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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


Understanding the Fund
What it does; how it sometimes goes wrong

By Tim Healy

THE ROLE OF THE International Monetary Fund in the Asian currency crisis has become a major issue, especially as currencies have come under continued attack even after the Fund announced rescue plans. Here's what the debate is all about:

What is the aim of the IMF when it intervenes?

The performance of currency markets often has little to do with economics or logic. Hunch and inspiration: These are the sentiments that usually rule, often with the additional influence of herd instinct. Thus, IMF bailouts in Thailand, Indonesia and South Korea were meant to begin the task of turning the herd away from the precipice by restoring confidence that there would be enough money to service loans and finance trade. This was done with both direct loans and policy directives from the IMF.

Has the strategy been successful?

So far, the record is spotty. In recent days, the Indonesian rupiah has been hammered, falling at one point to 10,550 rupiah to the dollar. Having recovered slightly, the currency is still worth less than half of what it was when an IMF bailout was first announced at the end of October. For the bailouts to work, the recipient governments must be seen following IMF prescriptions, and the program itself must be effective. Neither requirement has been met in Indonesia. On one hand, the government initially had been perceived as balking at the IMF strictures -- by, for instance, endorsing a spendthrift budget. In addition, the IMF itself acknowledges a mistake in forcing Indonesia to close 16 banks, which encouraged a panic among depositors and further caused the rupiah to slide. On the plus side of the ledger, the Seoul stock market has rallied in recent days, at least partly on the strength of an endorsement from IMF managing director Michel Camdessus. The situation is in maximum flux. South Korea received a reprieve last month on debt repayment, but the end of March brings another deadline. Negotiations are underway to convert short-term, private-sector obligations that are coming due into long-term, sovereign (government-backed) debt.

So is the IMF helping, or hurting?

This debate is raging. Harvard University economist Jeffrey Sachs argues that the kind of austerity usually championed by the IMF is misplaced in Asia's case. "The IMF took its normal remedy off the shelf," he says, arguing that the last thing struggling Asian economies need now is abstinence. On the other hand, supporters argue that the IMF is much more interested in encouraging economic discipline than self-denial. For example, the IMF feels that the region should build systems to regulate borrowing, spending and lending. But critics contend that the IMF has forced recipients to risk the collapse of entire financial systems as the price for aid. They also charge that the real motivation might be to open markets for Western institutions.

If the problem is excessive debt, why don't countries simply declare a repayment moratorium -- a grace period during which payments would not be required?

Nothing (short of outright default) quite worries financial markets as much as a debt-repayment moratorium. For one thing, the lenders who would be most immediately impacted are often located in other parts of Asia. For instance, some of the biggest commercial creditors to Indonesia are South Korean banks. In turn, those banks owe large sums to Japanese banks, which are already saddled with billions of dollars in non-performing loans (not to mention their own heavy exposure to Indonesia). In cases where the lenders are from North America and Europe, debt moratoriums discourage future lending. Suddenly, governments and enterprises can't get overseas financing to finish infrastructure projects, buy imports or even pay for essential services. The chief adviser to President Suharto on Indonesian debt, Radius Prawiro, said Jan. 11 that a debt moratorium is not in the cards because such a policy has been "a bad experience in many countries."

Who's to blame for the problems? Is it lax government bureaucrats and politicians, or sleazy bankers?

All of the above. Government officials often directed banks to lend to friends and relatives. And in return they protected the institutions from competition and allowed lucrative margins between the cost of funds and price of loans. And don't forget the culpability of foreign bankers, who often lent with little regard for foreign exchange risk or the soundness of their borrowers' projects. Economists say the system lacks "moral hazard" for these lenders. Miron Mushkat, chief economist with Indocam Hong Kong, agrees that bailouts reveal fundamental weaknesses within the international banking system. "The system is a sick animal," he says. "But what can we do? Allow massive loan defaults? We're talking about difficult choices." Two important factors have exacerbated the problems caused by imprudent lending. First, currency markets have plunged to unanticipated levels -- beyond what a rational reading of fundamentals could justify. Second, the IMF prescriptions have, at least for the time being, restricted credit available to enterprises, worsening the problems of financial institutions and threatening to plunge the region into recession.

How can the average citizen help? Donate gold and jewelry to the government? Stop buying imports? Save more?

Y.C. Jao, an economics professor at the University of Hong Kong, chuckles at the notion that donating gold and jewelry to the government, as South Koreans have done, or selling private stores of dollars like Indonesians and Thais, could do very much to help: "It is a good public relations move, though, isn't it?" Bangkok spent tens of billions of dollars in the first half of 1997 to defend the baht, but that amount was hugely inadequate. In Jakarta, tycoons and government officials have answered a call from Suharto's eldest daughter, Siti Hardiyanti Rukmana (commonly called Tutut), to change dollars for rupiah. But considering that daily turnover in world currency markets easily exceeds $1 trillion, even large amounts aren't likely to shift the exchange rates of a single Asian currency significantly. Jao suggests that the most useful thing people can do is realize they are in for a period of hardship.

This edition's table of contents | Asiaweek home



U.S. secretary of state says China should be 'tolerant'

Philippine government denies Estrada's claim to presidency

Faith, madness, magic mix at sacred Hindu festival

Land mine explosion kills 11 Sri Lankan soldiers

Japan claims StarLink found in U.S. corn sample

Thai party announces first coalition partner


COVER: President Joseph Estrada gives in to the chanting crowds on the streets of Manila and agrees to make room for his Vice President

THAILAND: Twin teenage warriors turn themselves in to Bangkok officials

CHINA: Despite official vilification, hip Chinese dig Lamaist culture

PHOTO ESSAY: Estrada Calls Snap Election

WEB-ONLY INTERVIEW: Jimmy Lai on feeling lucky -- and why he's committed to the island state


COVER: The DoCoMo generation - Japan's leading mobile phone company goes global

Bandwidth Boom: Racing to wire - how underseas cable systems may yet fall short

TAIWAN: Party intrigues add to Chen Shui-bian's woes

JAPAN: Japan's ruling party crushes a rebel at a cost

SINGAPORE: Singaporeans need to have more babies. But success breeds selfishness

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