Focus on Trade #23, part 7 of 8 (fwd)

[Robert Weissman <rob@essential.org>]

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

Part 7 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 and WHOLE DOCUMENT AS 
ATTACHMENT

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 7 OF 8

THE ROLE OF THE IMF (continued)

The course of the economic crisis might have been quite different had
the Asian Monetary Fund seen the light of day. The AMF might have been
more flexible in its terms whereas the IMF’s inflexibility deepened
the economic crisis. One should not underestimate the extent to which
the IMF is seen in Asia as the instrument of western neo-liberalism
and, for example, an ‘Asian’ approach might have proved more effective
in dealing with President Suharto. 

The IMF is now cash-strapped and the mobilisation of additional 
resources is proving difficult. In fact, the US administration is 
facing tough Congressional opposition, from all sides, in its bid to 
get approval for additional funding to replenish the IMF’s depleted 
resources. The US Treasury has mounted an all-out campaign to push 
the bill through Congress and, according to Treasury Secretary Robert 
Rubin, the stakes are high:  "Failure to provide funding could reduce 
our leverage in the IMF."

The European Union and the Asian Crisis 
Although European shareholders control 28.76 per cent of the voting 
rights at the IMF, compared to the US vote of 17 per cent, the 
European Union has so far taken a back seat in the crisis. However, 
the current role of the IMF in the Asian crisis appears to contradict 
stated European Union policy towards the developing world. Article 17 
of the Maastricht Treaty sets out the European Union’s principles for 
development cooperation, pledging the Community to work for  "the 
smooth and gradual integration of the developing countries into the 
world economy."  

This hardly accords with current IMF demands for an extremely rapid 
and destabilising process of financial and trade liberalisation in 
return for being bailed out of crises which were themselves the 
result of over-hasty liberalisation processes. The Maastricht Treaty 
commits the Union to working for "sustainable economic and social 
development" and "the campaign against poverty in the developing 
countries", yet IMF measures such as the impending removal of fuel 
subsidies in Indonesia are clearly risks exacerbating poverty and 
destabilising the economy. Giving greater priority to poverty 
reduction, or at the very least, avoiding making matters worse, also 
improves the likelihood of the Fund achieving its stated aim of 
stabilising the currency and rebuilding investor confidence – food 
riots and crime waves do not make for economic stability.

Britain currently holds the EU presidency and here too, there are
differences between the government’s stated development policy of
focusing on poverty eradication and coherence between the different
arms of government’s relations with developing countries,  and its
behaviour in the Asian crisis. To its credit, the British government
has, along with the World Bank, launched a Trust Fund to help
countries assess the poverty impact of the crisis.  However the
British Government is also leading moves within the G7 to change the
IMF’s Articles of Agreement to give it more authority to pursue
capital account liberalisation.

After discussing the lessons of the Asian crisis at the G7 Finance 
Ministers’ meeting in London in February 1998, the ministers 
recommended that "A capital account ammendment to the IMF Articles 
should be implemented quickly". Given the record of such 
liberalisation in Asia, the appropriate response should be to take 
stock of the issue of how liberalisation should be managed in order 
to improve stability and growth, rather than undermine them, and to 
reduce poverty, rather than increase inequality. This requires 
discussion and consultation, not the over-hasty push to expand the 
remit of the IMF that is currently under way. 

Thailand 
Even before the IMF came to Thailand, Thais themselves
had been clamouring for an emergency solution to the unfolding
economic crisis, and this had forced the Chavalit government to close
down 16 finance companies.  But it was known that more Thai finance
companies were effectively bankrupt, which is why when on 14 August
1997, shortly before the announcement of an IMF deal with Thailand, 42
more companies were added to the list, there was little opposition.
 
In its financial reform policy, the IMF was able to play to the strong
feelings among Thais that greedy and irresponsible politicians had
brought the country to financial collapse. 

