The IMF cometh to the region<\/p>\n
Manuel F. Montes looks at some of the implications of the IMF
\nrescue packages for three Asian countries.<\/p>\n
SINGAPORE: The International Monetary Fund (IMF), long the
\nbane of import-dependent economies with profligate governments in
\nLatin America and Africa, has come to Asia to help rescue
\nThailand, Indonesia and South Korea, whose record had helped to
\nsecure Asia's reputation of export vigor and conservative
\neconomic management. Under the approach typical of IMF
\nprograms, these economies face at least a year of slow growth,
\ncompany failures, rising unemployment especially in the urban
\nareas, cuts in government programs, high interest rates,
\ninvestment malaise, and domestic political recriminations over
\nthe impact of the programs and the loss of policy flexibility,
\nafter the steep currency devaluations they have already
\nundertaken. Will the medicine work in Asia, where the nature of
\nthe underlying problem is different?<\/p>\n
In exchange for these troubles, the economies hope to get some
\nbreathing space from the currency attacks that have afflicted
\nAsian economies since the Thai authorities attempted a gradual
\ndevaluation of the baht which was quickly overtaken by the
\npanicky reactions of Thailand's creditors, resulting in Thailand
\nseeking IMF protection in mid-August 1997. Thailand obtained US$4
\nbillion from the IMF, within a total rescue package of US$16
\nbillion. Indonesia sought IMF protection on Oct. 8, 1997, after
\nthe international value of the rupiah had fallen almost 40
\npercent. The total Indonesian rescue package was US$23 billion,
\nof which the IMF contributed US$10 billion. On Dec. 5, 1997,
\nKorea obtained a US$57 billion program of which the IMF
\ncontributed US$21 billion.<\/p>\n
These rescue packages are unprecedented in their size. In
\n1995, the total Mexican rescue package at US$48 billion was
\nitself unprecedented. In Asia, in less than half a year, these
\nthree rescue packages now total almost US$100 billion. In all
\nthese cases, the size of the packages is meant to reassure
\nexternal creditors that their leftover exposure to the countries
\ninvolved will be protected and that there is no need to cut their
\ncredit lines not only to the countries directly involved, but to
\nother countries they might deem to be in a similar situation. It
\nis still not clear if the Korean package is large enough to
\nreassure foreign creditors, as the currency attacks on the won
\ncontinued.<\/p>\n
The Asian IMF programs are also unprecedented in the sense
\nthat the programs have more to do with reforming the countries'
\nfinancial systems than with restoring a sustainable balance in
\nthe economies' external transactions. The IMF's comparative
\nadvantage is with the latter and its principal approach in
\nrestoring external balance has been in \"domestic demand
\nmanagement\" which requires cuts in spending by the governments
\ninvolved. Domestic spending cuts reduce the country's demand for
\nimports and also cause a slowdown in economic activity. In the
\ncase of Korea, the planned IMF program forecasts a halving of the
\nrate of economic growth in 1998.<\/p>\n
For the Asian countries affected, a case could be made that
\nfurther cuts in government spending are uncalled for. Savings
\nrates have been high and government deficits have been low or
\nnon-existent in these countries, and in most of Asia. The
\nresulting slowdown in the Asian economies, including those
\ncarried out by governments not under an IMF program such as
\nMalaysia, will reduce exports into the region from Japan, the
\nU.S., and Europe and is the proximate cause of the reduction in
\nthe IMF's own forecasted world growth rate for 1998 from 4.3
\npercent to 3.5 percent.<\/p>\n
The reform programs for Korea, Indonesia and Thailand include
\nreforms to improve the transparency of the banking system and
\nstock markets and of the oversight capacity of public
\nauthorities. These reforms actually take more time to realize,
\nbut any efforts in this area improve the regulatory reputation of
\ndomestic authorities in the eyes of the world and should be
\nstabilizing. An important feature of the Korean program is the
\nimplementation of accounting standards that would force Korean
\ncompanies to provide a clearer view of their financial condition.
\nThe proposed program reduces the power of Korean conglomerates
\n(chaebols) to borrow at favorable terms from their own related
\nbanks.<\/p>\n
Particularly in the case of Korea, the IMF programs also
\ninvolve further opening of the economy in trade and for external
\ninvestment. As part of its accession to membership to the
\nOrganization for Economic Cooperation and Development (OECD), the
\ngroup of advanced industrial economies, Korea had previously
\nannounced phased measures to liberalize investments into Korea.
\nThe IMF program represents an acceleration of these plans. This
\nmeans that the features of these measures to open up the economy
\nhave been previously studied and discussed in Korea, only their
\nimplementation will be brought forward.<\/p>\n
As long as short-term international investors are assured
\nabout an economy's ability to service their external debt and the
\ncurrency meltdowns cease, the IMF medicine can be said to have
\nworked for the countries affected, but at a considerable cost.
\nThe strategy of high domestic interest rates combined with
\neconomic growth slowdowns will further weaken financial
\ninstitutions, reduce corporate earnings, and turn some sound
\ninvestment projects into problematic ones. Given the normal
\npractice of syndication and joint guarantee among banks, the
\nstrategy of rapid writedowns and sell-offs in property and
\nfinancial assets will depress these prices equally rapidly and
\nendanger the health of banks whose portfolios were basically
\nsound before the crisis.<\/p>\n
After its US$35 billion commitment to the three Asian
\neconomies, the IMF would only have US$44 billion left to deal
\nwith any further requests; in 1996, the IMF only committed US$8
\nbillion. Not only does the IMF find its own resources severely
\nlimited to face future requests, the pattern of contagion
\nsuggests that the IMF cannot in the future deal with individual
\ncountry problems and must begin to consider the nature of global
\nfinancial markets in its operations. Because of the integration
\nof global currency markets, the days when the IMF could fly into
\ntown and advise the devaluation of one country's currency without
\neffectively causing the devaluation of currencies of related
\ncountries are probably long past. That an international crisis
\ncould strike so deeply in a region of the world generally
\nconsidered to be economically healthy also shows the weaknesses
\nof international institutions, including the IMF, in dealing with
\nsuch crises in the new economic environment.<\/p>\n
The Asian experience suggests two things. First, domestic
\nauthorities' responsibilities in maintaining the soundness of
\ndomestic financial systems becomes even more critical in a world
\nof integrated capital markets. Secondly, the search for ways to
\nimprove the stability of currency parities and to improve
\ninstitutions, including the IMF, to deal with such types of
\nmulti-country crises must become a key item on the international
\nagenda.<\/p>\n
Dr. Manuel F Montes is a Senior Fellow at the Institute of
\nSoutheast Asian Studies, Singapore.<\/p>",
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