logs and the end of the domestic plywood industry.

The World Bank has also weighed into the situation in Indonesia, with 
a package of up to $100 million to soften the blow of the crisis by 
creating "75 million man-days of low-wage jobs during the remainder 
of 1998." However, this is just a small part of the Bank’s overall 
plans "to disburse $4.5 billion over the next three years for 
adjustment operations and existing and planned investment loans."  
Critics were unimpressed, pointing to the Bank and the IMF’s past 
record of papering over deep flaws in the economy, and continually 
boosting Indonesia as a model of development. 

''The World Bank tended always to please the government by saying 
nice things about the Indonesian economy. These judgements then 
prompted foreign fund managers and donors to pour in loans, most of 
which were short term,'' said Rizal Ramli, head of the think tank 
Econit. Others who met Bank president James Wolfensohn accused it of 
ignoring problems of corruption, nepotism and a weak banking system 
when it heaped praises on Indonesia and continued to lend to the 
government. The Bank's endorsement discouraged reforms in dismantling 
monopolies and aided the country's borrowing binge, they said.
On 10 March 1998, the World Bank and Asian Development Bank 
underlined the strings attached to the programme when they announced 
their decision to delay $2.5 billion in aid until the Indonesian 
government met the IMF’s reform criteria. This followed hard on the 
heels of the IMF’s decision to delay disbursements of $3 billion for 
the same reasons.

Indonesia’s problems are just beginning. Predictions are almost 
uniformly pessimistic. One leader of the NU, the largest muslim mass 
organisation said, "If the IMF and other governments care for the 
people, we have hope. If not, unemployment will rise and the people 
will go hungry and be easy to burn – social unrest, riots and so on. 
And government must be honest - if corruption continues as it is now, 
we will see an explosion. We are worried."  It will take more than 
dismantling the monopolies to restore domestic confidence and 
stability.  

Korea 
The psychological impact of the crisis in Korea was one of shock, 
followed by an outburst of nationalistic anger.  However, the impact 
was real enough in terms of absolute loss of purchasing power, 
thousands of small companies going to the wall and a radical 
transformation in relations between workers and employers. One of the 
key IMF conditions was "labour market reform"  which would allow 
companies to lay off workers.

Clearly, this was an overhanging issue from the failed attempt in 
January 1996 to pass radical legislation which would have 
dramatically increased employers’ rights over workers. Such was the 
protest that the legislation was quickly withdrawn, only to reappear 
as part of the IMF reforms.

Unemployment will be the main fallout from the economic crisis, and 
there is no doubt that job loss and business closure was accelerated 
by IMF measures which caused a gut-wrenching contraction of the 
economy. It is estimated that the combined effects of the economic 
slowdown and industrial rationalisation could dramatically increase 
(double or triple) the present rate of unemployment,  from about 3 
per cent in 1997 to a minimum of 6-7 per cent in 1998 (signifying a 
minimum of 1 million new unemployed). Many observers fear that the 
actual figure could exceed 2 million by the end of 1998 or about 9 
per cent of the workforce. This will require a great deal of 
psychological and social re-adjustment in a country which has built 
itself on toil and become accustomed to full employment. Labour 
research institutes report that women are the first to be laid off, 
and women with children are likely to be dismissed first because, in 
the eyes of employers, "they are needed at home." 

According to the Korean Confederation of Trade Unions (KCTU) , an 
estimated 200 companies per day have shut their doors since the 
beginning of the crisis, reaching a peak of 340 on 5 January 1998. 
This translates into about 4,000 more employees finding themselves on 
the street every day. The union’s international secretary also points 
out that, while the big conglomerates or chaebol have enough ‘fat’ to 
see them through the tough times, small to medium enterprises which 
rely on cash flows and which also employ the majority of workers, are 
the hardest hit. 

On 6 February 1998 a tripartite agreement was reached between 
government, employers and unions to legalise layoffs through 
legislation by the National Assembly, paving the way for mass 
unemployment for the first time. Many workers in South Korea have 
come to recognise the IMF not as a source of economic relief but as 
the driving force behind using unemployment and job insecurity. In 
protests and demonstrations, the IMF is often referred to as "I am 
Fired".