Critique of the Stabilisation Package
It was the other part of the IMF package - the stabilisation package 
- that became the point of contention in the next few months.  The 
Fund’s prescription demanded the maintenance of high interest rates 
to keep further foreign capital from leaving the country and a sharp 
reduction in government expenditures in order for the government to 
achieve a budget surplus.  Both were expected to combine with the 
financial crisis to slow down the GDP growth rate, which in August, 
at the time of the signing of the IMF package, was predicted to fall 
in 1998 to 2.5 per cent (compared with 8.7 per cent in 1995 and 6.4 
per cent in 1996).  This figure was revised downwards in November to 
0.6 per cent.  And it was further revised to (minus)-3.5 per cent at 
the time of the IMF review in February 1998.  The issue raised by 
both foreign and domestic critics was:  this was not a crisis of the 
public sector but of the private sector, which had gone on an 
overborrowing binge. 

In fact, the Thai government had been  consistently running a 
government surplus until 1996.  So why squeeze the public sector, 
which as private investment slowed down had become the main element 
of counter-cyclical efforts to prevent a deepening recession? Wasn't 
the avowed aim of both Thai and IMF authorities -the return of 
foreign capital - in fact likely to be thwarted by a deep recession?  
There was no clear response to this except that foreign capital would 
be reassured by Thailand's willingness to undertake an austerity 
program. In any event, when the projections for 1998 foresaw a deeper 
fall in growth than expected, the IMF agreed that it would allow the 
Thai government to run a deficit of 1-2 per cent of GDP, an implicit 
acknowledgment that its original prescription of running a budget 
surplus had been wrong and may have contributed in fact to a deeper 
slowdown by affecting business decisions on investment. 

The IMF, for its part, countered that the concessions were agreed 
because the economy was showing signs of recovery due to the Thai 
government "resolutely implementing the economic programme in very 
difficult circumstances, " and that the actions taken were 
"increasingly being reflected in improved market sentiment." The 
focus on the government surplus has raised the further question of 
what the surplus is actually intended for - aside from assuring 
investors of Thailand's willingness to take bitter medicine and thus 
in some miraculous way, inspire investors to reenter the country.  
The likelihood is that the surplus is destined for the rescue of 
Thailand’s ailing financial sector, on top of the repayments to the 
IMF and the bilateral donors for the $17.2 billion rescue fund.
 
Encouraging "Moral Hazard" 
The IMF has explained that its $17.2 billion rescue fund is meant 
"for balance of payments support and to replenish government 
reserves." At least part of the fund will be devoted to servicing the 
country's foreign debt, most of which was incurred by private 
borrowers from international private banks.  Of course, the hope is 
the international banks will roll over Thailand's short-term debt, 
but the multibillion dollar fund is designed to show that there is 
cash to back up a substantial part of the debt coming due.  The 
government, in short, is providing a guarantee that the Thai private 
sector's debt will be repaid, and the IMF has guaranteed 
international creditors against substantial losses, which lends 
weight to the criticism that the Fund encourages "moral hazard" or 
irresponsible lending because lenders can count on it to act as their 
ultimate safety net.  The IMF can always come back and say that the 
only way to regain foreign investor confidence is by guaranteeing 
them against risk.  

The strategy for the Thai recovery is extremely narrow- and dangerous 
– the Thai economy is to rely almost solely on the return of foreign 
capital rather than to build up a diverse platform for recovery.  It 
is even more dangerous considering that one of the main causes of the 
financial crisis was the unregulated influx of finance capital and 
investment.

Interestingly, a Fund Manager of American Express International, one 
of the institutions being courted by this strategy, has pointed out 
that "The only card the government has to play right now is the 
return of foreign investors.  It's disconcerting that everything 
rests on the return of foreign investors."  And especially so when 
the IMF has predicted that Thailand will suffer a $12 - 14 billion 
net capital outflow in 1998. The IMF and the US Agenda Increasingly, 
some elements of the financial re-structuring program have also come 
under question.  

