Change or peril for financial bodies<\/p>\n
By C.B. Clagluena<\/p>\n
JAKARTA (JP): Back to 1944, the Bretton Woods agreement? No
\nmore free capital market? Practically dismantling the \"ancient\"
\nBretton Woods agreement in the early 1970s, has set the (capital)
\nworld free to trade on a virtually unlimited scale; goods,
\nassets, currencies...<\/p>\n
The basis for free world capital trading has been actualized
\nand everything looked and was just great; the rich industrial
\nnations could invest surpluses (profits) in emerging markets, in
\norder to create even bigger markets and to strengthen the
\ndevelopment in such countries and regions. The spiral was
\npositive, that is moving upward.<\/p>\n
The IBRD (International Bank for Reconstruction and
\nDevelopment) World Bank, founded at the Bretton Woods conference,
\nto assist Europe and Asia to rebuild after World War II, was a
\nhandy instrument to finance industrial and infrastructural
\nprojects in newly developing countries with the respective
\ngovernment's backing.<\/p>\n
At the same time the IBRD was created, the IMF was launched as
\na helping instrument to developing nations to pay their debts,
\nchecking foreign exchange reserves and the balance of trade.
\nBeside that, the IMF focuses on lowering trade barriers and
\nstabilizing currencies. The IMF constitution dictates tough
\nguidelines and regulations. There were not many emergencies in
\nthe world capital market between 1944 and the early seventies
\nwhen currencies were traded at least within a certain band-with,
\ndeveloping industrial projects were just emerging and, therefore,
\ncorruption and deviating the money stream was relatively small
\nand almost \"tolerable\". Thus, what went wrong?<\/p>\n
1998 was probably the bleakest year of World Bank and IMF and
\nhas drastically demonstrated the inability of these two world
\norganizations to apply a certain \"control\" on the developments in
\na partially free market. An aid-package of approximately US$120
\nbillion has been wrapped for Indonesia, Thailand and South Korea
\nwith the aim to stabilize these economies. The IMF-prescription
\nwas (and is) high interest rates, no budget deficit; the result
\nis a total investment stop, mass poverty and social unrest.<\/p>\n
It doesn't help to know that in most of the suffering
\ncountries the trigger point was the criminal corruption of the
\n(former) regimes and the casino-style capitalism exercised by
\nproteges of the respective rulers. The financial life time of
\nprojects has been stretched to a point of almost non-recovery by
\nadding commissions and illegal levies to the implementation
\ncosts. This has led to an inconceivable repayment structure with
\nthe results we all know, bad debts. Latest at the point in time
\nthe \"lender of last resort,\" the Central Bank, had to (or was
\nordered to) intervene to bail out the domestic lending
\ninstitutions. The start of the dead spiral.<\/p>\n
A national economy always strives to maintain an internal and
\nexternal balance. Internal balance is reached when and if there
\nis full-employment, whereas external balance means that all
\neventual trade deficits are covered by currency or gold reserves.
\nIf a situation of unemployment occurs the Central Bank has the
\npower to increase the money output, which on international
\ncapital markets would result in a devaluation of the home
\ncurrency.<\/p>\n
Export goods would become more competitive, whereas imports
\nwould be more costly. In a reverse, the Central Bank is able to
\nreduce the money output and, therefore, dampen demand. The World
\nBank has done this several times in the 1980s in Indonesia on
\nintervention, however, at that time it was not an independent
\nCentral Bank implementing such steps, but the government, which
\ncontrolled the Central Bank. An obvious conflict of interest,
\nwhich was \"tolerated\" by the World Bank.<\/p>\n
The IMF, under Michel Camdessus, still thinks that optimizing
\n\"transparency\" and control over the banking system in the
\nrespective countries should be discussed further. However, there
\nare already strong voices in several donor-countries to dismantle
\nthe IMF and create a new body with much stringer influence and
\ncontrol over \"their\" loans. The British government has already
\nproposed to combine World Bank and IMF in a new body equipped
\nwith rigid control tools. The German press agency DPA already
\npredicts the removal of Camdessus, who failed to implement
\nstronger political influence in the emerging markets.<\/p>\n
For the first time, when the World Bank and IMF meet this
\ncoming weekend in Washington, the critical comments will
\nunderline a worldwide disagreement concerning these bodies. The
\ndissension between the G-24 (developing countries), G-10 (donor
\ncountries) and G-7 (industrialized countries) is obvious and
\ninevitable. Everybody present different reform-proposals. Total
\nconfusion on the eve of a world recession?<\/p>\n
One of the hottest topics will (probably and hopefully) be the
\nwrong assessment by the IMF of the situation in Asia, very much
\nso in Indonesia. Its reaction to the recent development
\npolitically and economically was simply non-existing. The lack of
\nunderstanding and forecasting the events, politically and
\neconomically is almost shocking. Instead of setting clear
\npolicies as to how to stabilize the currency at an early point,
\nsheer endless talks about \"reforms\" in various sectors have
\ndelayed (and consequently made impossible) quick reactions; like
\nstocking up and controlling the Central Bank's reserves for
\nexample. A \"stable\" Indonesian rupiah around 10,000 to the U.S.
\ndollar is no solution and means nothing else than a dead sentence
\nof wide sectors of the Indonesian private industry.<\/p>\n
Some countries, frustrated enough, like Malaysia have fled
\ninto self-help, by restricting currency trading, which might be
\nmore self-deception on the long run, Russia said good-bye to the
\ncapital market by entering a debt-moratorium, other governments
\ntry to stabilize the deterioration of their stock markets with
\nmassive buying moves (Hong Kong).<\/p>\n
Regions, not only countries, will have to consider drastic
\nsteps to avoid massive recession, political instability and
\nresulting anarchy. Such radical steps might include discussions
\nabout a regional single currency, Euro-style, and finally
\nimplementing, on a much quicker scale, open and unrestricted
\nmarkets for trading of goods.<\/p>\n
After the failure of IMF and World Bank in Asia, the
\nconference in Washington this weekend might and could produce a
\ngolden key to revive the world's economy or, if worst comes to
\nworst, maintain the status quo, which would probably result in a
\nworld-recession and mass poverty.<\/p>\n
Not a nice outlook to enter the next millennium. It depends on
\nthe individuals representing their (different) interests, to
\nreach acquiescence on stabilizing economies. However, the term
\n\"growth\" will have to be redefined on a worldwide scale, that is,
\nit will (if at all, and we are lucky enough) be very moderate.<\/p>\n
A moderate growth rate requires professional management to
\ndisburse surpluses wisely and provides no room for any kind of
\ncorruption. It's like an extremely fragile life form, which dies
\nat wrong treatment.<\/p>\n
Window: One of the hottest topics will (probably and hopefully)
\nbe the wrong assessment by the IMF of the situation in Asia,
\nvery much so in Indonesia.<\/p>",
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