Argentina woes carry lessons for IMF in Indonesia

Berni K. Moestafa The Jakarta Post Jakarta

Argentina teetering into economic chaos right under the nose of the International Monetary Fund (IMF) hammers home some lessons for Indonesia on how it should work with the fund, experts said.

Former finance minister Bambang Sudibyo said Argentina was yet another illustration of the failure of the IMF's antidote for sick economies.

"The IMF should learn from its experience in Argentina ... the monetary approach only doesn't work," Bambang told The Jakarta Post over the weekend.

He said the IMF should give some leeway for the government to implement its own policy mix of fiscal and structural reform measures.

Wide spread unrest broke out in Argentina last week as the country's jittery economy descended into near collapse following the IMF's decision to suspend a bailout package to the country.

The fund withheld US$1.3 billion in loans as the Argentinean government failed to meet targets under the so-named zero-deficit law.

In attempting to meet the targets, the government introduced austerity measures, angering a public buckled under years of economic hardship.

Violent unrest, looting and the opposition turning down a power-sharing deal forced President Fernando de la Rua to resign.

He left behind an economy with a tough choice of either devaluing the peso or defaulting on $132 billion in debts.

With all this unraveling while the country was implementing the IMF's prescribed reforms drew criticism against the institution.

The IMF denounced such charges and instead heaped the blame on the Argentinean government for failing to meet reform targets.

Bambang said the Indonesian government should consider methods other than those under the IMF to achieve macroeconomic stability.

Curbing inflation and defending the rupiah through monetary policies only was inadequate and thus ineffective, he said.

Other factors easily push up inflation, and these were outside the reach of monetary policies, he explained.

For instance, he said, security problems disrupting the distribution of goods add to inflation pressure.

But while the IMF's monetary policies were ineffective they also drained much needed capital supply to industries.

The government invited the IMF in late 1997 to help pull Indonesia out of the financial crisis.

Its task is to provide bridging funds to the government, which is facing a liquidity crisis.

It still provides these funds, but they are tied to reform conditions set out under a letter of intent (LoI).

Bambang said the government should simplify the LoI, or develop its own reform program without making them LoI loan preconditions.

Elsewhere, economist Dradjad Wibowo said the fiasco the IMF left behind in Argentina again underscored the fund's weaknesses.

"It is time to reconsider the three principles of the Washington consensus on which the IMF works," he said.

That consensus, made with creditor countries and the World Bank in the late 1980s, allows the fund to provide assistance only to countries that are open market oriented.

It comprises three principles -- macroeconomic stability, trade and investment liberalization -- and privatization.

In Argentina, macroeconomic stability meant a zero deficit budget, which in practice shifted the burden onto the public.

Trade liberalization made the unemployment rate surge as more firms went bankrupt, while reckless privatization and state asset sales had severely cut Argentina's ability to raise funds for debt payments.

Dradjad suggested the IMF include the principle of social justice into its program.