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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

COVER STORY - SPECIAL REPORT

CAN THE IMF SAVE ASIA?
The Fund and the region's leaders do not see eye to eye, but together they can find the solution

By Assif Shameen and Cesar Bacani


MORE THAN A DECADE on, Solita Monsod still fumes when she recalls her brush with the International Monetary Fund. As Philippine economic planning minister in 1986, she was negotiating with Hubert Neiss, the IMF official who was recently at the forefront of the Fund's rescue of South Korea. As Monsod tells it, Neiss insisted that Manila produce a budget surplus by the end of the year. "What's the basis of this condition?" she asked. "It just sounds good," he answered. Monsod fiercely fought for a deficit. Its finances in disarray after the country's authoritarian president, Ferdinand Marcos, fled to Hawaii, Manila would have had to cut spending on anti-poverty programs.

She won, but soon found herself marginalized in the negotiations. Monsod wanted a selective repudiation of the country's foreign loans. The Fund demanded that every borrowed penny, even for manifestly corrupt projects, be repaid. "The IMF became the bill collector of the foreign commercial banks," says Monsod. Salvador Enriquez, budget and management secretary in the current cabinet, is also scathing. "I don't like reporting to a foreign master," he says. "Everytime they come [to monitor compliance], we stupid guys in the government have to sit on one side of the table and defend our fiscal situation and next course of action."

Imagine the submerged resentment of officials in Indonesia, South Korea and Thailand. The Asian tigers were humiliated into asking for IMF help last year after speculators pushed them into devaluing their currencies. In arranging a combined $117-billion rescue package, its largest program ever, the Fund demanded cuts in government spending to produce budget surpluses, high interest rates and economic restructuring. "That's the basic prescription," says Sanjoy Chowdhury, managing director of Fraser-AMMB Research in Singapore. "Jack up domestic interest rates to keep money at home and stabilize the exchange rate. Then reduce interest rates so the domestic economy can begin to come back."

Except that it didn't seem to be working. As sky-high rates throttled businesses, the rupiah, won and baht continued to slide, pulling down the Malaysian ringgit, the Philippine peso and the Singapore dollar. Even Hong Kong, Taiwan and China felt the heat. Why? "IMF remedies are deflationary and not appropriate for a private-sector debt crisis," argues Manu Bhaskaran of SocGen-Crosby Securities in Singapore. "The standard IMF methodology was better suited to Latin America, with its high public-sector debt, overvalued exchange rates and inward-looking trade regimes." He raises the specter of capital controls and debt moratoriums as politicians run out of options. Others are openly talking about the "D" word -- global deflation.

The maddening thing is that the markets mercilessly punish any sign of deviation from what may prove to be flawed IMF policies. On Jan. 6, Indonesia unveiled a budget that did not even pretend to produce a surplus equal to 1% of GDP, an IMF requirement. The rupiah broke through the 10,000-to-the-dollar level at one point, from 6,000 on Jan. 2. The currency strengthened after the IMF held urgent talks with President Suharto. "The president did not leave any doubt that he was willing to get behind the program, and go beyond what had been agreed in the original program," IMF First Deputy Managing Director Stanley Fischer told reporters in Jakarta. A revised agreement was due to be announced Jan. 15.

Suharto may deliver. But the bigger question is: Will the IMF? And will their combined action restore confidence? Last week, Fischer's boss, Michel Camdessus, was jetting from Washington to Seoul to Jakarta and Kuala Lumpur. A former French bureaucrat who never wanted the IMF job, he was on the mission of his life -- to restore the Fund's credibility. There were signs the agency was prepared to be more flexible. "Stanley Fischer now says he doesn't care whether Indonesia runs a surplus or not," says John Seel, an economist with Bear Stearns Asia in Hong Kong. "As long as Indonesia is seriously striving toward fiscal discipline, the size of the surplus shouldn't matter."