Under the 6 February agreement, companies will be allowed to 
lay-off workers only when they face "emergency situations" such as 
financial trouble, mergers or acquisitions, but it is widely agreed 
that this will be left to the subjective interpretation of employers, 
especially in these difficult times. Management is required to give 
60 days notice before dismissing workers, however, and employers will 
be obliged to try to rehire dismissed workers if business improves, 
although this is unlikely to be enforceable in practice. In return 
for this major concession, trade unions were given the right to 
engage in political activity for the first time, as from early 1998. 
Teachers will also be allowed to unionise, again for the first time, 
from July 1999 and public officials allowed to form a "consultative 
body" from early 1999. The employment stability fund, consisting of 
donations from government, businesses and workers, which is the only 
"social safety net" for fired workers, is to be increased to 5 
trillion won ($3.2 billion), an increase from an earlier government 
proposal of 4.4 trillion won ($2.8 billion). 

The effectiveness of the accord, which was  signed by the most vocal 
opposition union coalition, the KCTU, was thrown into some doubt 
within days of its signature when the union’s leadership was ousted 
by angry members who refused to abide by the agreement. Some members 
of the National Assembly also cast doubt on its smooth passage 
through parliament by insisting that the concessions given to labour 
were too great and were unacceptable in their agreed form. 

In early February, a special committee in charge of streamlining the 
government bureaucracy unveiled plans to reduce the 163,000 strong 
civil service by 10,000, although the final toll is expected to be 
higher. At the same time, the cabinet passed twelve new bills 
designed to speed industry restructuring and enable corporate 
layoffs.

udget cuts are unprecedented in the last 25 years, although 
in Korea they were nowhere near as severe as Thailand’s slashing. The 
budget measures announced in early February included cuts in 
expenditure on social infrastructure of 13.1 per cent compared with 
the plans submitted in late 1997, marking a 4.2 per cent decline 
compared with the previous year. This will put a number of high 
priority infrastructure projects on hold, including the Seoul-Pusan 
High Speed Railway, seven new regional expressways and the 
construction of new subway lines in the capital., in addition to 
delaying disbursements for the New Port Project.  

Significant cuts to Korea’s infrastructure development could lead to a
reduction in international competitiveness in the medium to long-term.
The revised budget total announced marked an increase of a mere 3.3
per cent from 1997, the lowest year-to-year rise since 1973. Even the
increase in the defence budget, estimated at only 1.8 per cent (15 per
cent less than requested) is the lowest in 15 years.  Budgets for
education and agro-fishery industries were expected to be cut by 5.6
per cent and 10.4 per cent respectively while plans to increase
government salaries by 3.5 per cent were abandoned.  Inflation in 1998
is expected to be between 10-20 per cent, well over the IMF targets
and predictions.

The economic crisis is seen by some as an opportunity to reconsider 
and reform social relations and social values. The KCTU, a vehement 
critic of the IMF, the chaebol and government, believes: If we can 
deal with the chaebol system, corruption and collusion of state 
powers and business, and state-directed financial practices, the 
current crisis could be a valuable opportunity for a genuine reform 
and maturation of Korean politics, society and economy.    

THE ROLE  OF THE IMF 
Following its intervention in Thailand, Indonesia and 
South Korea, the IMF found itself under attack from all sides. 
Suddenly non-government organisations and the progressive left, whose 
criticism of the IMF dates back to the Fund’s stabilisation 
programmes of the early 1980s, found themselves in unlikely company.

The criticisms came from some surprising sources, including former 
IMF employee and director of the Harvard Institute for International 
Development Jeffrey Sachs, World Bank chief economist Joseph 
Stiglitz, solid, conservative journals such as The Economist and The 
Financial Times, Republicans and Democrats in the US Congress, and 
even bone-dry neo-liberals such as former US president Ronald 
Reagan’s chief economic adviser Martin Feldstein and Milton Friedman 
of the Chicago School. 

The debates are wide ranging and call into question fundamentals such 
as the efficacy and appropriateness of the Fund’s economic advice, 
the way the Fund operates, and its relationship with its key 
shareholder, the US.

The Fund sometimes gives poor advice 
The public sector austerity measures imposed by the IMF, such as 
budget cuts, pushing up interest rates and raising taxes, were 
inappropriate for the circumstances of a private sector debt crisis 
and in fact deepened and accelerated contraction of the economies 
they were meant to be helping.  As Jeffrey Sachs said "the currency 
crisis is not the result of Asian government profligacy. This is a 
crisis made mainly in the private, albeit under-regulated, financial 
markets."  