This is especially the case with the IMF's insistence that Thailand's 
financial institutions, which have suffered big losses from the 
combination of non-performing loans and escalating foreign debt 
burdens owing to the precipitous drop of the baht, be recapitalised 
mainly through capital infusions from foreign partners in return for 
greater ownership rights.  Mergers among Thai banks and institutions 
are one alternative, but one that has been frowned on by the Fund. 
Infusing the banks with state resources in return for greater state 
ownership is considered a non-starter, given the Fund’s anti-statist 
leanings. 

Thailand has already given ground by allowing foreigners to own up to 
100 per cent of financial institutions for up to ten years without 
dilution, and it is also under pressure to concede to the IMF's other 
demands: to liberalise the Alien Business Law and to allow those 
foreigners who bring with them substantial investments to own land.   

Increasingly, the big push for a more prominent foreign presence in 
the economy has convinced many Thais that the IMF is really pushing 
the longstanding agenda of its principal stockholder, the United 
States, which has been to gain a stronger presence in Thailand 
through more liberal trade, investment, and ownership rules. US 
officials have, in fact, been quite candid about the symbiotic 
relationship between IMF policy and US trade policy.  

US Trade Representative Charlene Barshefsky has asserted that: 
"Thailand has made commitments to restructure public enterprises and 
accelerate privatization of certain key sectors--including energy, 
transportation, utilities, and communications--which will enhance 
market-driven competition and deregulation.  We expect these 
structural reforms to create new business opportunities for US 
firms".

Indonesia 
So few of the IMF conditions have been implemented in Indonesia that 
it is impossible to know what effect they would have on an already 
critical situation. The only exception to date has been the 
disastrous directive to close down 16 banks which, as the Fund itself 
acknowledged in an internal memo: "caus(ed) a bank panic that helped 
set off financial market declines in much of Asia… These closures, 
far from improving public confidence in the banking system, have 
instead set of a renewed ‘flight to safety’". 

However, the war of words between Indonesia’s 76 year old President 
Suharto, who has just entered his seventh consecutive term as its 
all-powerful president, and the IMF over Suharto’s proposed currency 
board gives a useful insight into just what is at stake. With its 
blend of belligerence, brinkmanship, self-interest and nationalism, 
the currency board debate encapsulates the antagonism between 
President Suharto and the IMF, a power struggle of the highest order 
in which both sides are playing for the highest stakes.

While the Fund has found compliant partners in South Korea’s Kim Dae 
Jung and Thailand’s Chuan Leekpai, whose own liberal democratic 
aspirations largely fit the Fund’s liberalisation agenda, Suharto is 
another political animal altogether.  The IMF argues that its 
conditions for Indonesia are designed to root out corruption (the 
latest passion of the IMF and the World Bank, replacing their 
previous fixation on Indonesia as the model of successful 
development) and increase market efficiency and competitiveness. In 
effect, though, through its explicit attacks on President Suharto’s 
personal interests, the IMF is attempting to dismantle the 
patrimonial state, a state which is strong, coercive and exclusive, 
and which protects and promotes highly individualised vested 
interests in the absence of a strong bureaucracy or effective 
institutions.

In Indonesia, there is no difference between Suharto and the state - 
an attack on Suharto is an attack on the State, and vice-versa.  
Public statements by members of Suharto’s family show the extent to 
which personal and national interests are perceived as identical: "if 
the (IMF) funds sacrifice our nation’s dignity, we do not want them," 
explained Suharto’s eldest daughter Siti Hardijanti "Tutut" Rukmana.  
In an increasingly nationalistic climate, Suharto is drawing the 
battle lines  between "‘liberal’ economic principles not in tune with 
Indonesia's economy" and the "‘family principle’ as described in the 
country's 1945 Constitution."   

