[Date Prev][Date Next][Thread Prev][Thread Next][Date Index][Thread Index]
Walden Bello testimony on IMF
Testimony of Walden Bello* before Banking Oversight Subcommittee, Banking
and Financial Services Committee, US House of Representatives, April 21, 1998
Let me first of all thank the members of the House Banking Committee
for inviting me to participate in these crucial hearings on the proposed
$14.5 billion replenishment for the International Monetary Fund. I am glad
and grateful that a representative of the non-governmental community in Asia
is being encouraged to share his views on an issue of paramount importance,
before a vote of historic international significance.
Allow me to state at the outset that the IMF's record in the Asian
region does not inspire confidence in the institution nor in the possibility
that the appropriated funds will be used wisely. I urge you to vote against
the Clinton administration's proposal for the following reasons:
First, the Fund, by promoting a policy of indiscriminate capital
account liberalization among the East Asian economies, has been a central
cause of the Asian financial crisis.
Second, the IMF exhibited a remarkable inability to anticipate and to
predict the financial crisis because it has been imprisoned by an economic
paradigm that severely underestimates the destabilizing effects of
unregulated global capital markets.
Third, the Fund is imposing stabilization and recovery programs that
are worsening instead of alleviating the economic crisis in the region,
raising the specter of a decade of stagnation, if not worse.
Fourth, the IMF is not so much restoring our economies to health as
bailing out the big international creditors. By not allowing the latter to
face market penalities, the Fund is practising what many in Asia
sarcastically term "socialism for the global financial elite."
Fifth, the Fund is being brazenly used by the Clinton administration as
an instrument to promote the bilateral trade and investment objectives of
the US, leading to the weakening of the legtimacy of the IMF as a
multilateral institution and to a backlash that could hurt America's ties
with the region.
Sixth, the IMF, for its own bureaucratic self-interest, is preventing
the Asian countries from developing innovative responses to the Asian
financial crisis that would not be dependent on US taxpayers' money.
Finally, replenishing the Fund would promote the Clinton
administration's objective of monopolizing foreign economic policymaking at
the expense of Congress—a development that I, though not a US citizen,
disapprove of as a partisan of democracy since decentralized, dispersed
power provides the best condition for the exercise of democracy.
Indiscriminate Capital Account Liberalization
I think it can no longer be denied that the Fund was central to the
development of the East Asian financial crisis. Two of the countries that
are now in trouble, Indonesia and Thailand, were, not too long ago, the two
model pupils of the Fund, for following the IMF's prescriptions,
particularly on capital account liberalization. Until last July, Indonesia
was consistently praised for having liberalized its capital account as early
as the 1970's, making it the leader, in the view of the Fund and the World
Bank, in Southeast Asian financial reform. The Bank of Thailand was also
put on a pedestal as a model for central banks in the regions. The Bank of
Thailand and the Thai financial ministry were especially complimented by the
Fund for carrying out radical measures of liberalization in the early 1990's.
Let me focus initialy on Thailand since it illustrates very clearly the
problem with the Fund and its prescription of indiscriminate capital account
liberalization. Prior to 1992, Thailand's financial system was highly
regulated. While foreign capital played a limited role in the financial
sector, the latter was also insulated from the highly destabilizing inflows
and outflows of unregulated portfolio investment and bank capital. In 1992
and 1993, owing to IMF pressure, a set of radical deregulatory moves were
carried out, which included:
- the removal of ceilings on various kinds of savings and time deposits;
- fewer constraints on the portfolio management of financial institutions
and commercial banks;
- looser rules on capital adequacy and expansion of the field of operations
of commercial banks and financial institutions;
- dismantling of all significant foreign exchange controls; and
- establishment of the Bangkok International Banking Facility (BIBF).
The BIBF was perhaps the most significant step taken by the Thais in
the direction of financial liberalization. This was a system in which local
and foreign banks were allowed to engage in both offshore and onshore
lending activities. BIBF licensees were allowed to accept deposits in
foreign currencies and to lend in foreign currencies, both to residents and
non-residents, for both domestic and foreign investments. BIBF dollar loans
soon became the conduit for most foreign capital entering Thailand, which
came to about $50 billion between 1993 and 1996. With liberalization of the
stock exchange, net portfolio investment also zoomed up, so that by late
1996, there was some $24 billion in hot money sloshing around in Bangkok
parked in stocks, corporate paper, or in non-resident bank accounts. This
was a massive amount of money entering--in a very short period of time--a
country which had no period experience handling such an infusion.
What both the IMF and its Thai pupils failed to foresee was that while
the liberalized capital account would be the conduit for huge capital
inflows when there was confidence in the country, it would also be the wide
highway through which capital would flee at the slightest sign of trouble.