Yet the IMF applied policy measures designed to rein in government 
overspending without addressing the real issue of private sector 
failure. The Fund’s macro-economic requirements were meant to 
stabilise currencies and restore market confidence. In Thailand, 
South Korea and Indonesia, the currencies continued to devalue with 
gathering momentum even after the IMF’s intervention, indicating that 
their economic policies were neither addressing the real problems nor 
having the magic effect of restoring market and investor confidence. 
Of the three countries studied, South Korea is the only one to show 
any signs of recovery measured by investment inflows (which are still 
predominantly short term and speculative rather than long term 
foreign direct investment) and this occurred only after the main 
creditor banks agreed to roll over private short term debts with the 
government acting as guarantor. 

The IMF also stands accused of creating the problem of "moral hazard" 
whereby both creditors and debtors who make unwise investment choices 
are saved from the consequences of their bad decisions, thus making 
it more likely that they will reoffend in the future. 

The Fund has also come under fire for its continued enthusiasm for 
freeing up capital flows. The crisis in Asia is a crisis of the 
private sector which engaged in excessive borrowing of easy-to-obtain 
foreign finance, following liberalisation of capital account regimes 
from the 1980s onwards. Therefore the IMF’s policy response of 
demanding further liberalisation of the finance sector and financial 
flows is wrong and actually "adds to financial vulnerability and 
renders these economies even more prone to future crisis."  

Speaking in Helsinki on 7 January 1998, the World Bank’s chief 
economist Joseph Stiglitz went even further, saying that "financial 
markets do not do a good job of selecting the most productive 
recipients of funds or of monitoring the use of funds and must be 
controlled." The pain of adjustment is not fairly distributed There 
is a double standard at work in the treatment of  "domestic" and 
"foreign" interests. Domestic firms are left to the mercy of the 
market (for example, the IMF insisted that numerous financial 
institutions in Indonesia and Thailand could not be bailed out). 
Foreign investors, on the other hand, are given enhanced rights to 
ownership, the possibility to convert debt to equity in struggling 
Asian enterprises and the chance of picking up others at bargain 
basement prices, thanks to changes in foreign ownership rules 
included in the IMF packages. 

IMF bailouts of the private sector have also been criticised for 
socialising the debt, leaving the government and the taxpaying 
public, both in Asia and in the IMF’s main contributor nations, to 
bear the burden of the private sector’s failure. 

The Fund has gone beyond its remit, and should be overhauled

Critics argue that the IMF has exceeded its mandate as defined in its 
Articles of Agreement and has assumed the role of global economic 
policeman, "forcing it into a convergence toward the reigning 
consensus"  (in this case, the so-called ‘Washington consensus’). 
Martin Feldstein, Professor of Economics at Harvard University and 
President of the National Bureau of Economic Research, and former 
adviser to US President Ronald Reagan, is sharply critical of the 
IMF. "Imposing detailed economic prescriptions on legitimate 
governments would remain questionable even if economists were 
unanimous about the best way to reform the countries' economic 
policies.

In practice, however, there are substantial disagreements about what 
should be done."  He goes on to say that the Fund should not use the 
opportunity of countries being ‘down and out’ to override national 
political processes or impose economic changes that "however helpful 
they may be, are not necessary to deal with the balance-of-payments 
problem and are the proper responsibility of the country's own 
political system." He continues "a nation's desperate need for 
short-term financial help does not give the IMF the moral right to 
substitute its technical judgments for the outcomes of the nation's 
political process."

It is worth going back to the original Articles of Agreement of the 
Fund to get a rough measure of whether it is achieving its 
objectives, even in its own terms: The purposes of the International 
Monetary Fund are: - to promote international monetary cooperation 
through a permanent institution which provides the machinery for 
consultation and collaboration on international monetary problems - 
to facilitate the expansion and balanced growth of trade, and to 
contribute thereby to the promotion and maintenance of high levels of 
employment and real income and to the development of productive 
resources of all members as primary objectives of economic policy - 
to promote exchange stability, to maintain orderly exchange 
arrangements among members, and to avoid competitive exchange 
depreciation - to assist in the establishment of a multilateral 
system of payments in respect of current transaction between members 
and in the elimination of foreign exchange restrictions which hamper 
the growth of world trade to give confidence to members by making the 
general resources of the Fund temporarily available to them under 
adequate safeguards, thus providing them with opportunity to correct 
maladjustments in their balance of payments - in accordance with the 
above to shorten the duration and lessen the degree of disequilibrium 
in the international balances of payments of members.