These sentiments clearly resonate with some groups, including Iman 
Taufik, deputy chairman of Indonesia's chamber of commerce and 
industry, who called the IMF's decision to suspend the release of 
bail-out funds a political move. ''You have to question the move, 
whether it is purely the IMF's or the United States," he said. Since 
independence in 1945, Indonesia has generally adopted interventionist 
economic policies and, in spite of poor policy implementation due to 
nepotism, corruption, bureaucratic weaknesses and lack of capacity, 
there has been impressive growth in the past 30 years.    

However, institutional weaknesses and lack of accountability, 
combined with Indonesia’s highly restrictive political framework, 
have led to the proliferation of rent-seeking activities, both 
individually and collectively, through patrimonial networks. That is, 
special interest groups and individuals are able to pursue their 
advantage directly with those in power or via those directly 
connected to power.

The process has been supported and reinforced by foreign investors, 
banks and transnational corporations who have benefited from 
Indonesia’s openness to investment, rapid growth and high 
profitability. As a result, Suharto’s family and friends are 
tremendously wealthy and powerful. Any attempt by the Fund to 
undermine Suharto will create a dangerous political vacuum which 
cannot be filled because, after 32 years of authoritarian and often 
repressive rule, there is neither an effective bureaucracy nor a 
strong, well-organised opposition. 

The opposition that exists, centred on NGOs and independent trade 
unions, has mixed views of the IMF role, summed up in one activist’s 
description that it is "politically good and economically bad". In 
interviews, NGO activists have identified the positive elements of 
the programme as better management of banking and financial sectors; 
pressure for transparent and clean government and the elimination of 
monopolies and cartels. 

The negative aspects are seen as the cuts in the government’s fuel 
subsidy and other subsidies; moves to make the labour market more 
flexible by reducing workers’ rights and a wage freeze. Most 
interviewees take a short-term view that the most pressing need is to 
get rid of Suharto, and that the IMF could help in that. Few show 
interest in longer-term issues of sovereignty or whether the 
anglo-saxon development model espoused by the IMF is the best for 
Indonesia.  

The possible outcomes for the Indonesian people are invidious, 
boiling down to little more than a choice between the devil you know 
and the devil you don’t. 

Firstly, Suharto and the IMF could reach some rapprochement, in which 
case Indonesia is stuck with the Suharto regime (at least until age 
or infirmity forces him from power), but loses economic sovereignty, 
as the economy is opened up to foreign interests. This could ensure 
some degree of stability, but will only defer the necessary political 
transformation of Indonesian society. At the time of writing, such a 
scenario looks increasingly unlikely given the line-up of Suharto’s 
newly-appointed cabinet, which includes golfing-buddy Mohamad ‘Bob’ 
Hasan, a prime target of the IMF reform programme, as minister of 
trade and industry, and Suharto’s daughter Siti Hardiyanti Rukmana as 
minister of social affairs. This will do nothing to smoothe relations 
between Indonesia and the IMF.

Secondly, the IMF could withdraw from Indonesia. IMF withdrawal is 
widely expected to lead to the mass flight of capital and a slide 
into political and economic chaos. However, there are some 
indications that Indonesia has some real options apart from the IMF. 
A consortium of Japanese and German banks has offered to establish a 
stabilisation fund of between $10 - $15 billion dollars, which would 
allow cash strapped Indonesian firms to borrow at  R 5,000 and repay 
one year later at the same rate. In addition, the Suharto family 
fortune, thought to be safely invested overseas, is rumoured to be as 
much as $40 billion – enough for Suharto to personally bank-roll the 
currency board.   It has even been suggested that Suharto’s wealthy 
friends, whose interests are threatened by the IMF reforms, would be 
prepared to back the currency board with their personal fortunes, 
provided the "IMF is shown the door".  And, as one Singapore-based 
banker commented "They may even make some profit out of it."  

Third, external and internal pressures could force Suharto out, but 
this possibility seems to have passed with his unchallenged 
"election" in March 1998 by the National Assembly to a further five 
year term. With the high-spending B.J. Habibie only a heart-beat from 
the presidency, the West may be wishing Suharto a long and healthy 
life.