And, indeed, this is what happened in 1997, when billions of dollars exited
in panic, bringing down the currency and the whole economy in the process.
Blindsided by Ideology
Thailand's financial crisis was about two years old before it got
global attention with the dramatic devaluation of the baht on July 2, 1997.
However, it cannot be said that either the IMF or its sister institution,
the World Bank, was worried about the possible consequences of the massive
inflows of foreign capital in the form of portfolio investments and loans
contracted by the Thai private sector .
At the height of the borrowing binge in 1994, the World Bank's line on
Thailand
in its annual report was:
Thailand provides an excellent example of the dividends to be obtained
through outward orientation, receptivity to foreign investment, and a
market-
friendly philosophy backed up by conservative macro-economic management
and cautious external borrowing policies.
As for the Fund, as late as the latter part 1996, while expressing some
concern with the huge capital inflows, it was still praising Thai
authorities for their "consistent record of sound macroeconomic management
policies."
The complacency of the Bretton Woods institutions stemmed from the
assumption that the massive capital inflows were fine so long as they were
incurred by the private sector and not by the government to fund the
latter's deficit spending. Indeed, the high levels of debt of the
mid-1990's coincided with the government running budget surpluses or very
slight deficits. In the IMF's view, that the country's debt skyrocketed
from $21 billion in 1988 to $55 billion by 1994 to $89 billion by 1996 was
no cause for alarm because it was mainly the private sector that was
contracting the debt. In 1996, the private sector accounted for 80 per cent
of Thailand's external debt. In other words, the market would ensure that
equilibrium would be achieved in the capital transactions between private
international creditors and investors and private domestic banks and
enterprises. So not to worry.
As we now know, leaving things to unregulated market forces led to a
situation whereby massive amounts of capital went, not to productive
investment in manufacturing or industry, but to high-yield areas with a
quick turnaround time, like real estate, car financing, and massive credit
creation. The consequent massive oversupply of real estate—some $20 billion
of residential and office buildings could not be moved by 1995—triggered not
a simple correction but a crash.
That equilibrium would entail such a painful adjustment owing to the
irrationality of global capital markets was not something that the Fund
factored into the equation when it promoted radical financial market
liberalization. This was a post-crisis realization, although the Fund is
now rewriting history saying that it had all along been warning the Thai
government of the consequences of the massive capital inflows.
But what is a matter of great surprise to most of us in Asia is that
despite the lessons of indiscriminate capital liberalization, the Fund's
basic solution to the financial crisis is for Asian countries to liberalize
our capital account and financial sectors even more. The solution is not
just transparency, as Fund officials are now fond of arguing, but greater
government regulation of capital flows, such as placing limits on bank
exposure to real estate or creating mechanisms to limit portfolio
investment, is the crying need. The Fund, however, has a negative view of
such regulatory tools.
A Cure Worse than the Disease
As many have already pointed out, the financial crisis in Asia is a
crisis of the market, of the private sector. Yet the solution of the IMF is
to impose the traditional Fund solution that addresses mainly a problem of
severe government indebtedness by cutting back on government expenditures
and requiring government to produce a surplus. The problem is also one not
of severe inflationary pressures, which is why another element of the
traditional IMF formula, raising interest rates, is questionable. The
upshot of the IMF formula is to add deflationary pressures that aggravate
the recessionary effects of the financial crisis instead of putting into
motion countercyclical mechanisms such as increased government capital
expenditures that would arrest the decline in private sector activity.
The aim of the IMF program is supposedly to achieve what IMF
bureaucrats see as the centerpiece of the program: the return of foreign
capital. This the reason why they defend in particular the maintenance of
high interest rates. There are two problems with this. First a program of
recovery demands a more diverse platform than just waiting for foreign
investors to return. As a fund manager of American Express International
has said with respect to the IMF program in Thailand, "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."
Second, even granting that focusing on the return of foreign investors alone
is a valid strategy, how on earth are they expected to return and make
profitable investments in an economy where one is engineering a deep recession?
The dangers of imposing the wrong solution are evident in Thailand. At
the time of the IMF program in August 1997, the projected GDP growth rate
for 1998 was 2.5 per cent. By the time of the first IMF review in early
December, after the government began to put into effect the deflationary
measures demanded by the IMF, the projection for the GDP growth rate was
lowered to 0.6 per cent. By the time of the next IMF review in February
1998, GDP growth was projected at a negative 3.5 per cent; and some quarters
in the Chuan Leekpai government estimated that the actual fall in output in
the second quarter of this year would be at an annual rate of 6.5 percent.
