IMF Fiddles While Jakarta Burns
Los Angeles Times, May 29, 1998
Boston Globe, May 22, 1998
Minneapolis Star-Tribune, May 26, 1998
When India set off its nuclear explosions last week, taking our foreign policy and intelligence establishment by surprise, there were immediate calls for an investigation of the Central Intelligence Agency (CIA). It's not surprising: members of Congress and the public want to know how this organization, which soaks up billions of taxpayers' dollars each year, was caught napping.
But when another secretive and unaccountable institution committed its most colossal screw-up in half a century, the response was quite different: the Clinton Administration proposed that Congress increase its funding by 45%, or $18.5 billion.
That institution is the International Monetary Fund (IMF), the most powerful financial institution in the world. It is now widely recognized that the IMF has actually worsened the Asian economic crisis-- in fact it is difficult to find an economist outside the government or the IMF payroll who will defend its recent actions. As the misery and frustration spreads throughout the area, expressions like "IMF riots," "IMF survival crimes," and "IMF suicides," have become a part of the regional vocabulary. In Indonesia, the rioting began after the IMF forced sharp increases in the price of fuel. But these price hikes, which were the last straw for many poor and working people already hard hit by falling real incomes and spiraling unemployment, were just the latest footprints in a trail of IMF blunders.
The most destructive error was to impose austerity-- economists' jargon for the high interest rates, spending cuts, and layoffs that send the economy into a recession. That turned what began as a financial crisis into a crisis of the real, underlying economy.
This is especially clear in South Korea, whose underlying economy was the strongest. The Korean private sector had piled up too much short-term international debt, which left their economy vulnerable to a financial panic when their currency began to decline against the dollar. When the domestic currency falls, it makes the debt service on foreign loans more expensive. Debtors then sell domestic currency for dollars, which sends the currency down further, which makes debt service even more expensive, and the spiral continues. In such a situation, even healthy firms can go under for lack of access to foreign exchange.
South Korea eventually stabilized the situation by reaching an agreement with foreign banks to roll over-- that is, extend the duration of-- their loans. It's not clear that the IMF contributed much to this result, other than making sure that the banks-- including our own Citibank and Chase Manhattan-- didn't have to take any serious losses. On the other hand, the Fund did cause a lot of unnecessary suffering with its forced austerity: South Korean unemployment is expected to hit 12.5% this year, up from 2.5% last year.
This could well provoke a political crisis in South Korea, a country in which big companies have traditionally provided steady employment, and which has no social safety net for the unemployed. The IMF has insisted on introducing mass layoffs, on the grounds that this will make the Korean economy more "efficient." But it is not clear that throwing people out on the street is more efficient than re-employing them elsewhere within a large firm or conglomerate, as has been done in the past. South Korea's per capita economic growth rate of more than 7% a year over the past 30 years-- among the highest in world history-- indicates that their form of capitalism is not altogether "inefficient" in its allocation of capital and labor, however corrupt and dictatorial it has been.
A confidential IMF memo leaked to the New York Times last January admitted that the Fund's policies had worsened the crisis in Indonesia's banking system. Even worse, the IMF's "bailout" package has neglected to do the single most important thing that it could do to stabilize the Indonesian economy: arrange a roll-over of the more than $65 billion in short-term foreign debt owed by Indonesian companies and banks. Until this is done, much of the Indonesian economy will be unable to recover due to lack of foreign credit for essential imports.
Ironically, one of the effects of the IMF's regional economic destabilization may be to topple the Suharto dictatorship. This will not be the first government that was brought down by its adherence to IMF "reforms." But of course if the Fund really wanted to promote democracy, there are more direct means than depressing people's living standards until they take to the streets. It could condition its aid on the holding of elections, the release of political prisoners, or an end to Indonesia's occupation of East Timor. But these are the measures it has steadfastly refused to consider.
The IMF's massive funding increase almost sailed through Congress-- without any debate-- after its proponents cynically attached it to American disaster relief in the Senate. But a real debate over what this secretive institution actually does is badly needed, as its victims in Asia and throughout the world can surely attest.