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,
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
World Bank, Structural Adjustment