That the Fund's regimen had helped trigger a freefall was admitted by
Hubert Neiss, the IMF's Asia-Pacific director, who said that "the economy
had slowed down to such an extent that a continued austerity regime may
prompt a new economic crisis." The IMF was forced to make a slight
concession, which was to allow the government to run a budget deficit of 1-2
per cent of GDP instead of insisting on the original demand to achieve a 1
per cent surplus, but the slight postiive effects of this move are likely to
be neurtralized by the IMF's continuing insistence on high interest rates.
In this connection, it must be noted that this is not the only instance in
the last few months that an IMF program has accelerated the crisis: the IMF
recently admitted in an internal memo that in November, its directive to the
Indonesian government to shut down 16 insolvent banks precipitated a run on
two thirds oif the country's banks, throwing the country's financial sector
into shambles.
Not surprisingly, owing to the Fund's lack of concern about the way
high interest rates are making survival difficult for local firms, some of
Asia's business groups increasingly see IMF programs as geared toward
softening the resistance of local firms to takeovers by foreign investors.
Also people in Asia cannot understand why Washington and the IMF are
encouraging the Japanese to engage in more government spending, provide tax
cuts, and keep interest rates low, when they are prescribing exactly the
opposite to the rest of East Asia, in response to the same region-wide crisis.
Building a Safety Net for the Global Financial Elite
While squeezing local businesses, the IMF programs are serving as a
safety net for the big Japanese, European, and American banks that have made
irresponsible lending decisions. And in this regard, I must stress that
European banks collectively are more exposed in East Asia than Japanese
banks, who are in second place, and American banks.
To clarify matters, allow me to focus once more on Thailand.
"Financing the balance of payments deficit," which is one of the key
purposes of the IMF package for Thailand, is a broad canopy that covers
servicing the debt of Thailand's private sector. The IMF-assembled funds of
$17.2 billion provide an assurance that the government will be able to
address the immediate debt service commitments of the private sector, while
it is trying, with the support of the IMF, to persuade creditors to roll
over or restructure their loans.
The program thus repeats the pattern of the IMF-US Mexican bailout in
1994 and the IMF structural adjustment programs during the Third World debt
crisis in the 1980's, in which public money from Northern taxpayers was
formally handed over to indebted governments, only to be recycled as debt
service payments to commercial bank creditors.
To many of us in Asia, there is something fundamentally wrong about a
process that imposes full market penalties on our private sector while
sparing international private financial institutions—indeed, socializing the
latter's losses. We are not asking the IMF to bail out our firms; we are
simply asking for a sharing of the market's punishment for making the wrong
decisions. As the Thai newspaper, The Nation, puts it, "The penalties
imposed on foreign creditor banks which have lent ot the Thai private sector
must be precise and applied equally…Thailand and Thai companies may bear the
brunt of the financial crisis but foreign banks must also share part of the
cost because of some imprudent lending. It would be irresponsible to lay
the blame entirely on Thailand."
To exempt the international banks from market penalties will encourage
them to continue in irresponsible lending—and here it must be noted that
during the mid-1990's, the international banks were often the ones
scrambling to lend to Thailand. As one 1995 account put it, "as a result of
still competition, pricing levels in some cases are not premised entirely on
the financial fundamentals of the borrower. Many banks in Asia are anxious
to develop good relations with their Thai counterparts, and are increasingly
willing to lend to build relationships…."
Promoting Anti-Americanism
One of the implications of the IMF programs that this body must
seriously consider is the way that they may be promoting a new round of
anti-Americanism in the region. This has to do with the way that the
Clinton administration has made it clear that it will use the IMF to push
the US bilateral economic agenda with East Asia. In the case of Thailand,
for instance, United States Trade Representative Charlene Barshefsky has
bluntly stated in public that "we expect these [IMF] structural reforms to
create new business opportunities for US firms." Indeed, so frank has the
administration's statements been in this regard that the Financial Times has
reported that US officials have told their "domestic audience that they will
use the opportunity provided by the crisis to force radical structural
reform on other countries that would amount to what some critics see as an
‘Americanization' of the world economy."
US trade and investment proposals for the region should be negotiated
bilaterally with the different countries involved. The dangers associated
with using the IMF to achieve them are clear. First, they may achieve
benefits in the short term, but they will ultimately result in great
disadvantage to US political and economic interests in the future owing to
the great resentment they breed. The US cannot afford to create more
enemies. Second, it erodes the legitimacy of the IMF, making it
increasingly look like an extension of the US Treasury Department and
Commerce Department, thus weakening its role in a multilateral world order
and bringing us all back to a unilateralist way of resolving
disagreements—precisely the approach that the administration itself has
disavowed.
