Good governance or illusion?<\/p>\n
By Makmur Keliat<\/p>\n
Will the International Monetary Fund help bring good
\ngovernance to Indonesia or is it only a political illusion? This
\nis the first of two articles.<\/p>\n
SURABAYA (JP): There have been divergent views raised by
\nIndonesian observers regarding the recent government decision to
\nrequest International Monetary Fund (IMF) assistance.<\/p>\n
The existing views range from a full endorsement, to a
\nhalfhearted acceptance so long as the assistance does not put
\nIndonesian sovereignty at jeopardy, to a candid rejection.<\/p>\n
This article attempts to analyze the plausibility of reasons
\nbehind this critical view of IMF policy prescription.<\/p>\n
The IMF, since its very inception in 1944, was conceived as an
\ninstitution to promote liberal world trade order.<\/p>\n
The underlying assumption behind its establishment was that
\nthere should be an institution acting as a credit provider to
\ncountries which suffer from acute problems in their balance of
\ntrade and payments.<\/p>\n
It is feared that such difficulties could push countries into
\nrelying on protectionism in their foreign trade policies, this is
\nperceived to be a contravention of the basic tenets of liberal
\ntrade. Protectionism is considered destructive to the well-being
\nof the international community.<\/p>\n
It is from this concept that the IMF has come to exist as a
\nlending institution. Its fund resources are taken from
\ncontributions given by all members and redistributed to members
\nwhich are in need of financial assistance.<\/p>\n
However, the largest chunk of IMF fund resources does not come
\nfrom developing countries, despite the fact that the institution
\nnow consists of more than 180 members.<\/p>\n
The total contribution given by the United States, the United
\nKingdom, Germany, France, Japan, Canada and Italy remains
\nparamount and accounts for more than 50 percent of the IMF's
\ntotal fund resources.<\/p>\n
Accordingly, it is difficult to erase the impression that the
\nIMF -- initially consisting of 44 members -- can continue to do
\nits job appropriately due to the fund commitment shown by
\ndeveloped countries. This, however, has resulted in developed
\nnations playing the dominant role in shaping IMF policies.<\/p>\n
It is noteworthy that the IMF is not a democratic institution.
\nVoting power is not equally distributed among members, it is
\ndetermined by the magnitude of funds provided by each member.<\/p>\n
Since fund contribution from developed countries is larger
\nthan that of developing countries, it is therefore natural that
\nthe voting power of developed countries is also greater than that
\nof developing countries.<\/p>\n
Seen from this viewpoint it is reasonable to say that any
\nchange to the IMF procedures -- which require 85 percent approval
\n-- will be largely determined by the political will of developed
\ncountries.<\/p>\n
The IMF's scheme for providing financial assistance is
\narranged through a short-term standby arrangement with an average
\nrepayment period ranging from 12 months to 18 months, but it can
\nsometimes be extended up to three years.<\/p>\n
The disbursement, however, is made in the form of a series of
\ninstallments and depends on certain performance criteria and
\nconditions, be they qualitative or quantitative.<\/p>\n
Therefore, it is possible for financial assistance not to
\ncontinue if the performance criteria and conditions determined
\nby the IMF are not fulfilled by debtor countries.<\/p>\n
It is this performance criteria and conditionality that leads
\nto IMF assistance being a hotly debated issue.<\/p>\n
In general when countries receive IMF financial assistance,
\nthey should accept the introduction of a variety of policies such
\nas the removal of government subsidies, placing a ceiling on
\nexternal borrowing and the adjustment of the exchange rate, the
\nso-called devaluation.<\/p>\n
Besides implying a reduction of the state's role and
\nencouraging an expanded role for the private sector in the
\neconomy, all these economic measures indicate the importance of
\nan export-oriented economy.<\/p>\n
This prescription can certainly be considered harsh.
\nNevertheless, the tendency since the 1970s has been for the
\ncumulative amount of IMF assistance, with high conditionality, to
\nbecome more and more significant.<\/p>\n
There are three plausible reasons behind this phenomenon.
\nFirst, there have been an increasing number of developing
\ncountries beset with great difficulties due to their balance of
\npayments.<\/p>\n
Such difficulties may have arisen from debt payment or because
\nof prolonged deficit in their balance of trade.<\/p>\n
Second, IMF's appraisal and its policy prescription are
\nclosely knit with the international finance market. It seems to
\nhave become convention that if developing countries decline to
\naccept the IMF prescription, other international institutions
\nsuch as the World Bank and international private banks will
\nautomatically be reluctant to provide credit facilities.<\/p>\n
As a consequence, though IMF conditionality is considered
\npainful, developing countries are put in a position of having no
\nchoice.<\/p>\n
Third, the arguments most often put forward by those who
\nsupport the IMF prescription have to some extent gained ground.
\nHigh conditionality is said to have become a must in the name of
\nequal rights between member countries and with a view to evolving
\na mechanism for the revolving fund.<\/p>\n
They argue that high conditionality will avoid the possibility
\nof debt rescheduling and this, in turn, can be used to maintain a
\nmechanism for fund recycling to help other countries which need
\nfinancial assistance.<\/p>\n
However, criticism against the IMF policy prescription
\ncontinues unabated. The criticism mainly relates to the
\nsuggestion that developing countries should seek to boost exports
\nand reduce imports.<\/p>\n
As Paul Stern's study (1991) has proved, not all developing
\ncountries that followed this IMF prescription in the early 1980s
\nsucceeded in achieving the objective.<\/p>\n
What happened to some of them is that the reduction in imports
\ntook place along with a decrease in export revenue. One of the
\nreasons behind the decrease in export revenue stemmed from the
\ndeterioration in terms of trade for their exports, which is
\nbeyond the control of developing countries.<\/p>\n
At the same time, the reduction in imports had a severe impact
\nfor developing countries. The problem of unemployment became
\nexacerbated and economic potential could not be fully realized.<\/p>\n
Moreover, the success of an export-led economy largely depends
\non the global economic situation. This means that a failure to
\nincrease exports is bound to occur if other countries refuse to
\nabsorb developing countries' exports.<\/p>\n
Therefore, it is not an exaggeration to say that an export-led
\neconomy is not a short-cut or instant formula for the economic
\nproblems faced by developing countries.<\/p>\n
The writer is a teacher at the Department of International
\nRelations, Faculty of Social and Political Sciences, Airlangga
\nUniversity, Surabaya.<\/p>",
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