Behind the political theatre of Suharto and the IMF, lie the profound 
problems of poverty, exclusion, and the lack of popular participation 
and economic democracy which continue to hamper Indonesia’s progress. 
Neither Suharto nor the IMF has a solution to this wider 
developmental problem, and in the absence of an organised opposition 
or an alternative agenda, Indonesia’s future may come to resemble its 
past.

Korea 
South Korea, more than any other country, shows the role of the IMF 
as an instrument of its major shareholders and main contributors to 
the bailout package. In many ways, the IMF has served as a modern-day 
Trojan horse, bringing in a whole range of trade, security and 
commercial interests on the coat-tails of its "rescue package". This 
explains, perhaps, why criticism of the IMF reached its most intense 
in South Korea.  

For more than 30 years, South Korea had been the master of its own 
economic destiny, an attitude which had galled the US, but filled 
Koreans with a nationalistic pride at having transformed themselves 
from pauper to prince in just one generation. Therefore, the 
immediate public reaction to the IMF was one of anger, rejection and 
insistence that this was just another back-door way for the US to 
prise open Korean markets. And, there is some evidence to support 
this theory.

In a telling testimony to the House Ways & Means Sub-Committee, US 
Trade Representative Charlene Barshefsky said that "Policy driven 
rather than market-driven economic activity … meant that the US 
industry encountered many specific structural barriers to trade, 
investment and competition in Korea."   

Rolling back the interventionist state and breaking the 
state-industry link (which was weakening of its own accord in any 
event) is a high priority for the US and it is perhaps no coincidence 
that an important part of the IMF conditions is a set of measures 
aimed to dismantle the chaebol and weaken the links between the State 
and industry (see also Chapter 3). The specific barriers mentioned by 
Barshefsky include import clearance and certification, import 
licensing for agricultural products, and opening the financial 
services sector to foreigners. According to the IMF agreement, Korea 
has agreed to liberalise rules for import licensing and certification 
requirements for, amongst others, agricultural products and to open 
the financial sector radically to foreign ownership and foreign 
firms. Clearly satisfied with the outcome, Barshefsky says that the 
IMF package should "improve market access in Korea and correct the 
over-capacity and aggressive exporting patterns of the Korean 
chaebols."  

IMF backs off conditionalities
Even after the IMF agreement was announced in early December, the 
Seoul stockmarket continued to tumble and the won collapsed even 
further. It seemed that the IMF magic was not working, either to 
restore investor confidence, calm the markets or stabilise the 
currency. In fact, the tight fiscal requirements of the IMF deepened 
the crisis by squeezing domestic credit and pushing up interest 
rates, turning what had thus far been a crisis of the financial 
sector into a crisis of the real economy. Real people with real jobs 
started to feel the pinch. As discussed earlier, the deteriorating 
situation put the Government at the risk of default unless there was 
an immediate injection of cash, ahead of the IMF schedule. According 
to reliable sources,  the US insisted on a quid pro quo on several 
key points before they would liberate the funds. These included 
closing ailing merchant banks and reducing risky assets to make them 
more attractive for foreign takeover, opening the bond market by the 
end of 1997, liberalising interest rates, opening domestic markets to 
cars and other key Japanese industrial goods by mid-1999, and 
allowing foreign banks and financial institutions to set up wholly 
owned branches ahead of schedule.  Thus, Korea was subjected to a 
second round of conditions, before they even received the money.
 
Security interests are never far from the surface in any discussion 
about South Korea. It is reliably reported  that when it was 
suggested that the Government might cut the defence budget to meet 
IMF targets, there was a timely call from the US Pentagon suggesting 
that significant commercial contracts were at stake, and that it 
would not be a good idea to pursue that particular budget cut. 

Within a month of its bail-out programme, the IMF had eased some of 
its conditions. These included revising the inflation target upward 














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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
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Joy Obando                  Joy@focusweb.org
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