Creating Poverty and Instability
In a recent statement that appeared in the International Herald
Tribune, Michel Camdessus, the managing director of the IMF, said among the
basis of IMF programs must be "a more effective dialogue with labor and the
rest of civil soceity to increase political support for adjustment and
reform…" Well, this is certainly not the case with the programs in
Indonesia, Thailand, or Korea. In all of these countries, the IMF programs
were designed behind closed doors, between IMF bureaucrats and government
technocrats, with the participation of few elected officials and little or
no input from labor unions, non-governmental organizations, and people's
organizations. In Indonesia, negotiations on the program have taken place
strictly between IMF officials and a few trusted lieutenants of a dictator.
Now, this lack of democratic legitimation of IMF programs may prove to
be explosive in the coming months as the population is forced to bear the
brunt of the costs of the profligacy and irresponsibility of local business
groups and international banks. In September 1997, then Finance Minister
Thanong Bidaya announced that about one million workers would lose their job
in the coming recession. As of February 1998, some 80,000 workers had
already been thrown out of work. With the downturn expected to be much
worse than projected, it is likely that the unemployment rate could reach as
high as 15-20 per cent of the work force of 2.9 million people. In
Indonesia, the economic freefall, according to economist Faisal Basri, has
raised the number of people living under the poverty line to 118.5 million
people from 22.5 million—that is from 11.2 per cent of the population to
60.6 per cent.! The ranks of the unemployed is expected to reach 13 million
in the next few months. In Korea, many observers estimate that the numbers
of unemployed will exceed two million by the end of 1998, or 9 per cent of
the work force. Women are likely the first to be layed off, and women with
children are likely to be laid off first. This will require a great deal of
psychological adjustment on the part of a work force that is accustomed to a
system of lifetime employment with no unemployment insurance. That the
adjustment is extremely traumatic is underlined by the increasing number of
what Koreans call "IMF suicides" of layed off workers who also take with
them their wife and children to the after life, most likely because of their
worry that no one will be left to provide for them in this life.
A few weeks ago, Thais were treated to a preview of things to come when
they woke up to a veritable mini-uprising by workers at a Thai auto parts
firm. The event, which was seen worldwide via CNN, began when the workers
blocked a major highway as a response to the firm's announcement that it
would not be able to give them their much-awaited bonuses owing to the
financial crisis. There followed several hours of pitched battles that
pitted the workers against the police and angry motorists, ending woith the
wholesale arrest of scores of workers who were herded in prisoner-of-war
fashion into police vans. To Thais, who are known for their
non-confrontative ways, the television images of the event reminded them
more of Korea than of Thailand.
Institutionalizing Stagnation
Jeff Garten, Undersecretary of Commerce during President Clinton's
first term in office, has said that the countries of East Asia "are going
through a deep and dark tunnel" in the next few years. What lies at the end
of that tunnel, many fear, is a condition akin to that of the Philippines,
an Asian country that was known until just a few years ago as the ‘sick man
of Asia."
The Philippines, as President Fidel Ramos told you two weeks ago when
he was visiting Washington, has been under one or other IMF program for the
last 36 years. But whereas Mr. Ramos viewed this condition positively, I
draw the opposite conclusion. The height of the IMF years ocurrred in the
period 1983-1993, when the country was subjected to successive programs of
structural adjustment. The main aim of economic policy during this period
to which all other objectives were subordinated was repaying the foreign
debt. The economic formula consisted of sharp cutbacks in government
spending, high interest rates, liberalization, deregulation, and
privatization. Not surprisingly, the economy registered zero average growth
during that decade, causing the country to fall far behind its neighbors
which were growing by 6 to 10 per cent. In the 1970's, the Philippines was
known as Southeast Asia's most advanced large economy. Its economy was as
large as Thailand's. By the early 1990's, a combination of rapid growth in
Thailand and a dose of Marcos economics followed by IMF adjustment in the
Philippines resulted in situation wherein the Thai economy was more than
twice that of the Philippines.
Not surprisingly, the country was afflicted with the highest poverty
incidence among the non-communist Asian countries and one of the most
unequal distributions of income and wealth.
The Philippines economy has grown again modestly in the last few
years—mainly because we had sunk so low that we had nowhere to go but up.
Yet even this slight growth threatens to be choked off by a potent
combination of the financial crisis and a "precautionary"program of the
IMF—what people sarcastically call a "post-graduate program" since we were
supposed to have exited from the Fund on March 31 this year.