Seel criticizes the Fund for insisting on budget surpluses and other fiscal targets. "They just distract people from the bigger issues," he complains. For Rajeev Malik of Jardine Fleming in Singapore, the focus should be on economic restructuring, including reforms in the banking system and laws to expedite bankruptcies. "Otherwise the IMF money will be just a drop in the bucket and sooner rather than later, governments would need to rush out and beg for more," he says. Agrees Chowdhury: "There may be scope for specific changes and fine-tuning as the environment changes. But neither the countries receiving IMF assistance nor the IMF itself can afford to send a message that the fundamentals of the package are negotiable."

Jeffrey Sachs, the Harvard economics professor who served as adviser on economic restructuring to the Russian government, is among the IMF's fiercest critics. He argues that the Fund "turned a dangerous situation into a calamitous situation" by imposing austerity measures, thereby "signaling to anyone who didn't see it before that these economies would go into free fall." Southeast Asian countries have competent economic managers, he says. "But if the IMF insists on great austerity," he warns, "what it could do is solidify the emerging image of Southeast Asia as a basket case and could actually spur the flight of capital from these countries." Jakarta has asked the professor to advise it on the negotiations with the IMF.

One big fear is massive social upheaval, a real possibility in Indonesia. Some 2 million people there are said to have lost their jobs since the crisis began. "I'm sure of chaos if the government really implements [the IMF] requirements," says Umar Juoro, an economist with the independent think tank Indonesian Development Economic Strategy. "Who is going to negotiate with angry stomachs?" Admittedly, the country's 1998 budget is unrealistic. It assumes an average exchange rate of 4,000 rupiah to the dollar and GDP growth of 4% -- most economists expect the economy to expand 1% or even to contract. But it also seeks to head off social unrest by continuing subsidies for fuel and food as well as funding for labor-intensive projects.

To be sure, Asian governments cannot be absolved of blame. "If you were to design the best possible and most potent package in the world, it wouldn't work so long as there are cronies and political risk," says Malik. Indonesia has taken the first step to restructure its financial sector by shutting 16 banks. But a closed institution owned by Bambang Trihatmodjo, Suharto's second son, has been allowed to reopen under another name. The perception is that the aging president is protecting the interests of his family and friends at the expense of economic reform.

"Unlike Mexico, where the government moved swiftly under pressure from Washington, governments in Asia were too busy looking inward and counting the political cost of harsh measures," adds Seel. "Because they dragged their heels for so long, it has taken time for the IMF medicine to be effective." Thailand is the prime example. A $17.2-billion IMF-led rescue package was signed in August, but the government of prime minister Chavalit Yongchaiyudh could not bring itself to close insolvent financial companies, especially those controlled by political allies. It took a new administration, led by PM Chuan Leekpai, to break the logjam in November.

All this has done little to restore investor confidence. Clearly, the IMF and its client economies need to put their act together. "The IMF realizes that some concessions are required because the environment has changed, and that's what it has been doing in the past week," says Malik. "At the same time, governments need to speed up structural reforms." Dirk Morris of investment bank Bankers Trust thinks the Fund is learning the right lessons. He says: "The renegotiations and flexibility shown by the IMF prove that its Asian programs, unlike those in Latin America, are not about fiscal tightening but structural reforms and rebuilding confidence."

The IMF is likely to drop the budget-surplus condition in the revised agreement with Indonesia. In South Korea, Camdessus told labor leaders that the agency is encouraging more government spending on social welfare. Thailand may get a favorable hearing on its request to renegotiate some of its fiscal targets. But don't expect the Fund to let up on reforms. Last week, Suharto postponed 15 infrastructure projects, including those backed by his children. Some had been put on hold last year, but were quietly reinstated.

