IMF Under Siege

by John Miller

Dollars and Sense magazine, July / August 1998


When the Indonesian government under IMF order ended oil subsidies in May, the people rebelled. Already suffering an economic crisis that pushed as many as half of Indonesians into poverty and ignited a near-hyper inflation that more than doubled the price of such staples as cooking oil and rice, protectors burned grocery stores, shopping malls, and car dealerships, and much of Jakarta's Chinatown. Over five hundred died.

Despite quickly reinstating price supports for fuel, it was too late for presidential strongman Suharto. His regime shattered, Suharto resigned.

Earlier this year, back in Washington, far fewer demonstrators, perhaps a couple of hundred, gathered outside of Congress. The protesters, organized by 50 Years is Enough, a coalition of groups opposing World Bank and IMF policies, chanted, "support the people, not the bankers," as Clinton l Treasury officials argued for $18 billion in new funding for the IMF.

Inside Congress, the Treasury officials had their hands full. Conservatives, not at all the usual suspects, attacked the IMF funding request. The Heritage Foundation, the right-wing think-tank, supplied the ammunition, launching salvos that sounded awfully similar to the chants of those outside: "The IMF bails out investors, not the people of troubled countries."

Its free-market distaste for rescuing countries that "fell into their current morass because of their own shortsighted policies," even led the Heritage Foundation to suggest, "It might be time to abolish the IMF."

So far, the conservative-led campaign has denied President Clinton's request for more money for the IMF.

A quick look shows why so many-including among the right and the business press-believe the IMF made things worse in East Asia. The IMF's demand that Thai and Indonesian authorities cut government programs and tighten monetary policy is a perverse response to a region already suffering a massive outflow of capital, more than $100 billion, since the crisis began last year.

Even from the perspective of budget balancing, cuts in government spending are uncalled for. These governments have not run large deficits. Unlike earlier Third World debt crises, the Asian crisis is firmly rooted in private, not public sector, debt. And higher interest rates have done little to lure foreign monies back into Thailand and Indonesia and to restore the lost value of their currencies. Instead, already cut off from international capital, Thais and Indonesians now find that their own banks are no longer making loans, as the IMF closes nearly fifty banks in Thailand and over thirty in Indonesia.

IMF policies have been alarmist as well. As the Thai currency came under attack, the IMF labeled Thailand in crisis despite having praised Thai economic management in its 1997 annual report. The IMF fueled a panic that fed on itself

First world economies facing financial crises come in for far different treatment. When the U.S stock market crashed in 1987, Alan Greenspan assured investors that the underlying fundamentals of the economy were sound and that the Fed, backed by the U.S. Treasury, would provide the needed cash flow. Likewise, the leading industrial economies (and the IMF) are urging Japan to increase government spending, cut taxes, and keep interest rates low to counteract its continued economic stagnation-just the opposite of the IMF prescription for the rest of East Asia.

The IMF maintains that its austerity measures are necessary because Asia's problems are "mostly l homegrown"-due to serious policy failures. To lure foreign investors and win their confidence that their investment's value would remain stable into the future, Thailand, and to some extent Malaysia and Indonesia, tied their currencies' values to the dollar's. But this move overvalued their currencies, making it relatively cheap for Thais or Indonesians to borrow from abroad. And they did, to an excessive extent. Lax financial regulation also allowed overlending by unsound local banks, and overinvestment in property.

But the IMF's austerity measures to battle these policy sins fall short on several counts. First, even if structural reforms are needed, they should not be part of an initial plan to stabilize an economy. Instead, the IMF should have focused on saving the sound elements of these economies-from solvent banks to viable long-term investments. Second, the IMF's call for liberalization, especially of laws relating to foreign ownership, will allow international capital to buy banks and other domestic businesses at fire-sale prices, and further reduce the national autonomy of these economies. Third, IMF free market policies got these countries, especially Thailand, into their current troubles. In the early 1990s, under IMF pressure, Thai authorities radically deregulated its financial sector. Deregulation allowed foreign capital to flood the economy but also to flow out with equal ease at the first sign of trouble.

Finally, even if the faults of the Asian economies are as real as the IMF alleges, they hardly justify the enormity of the punishment. Against the dollar the Thai baht has lost half its value and the Indonesian rupiah nearly three-quarters its value. But neither country ran a large government deficit or allowed ruinous double-digit inflation. Surely international investors are just as responsible or more responsible for the instability of the region than its local capitalist, bankers, governments, and workers. Yet foreign investors are being bailed out by the IMF, not punished.

These missteps have even Jeffrey Sachs, the Harvard economist and no enemy of capitalism, arguing that, "the IMF should be held to the same standards of good governance that it sanctimoniously preaches for others." Jesse Helms, the notoriously grumpy right-wing Chair of the Senate Foreign Relations Committee, has made "book- keeping transparency' a condition for considering replenishing the IMF coffers. As a starting point the IMF deliberations and program documents must be made public.

Yet more fundamental reforms of the IMF are necessary. To begin with, the 1994 U.S. law, sponsored by Representatives Bernie Sanders and Barney Frank, that requires labor rights to be an element considered in all IMF bailout loans, must be enforced. It has not been in East Asia. Neither Indonesia nor Thailand has ratified the International Labor Organization Convention that recognizes the right of workers to organize The Suharto regime brutally smashed Indonesia's independent labor movement. Thai and Indonesian workplaces remain among the most dangerous in the world. Horrifying industrial accidents-from chemical spills to fires -are commonplace. What labor law exists is seldom enforced, and wages are often as little as two dollars a day.

To promote social accountability, instead of frustrating it, and to relieve human suffering, not add to it, the IMF would have to operate far differently. Many progressives in Southeast Asia and the United States favor replacing the IMF as we know it with a financially independent institution funded by a tax on all cross-border flows of capital. This transaction tax, designed by Nobel prize winning economist James Tobin, would discourage speculative capital movements. The new IMF would also need new standards that gave financial relief to bankers and capital investors only when they invest long term, pay living wages, and respect international labor standards. ~


John Miller teaches economics at Wheaton College and is o member of the D&S Collective

IMF, World Bank, Structural Adjustment