This program calls on the government to fall in line with our neighbors
by keeping interest rates high, produce a budget surplus, and export our way
out of the crisis. As a result, our modest growth is likely to give way to
a recession, unemployment is expected to reach 15 per cent of the work
force, and our poverty incidence, after stabilizing for a few years, is
likely to worsen. Moreover, with greater competition for export markets
from our neighbors, with their newly devalued currencies, the IMF
prescription to export our way out of the crisis is leading us to exploit
our natural resources and environment more intensively. Just last week,
the Ramos administration tried to lift a ban on the export of lumber, which
had been instituted a decade ago to protect our last remaining forests.
The Philippines is no exception to the Asian gloom, contrary to Mr.
Ramos' Panglossian assessment when he was in Washington to convince you to
vote for the IMF replenishment. Like our neighbors, we are headed for the
same "deep and dark tunnel," as Jeff Garten calls it, pulled by the same IMF
locomotive.
Monopolizing Solutions and Eroding Congress's Authority
One of the biggest myths around these days is the indispensability of
the Fund to a resolution of the Asian financial crisis. In fact, the Asian
countries did attempt to set up an alternative institution and process to
stabilize the financial situation in the region in the fall of last year,
one which would not have entailed additional dollar appropriations by the US
Congress..
The alternative approach came in the form of the Japanese proposal to
establish the "Asian Monetary Fund " (AMF) last August.. I think it is
important to note in this connection that contrary to the administration's
claim that Japan is not doing anything to help its neighbors get out of the
crisis, the Japanese government was willing to put up a considerable part of
the resources for this alternative approachThe Fund, with a possible
capitalization of $100 billion (all of it drawn from Asian countries) was
envisioned as a multipurpose fund that would assist Asian economies in
defending their currencies against speculators, provide emergency
balance-of-payments financing, and make available long-term funding for
economic adjustment purposes. As outlined by the influential Ministry of
Finance official Eisuke Sakakibara, the fund would be a quick-disbursing
mechanism that would be more flexible than the IMF by requiring a less
uniform and less deflationary set of policy reforms as conditions for
receiving help. The AMF had the backing of all the Asian countries, with
Taiwan and China being on the same side for once..
Not surprisingly, IMF Managing Director Camdessus and his deputy,
Stanley Fischer, argued against the establishment of the AMF. The stated
rationale was that the AMF would subvert the IMF's ability to secure tough
economic reforms from Asian countries. The reality was that the AMF would
threaten the IMF's monopoly on the making of policy for dealing with the
financial crisis. The Clinton administration, without consulting Congress,
backed the IMF leadership and "made considerable efforts to kill Tokyo's
proposal." One of the key reasons is that, with increasing Congress'
increasing assertiveness in foreign economic policy using its power of the
purse, the Clinton administration sees the IMF as an increasingly important
instrument to push key initiatives without having to submit them to
Congressional oversight.
Faced with the administration's opposition, the Japanese government
withdrew the proposal and with that went the promise to commit substantial
sums of money. With Japan retreating, the Taiwanese and the Chinese also
withdrew their promise to commit their tremendous reserves to dealing with
the crisis. Instead of these countries bearing the costs of the adjustment
and recovery of their neighbors, the Clinton administration is now asking
you, the Congress, for this money in the form of the $14.5 billion IMF
replenishment fund.
Recommendations
In conclusion, I join many of those who recommend withholding the $14.5
billion from the Fund. The world will not come to an end without an IMF
replenishment. In fact, I daresay that the with IMF resources reduced, the
Asian countries will be forced to come up with innovative, self-help
cooperative solutions, like some revived version of the Asian Monetary Fund,
to deal with the financial crisis that would not be a drain on American
taxpayers' money. Giving the Fund the replenishment at this time will only
allow IMF bureaucrats to dig in their heels against the much needed reform
of their structures of decisionmaking and accountability and the urgently
needed review of their failed policies. Giving the replenishment at this
time will only encourage persistence in economic programs that perpetuate
dependence on the Fund and American taxpayers' money rather than promote
financial independence. Giving the replenishment will only serve to
strengthen the executive's drive to monopolize foreign economic policymaking
at the expense of Congress.
I thank you.
*Professor of Public Admiinistration and Sociology, University of the
Philippines; co-director, Focus on the Global South, Chulalongkorn
University Social Research Institute, Bangkok, Thailand; national chairman,
Akbayan! Party, Philippines; co-author, Dragons in Distress: Asia's Miracle
Economies in Crisis (London: Penguin, 1991), and A Siamese Tragedy:
Development and Degradation in Modern Thailand (London: ZED, forthcoming).
The Development GAP
927 15th Street, NW
Washington, DC 20005
Ph: 202/898-1566
Fax: 202/898-1612