In short, nothing about trade and investment liberalisation, 
privatisation, foreign investment or public sector austerity 
measures, all of which have become central to the IMF’s demands in 
Asia. Article II, however, mentions the Fund’s role in promoting 
"high levels of employment and real income" – purposes which the  
Fund has clearly failed to achieve in South Korea, Thailand and 
Indonesia.

While it demands greater transparency from government and 
financial systems, the IMF has itself been criticised for its lack of 
transparency and accountability. Again, Jeffrey Sachs goes straight 
to the point "Of course, one can’t be sure what the IMF is advising, 
since the IMF programmes and supporting documents are hidden from 
public view. This secrecy itself gravely undermines confidence."
   
The Fund has also been attacked for its intellectual arrogance in 
applying the same solution, regardless of the problem. According to 
Joseph Stiglitz the main problem is the belief that "political 
recommendations could be administered by economists using little more 
than simple accounting frameworks", leading to the situation where 
"economists would fly into a country, look at and attempt to verify 
these data, and make macroeconomic recommendations for policy 
reforms, all in the space of a couple of weeks."

The IMF works in the interests of powerful nations, especially the US 
Finally, there is well-founded concern about the policy and power 
nexus between the IMF and its major shareholder, the US. In the face 
of increasing resistance at home to its free-wheeling liberalisation 
agenda  the US Government is having to rely even more on bodies such 
as the IMF and APEC to push its trade objectives.

Charlene Barshefsky, in her testimony to the House Ways & Means 
Subcommittee, described how US interests could be furthered by the 
IMF "Many of the structural reform components of the IMF packages 
will contribute directly to improvements in the trade regimes in 
those countries. If effectively implemented, these programs will 
complement and reinforce our trade policy goals."  To make it clear 
that the US would brook no competition, Barshefsky continued "Support 
for the IMF… sends the important message that America will continue 
to lead in the world economy."

 The IMF’s First Deputy Managing Director, Stanley Fischer, 
reinforced this view in a speech earlier this year when he outlined 
the primary purpose of the IMF, quoting from its articles of 
agreement: "To facilitate… the balanced growth of international trade 
and to contribute thereby to… high levels of growth and real income" 
and then added his own words, "we have consistently promoted trade 
liberalisation."   There is a seamless congruence between the IMF’s 
world view and that of its biggest shareholder, the US. 

The US was also responsible for derailing Japan’s proposal, early on 
in the crisis, to establish an Asian Monetary Fund capitalised at 
$100 billion and designed to respond quickly to currency and market 
instability in the region.

Japan had good reasons for putting its money on the table: Japanese 
banks are heavily exposed to Thailand, South Korea  and Indonesia and 
it is in their interests to stabilise volatile currency markets and 
the Japanese economy is deeply integrated with its neighbours so any 
slow down or collapse would have an immediate domestic impact. For 
some time Japan has promoted an Asia-specific development model in 
its dealings with international institutions such as the IMF and 
World Bank. Essentially, Japan has argued that the ‘Washington 
Consensus’ of rapid deregulation, reducing the role of the state and 
liberalisation of capital flows may not be the best path for 
countries such as those in Asia which have followed a state-led 
development model, and that severing the links between the state and 
industry of the one hand, and the banks on the other would be 
politically unpalatable and may not achieve the expected results. In 
short, the Asian Monetary Fund was conceived as being more flexible, 
less doctrinaire and ‘more Asian’ than the IMF deal.

It seemed like a good idea if for no other reason than to break the 
IMF monopoly on economic thought and open the market to new ideas and 
economic paradigms. In the event, Japan was forced to back down in 
the face of "heated opposition from officials at the Department of 
the Treasury, most notably the Deputy Secretary Lawrence Summers,  
and the International Monetary Fund… They instead reaffirmed the 
central role of the IMF in the Asian financial bailout." 

END PART 6 OF 8













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Focus on the Global South (FOCUS)
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Walden Bello                W.Bello@focusweb.org
Kamal Malhotra              K.Malhotra@focusweb.org
Chanida Chanyapate Bamford  C.Bamford@focusweb.org
Junya Prompiam              J.Prompiam@focusweb.org
Nicola Bullard              N.Bullard@focusweb.org
Ehito Kimura                E.Kimura@focusweb.org
Joy Obando                  Joy@focusweb.org
Mayuree Ruechakieattikul    nok@focusweb.org
Focus Administration        admin@focusweb.org 
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