DEVELOPMENT-ASIA: Is the IMF Prescribing the Right Medicine?

By IPS Correspondents Reprint | | Print |

Johanna Son

MANILA, Jan 24 1998 (IPS) - Asian countries wracked by economic spasms continue to take the pills dispensed by the International Monetary Fund (IMF), but they themselves are beginning to doubt the efficacy of its commonly prescribed medicine.

Some critics even go as far as saying that the IMF may in fact be aggravating the illness that has hobbled East Asian tigers.

For months now, countries like Thailand and South Korea have been taking the Fund’s prescription of high interest rates, tight government spending and credit and increased taxes, in the belief that its seal would jumpstart confidence in their economies.

But there remains little sign that the IMF prescription is shoring up confidence and that ailing East Asian economies are turning the corner soon. On the other hand, unrest such as Tuesday’s protests by workers in Thailand, is simmering and criticism slowly building up.

That in itself may not be surprising. But the sceptical voices are coming not just from the Fund’s usual critics, but from free- market economists and analysts as well.

Early this month, World Bank chief economist Joseph Stiglitz was quoted as saying the IMF — the Bank’s Bretton Woods twin — may be pushing East Asian economies into recession, not recovery. The IMF should concentrate on “things that caused the crisis, not on things that make it more difficult to deal with”, Stiglitz said in remarks published in the ‘Wall Street Journal’.

Similar views are being aired by financial analysts. In a published commentary, Ajay Kapur, Asia equity strategist at UBS Securities, put it bluntly: “TeIMF has got it comprehensively wrong in its approach to Asia, and instead of being part of the solution, it is now part of the problem.”

In December, the same doubts had been expressed by critics, among them Malaysian Prime Minister Mohamad Mahathir. “The IMF has been successful in Mexico, but it doesn’t seem to work for us. Maybe we can’t give Panadol to everyone,” he said. “Some are allergic to it, and the illness becomes worse.”

The question is: is the pain that Asia’s patients are now going through part of the recovery process, or could the IMF treatment be weakening them further?

Thailand now wants to renegotiate some terms of its IMF bailout, which its economic managers say are strangling growth and depriving the economy of momentum to stimulate itself. Yet latest official data show that Thailand has so far met the Fund’s targets for foreign reserves and current-account deficits.

“The IMF has got to be more flexible,” one Bangkok-based financial manager remarked, adding Thailand had just about done all it could to comply with IMF standards. “Growth cannot be sacrificed completely.”

South Korea also wants fiscal requirements eased, saying it is left with little room to revive economic activity to create jobs. In Thailand, South Korea and Indonesia, the IMF has batted for high interest ates to encourage people to hold on to local currencies and discourage speculation. But high interest rates make credit, vital to commerce, too expensive. Unable to survive, many firms fold up and throw people out of work.

To get troubled economies to generate resources, the Fund has sought sharp cuts in public spending and greater tax and revenue collection. Even for hobbled economies like Thailand, it demands a budget surplus of 1 percent of GDP.

Kapur calls these conditions part of the Fund’s “standard formula, concocted for Latin American, African and East European crisis”, likening it to the “country physician who hands out pink pills regardless of the ailment”.

Experts say it may well be time to review the IMF formula and see whether it fits a region made up not of splurging economies, but countries that, till trouble struck, had budget surpluses and robust foreign reserves. East Asia still has among the world’s highest savings rates.

Likewise, critics say the Fund is used to bailing out mismanaged governments, not imprudent financial sectors that went on lending and borrowing binges. The current crisis, after all, stemmed mostly from private, not public debt.

South Korean officials are in the U.S. negotiating with international bankers on rescheduling short-term debt — though the banks want the Seoul government to assume responsibility for the repayingment of private loans. Thais and Indonesians are looking to see the U.S. will put as much weight into backing their efforts at debt renegotiation.

Among the biggest worries of governments in the region are the social fallout from the IMF’s rescue packages. While the Fund deals with macroeconomic figures and graphs, political leaders have to face the wrath of their people.

In Indonesia, people are protesting the removal of long-time subsidies to fuel and food staples and riots have erupted amid rising prices. In South Korea, unemployment is shattering the culture of lifetime employment.

Concerns about the social time bomb set off by austerity measures are of particular concern in Indonesia, which in its life as an independent nation has not seen a peaceful transition of power from one leader to another.

South Korea and Thailand have been able to undergo some degree of political catharsis by changing political leaders in recent months, amid the economic crunch. But there has been no similar release valve fr Indonesia, where President Suharto has just confirmed he would seek a seventh, five-year term in March.

Indeed, the coming months promise to be touchy times for East Asian leaders. Understandably, they are keeping an eye on unemployment rates soaring across the region.

This year, unemployment in Thailand is expected to reach 3.7 million. Unofficial estimates say Indonesia’s unemployed could number 9 million by the yearend. Together, those figures add up to the population of a small country like Cambodia.

The implications of joblessness are all the more severe for South-east Asia, when viewed against the fact countries like Malaysia and Thailand were until recently full employment economies with labour shortages.

Already, restive citizens are blaming the IMF fo much of their economic ills. ‘Down with ‘IMF’ placards are popping up in Seoul, and Thai intellectuals are accusing the IMF of being a Western tool for humiliating Asia.

As early as November, Jeffrey Sachs, director of the U.S.-based Harvard Institute for International Development, warned: “If the currency crisis is well managed, Asia will be able to resume its rapid economic growth. If it is managed, with unthinking (IMF) orthodoxy, the costs could be very high, for Asia and the rest of the world.”