In Seoul, Camdessus tried to persuade labor unions to back laws that would make it easier for companies to fire workers. That is necessary for mergers and acquisitions, a key element in the IMF's rescue plan. The country's chaebol are also under pressure. President-elect Kim Dae Jung, who formally takes over next month, met with the chairmen of the top conglomerates last week to urge changes in the way they do business. The executives promised to implement changes to promote transparency and efficiency, among them the consolidation of group financial statements. Outside the IMF, Korean officials are talking with foreign banks on a proposal to turn the short-term debts of government-controlled institutions into state-backed bonds.

As a result, a measure of stability has returned to Seoul's currency and stock markets. Indonesia is hoping the same thing happens when its revised IMF program is finalized. Confidence is already beginning to come back. The rupiah closed at 7,200 to the dollar on Jan. 14. The baht, ringgit, peso and other currencies also strengthened, along with stock markets in Bangkok, Manila, Kuala Lumpur and Singapore. But everyone knows it is a fragile recovery. When the euphoria dissipates from the more realistic IMF approach and the renewed commitment of governments to reform, the markets will focus once again on the painful problem of implementation.

Analysts caution against putting too much importance to the apparent calm. "Nothing has really changed, except that we've had a few good days of positive TV sound bites," warns Seel. "There are enormous hurdles to overcome in Indonesia and Korea, and to an extent, in Thailand too." And they are not only economic. Indonesia is the most vulnerable to political and social unrest, given the absence of a successor to Suharto and the ever widening gap between rich and poor. "The Hong Kong dollar peg will come under more attack and will probably give way at some point," says Morris. "Then we will see another round of speculation against Asian currencies." The Hong Kong government vows to defend the peg at all costs.

Asia may need more help and that can come only from the U.S. and other industrialized countries. British Prime Minister Tony Blair and German Chancellor Helmut Kohl are said to favor a concerted plan for Asia. But any effort would need the backing of the U.S. Congress, which must authorize the release of funds. So far, the Republican-dominated legislature has been lukewarm. "Can you blame the peanut farmers in America for not getting excited about the problems of Asia?" asks Chowdhury. "Mexico was at their doorstep. Asia is just too far away." Even then, U.S. President Bill Clinton had to fight hard in 1995 to get congressional help for Mexico.

Clinton has taken a personal hand in the Indonesian crisis in phoning Suharto to urge his compliance with IMF recommendations and sending Deputy Treasury Secretary Lawrence Summers to Jakarta and other Southeast Asian capitals. Robert Zielinski, an analyst with Jardine Fleming brokerage, urges a more activist role. "Bill Clinton has been waiting for a defining moment of his presidency, something that he'd be remembered for," he says. "Well, the Asian crisis can be that moment. Rescue these debt-ridden countries in return for more open markets and complete deregulation. In the end, it will boost trade, expand U.S. ties with Asia, create jobs there and also do the same back in America."

And if nothing works? The unthinkable may happen. Nations may give up in despair and default on their foreign loans. Or they may declare a moratorium on payments, which amounts to the same thing. Foreign banks will take big hits. It will be years before the country in default can repair its creditworthiness. Another option: Hong Kong-style currency boards. With the blessing of the IMF or a nod from the U.S., governments may peg their currency to the greenback at a level their dwindling foreign reserves can support. But this course is fraught with danger, as evidenced by the continued attacks on the Hong Kong dollar.

At the moment, the world is still keeping faith with the IMF. After all, the Fund has successfully rescued many economies, including the U.S. in 1963 and, yes, Indonesia in 1966. For all its complaints against the Fund, the Philippines has flourished under the IMF in the past few years and will soon leave its tutelage. "The success of a country's economic program does not depend on the IMF but on the nation itself," says Philippine Finance Secretary Roberto de Ocampo. "The IMF is there to tide you over. But it cannot tell you how to sort out your political system." Food for thought for those just beginning the course of treatment -- and others, like Malaysia, that may yet find themselves signing up. n

-- With reporting by Antonio Lopez/Manila,Alejandro Reyes/Hong Kong, Laxmi Nakarmi/Seoul, Julian Gearing/Bangkok, Andrea Hamilton/Singapore and Dewi Loveard/Jakarta


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