Change or peril for financial bodies

By C.B. Clagluena

JAKARTA (JP): Back to 1944, the Bretton Woods agreement? No more free capital market? Practically dismantling the "ancient" Bretton Woods agreement in the early 1970s, has set the (capital) world free to trade on a virtually unlimited scale; goods, assets, currencies...

The basis for free world capital trading has been actualized and everything looked and was just great; the rich industrial nations could invest surpluses (profits) in emerging markets, in order to create even bigger markets and to strengthen the development in such countries and regions. The spiral was positive, that is moving upward.

The IBRD (International Bank for Reconstruction and Development) World Bank, founded at the Bretton Woods conference, to assist Europe and Asia to rebuild after World War II, was a handy instrument to finance industrial and infrastructural projects in newly developing countries with the respective government's backing.

At the same time the IBRD was created, the IMF was launched as a helping instrument to developing nations to pay their debts, checking foreign exchange reserves and the balance of trade. Beside that, the IMF focuses on lowering trade barriers and stabilizing currencies. The IMF constitution dictates tough guidelines and regulations. There were not many emergencies in the world capital market between 1944 and the early seventies when currencies were traded at least within a certain band-with, developing industrial projects were just emerging and, therefore, corruption and deviating the money stream was relatively small and almost "tolerable". Thus, what went wrong?

1998 was probably the bleakest year of World Bank and IMF and has drastically demonstrated the inability of these two world organizations to apply a certain "control" on the developments in a partially free market. An aid-package of approximately US$120 billion has been wrapped for Indonesia, Thailand and South Korea with the aim to stabilize these economies. The IMF-prescription was (and is) high interest rates, no budget deficit; the result is a total investment stop, mass poverty and social unrest.

It doesn't help to know that in most of the suffering countries the trigger point was the criminal corruption of the (former) regimes and the casino-style capitalism exercised by proteges of the respective rulers. The financial life time of projects has been stretched to a point of almost non-recovery by adding commissions and illegal levies to the implementation costs. This has led to an inconceivable repayment structure with the results we all know, bad debts. Latest at the point in time the "lender of last resort," the Central Bank, had to (or was ordered to) intervene to bail out the domestic lending institutions. The start of the dead spiral.

A national economy always strives to maintain an internal and external balance. Internal balance is reached when and if there is full-employment, whereas external balance means that all eventual trade deficits are covered by currency or gold reserves. If a situation of unemployment occurs the Central Bank has the power to increase the money output, which on international capital markets would result in a devaluation of the home currency.

Export goods would become more competitive, whereas imports would be more costly. In a reverse, the Central Bank is able to reduce the money output and, therefore, dampen demand. The World Bank has done this several times in the 1980s in Indonesia on intervention, however, at that time it was not an independent Central Bank implementing such steps, but the government, which controlled the Central Bank. An obvious conflict of interest, which was "tolerated" by the World Bank.

The IMF, under Michel Camdessus, still thinks that optimizing "transparency" and control over the banking system in the respective countries should be discussed further. However, there are already strong voices in several donor-countries to dismantle the IMF and create a new body with much stringer influence and control over "their" loans. The British government has already proposed to combine World Bank and IMF in a new body equipped with rigid control tools. The German press agency DPA already predicts the removal of Camdessus, who failed to implement stronger political influence in the emerging markets.

For the first time, when the World Bank and IMF meet this coming weekend in Washington, the critical comments will underline a worldwide disagreement concerning these bodies. The dissension between the G-24 (developing countries), G-10 (donor countries) and G-7 (industrialized countries) is obvious and inevitable. Everybody present different reform-proposals. Total confusion on the eve of a world recession?

One of the hottest topics will (probably and hopefully) be the wrong assessment by the IMF of the situation in Asia, very much so in Indonesia. Its reaction to the recent development politically and economically was simply non-existing. The lack of understanding and forecasting the events, politically and economically is almost shocking. Instead of setting clear policies as to how to stabilize the currency at an early point, sheer endless talks about "reforms" in various sectors have delayed (and consequently made impossible) quick reactions; like stocking up and controlling the Central Bank's reserves for example. A "stable" Indonesian rupiah around 10,000 to the U.S. dollar is no solution and means nothing else than a dead sentence of wide sectors of the Indonesian private industry.

Some countries, frustrated enough, like Malaysia have fled into self-help, by restricting currency trading, which might be more self-deception on the long run, Russia said good-bye to the capital market by entering a debt-moratorium, other governments try to stabilize the deterioration of their stock markets with massive buying moves (Hong Kong).

Regions, not only countries, will have to consider drastic steps to avoid massive recession, political instability and resulting anarchy. Such radical steps might include discussions about a regional single currency, Euro-style, and finally implementing, on a much quicker scale, open and unrestricted markets for trading of goods.

After the failure of IMF and World Bank in Asia, the conference in Washington this weekend might and could produce a golden key to revive the world's economy or, if worst comes to worst, maintain the status quo, which would probably result in a world-recession and mass poverty.

Not a nice outlook to enter the next millennium. It depends on the individuals representing their (different) interests, to reach acquiescence on stabilizing economies. However, the term "growth" will have to be redefined on a worldwide scale, that is, it will (if at all, and we are lucky enough) be very moderate.

A moderate growth rate requires professional management to disburse surpluses wisely and provides no room for any kind of corruption. It's like an extremely fragile life form, which dies at wrong treatment.

Window: One of the hottest topics will (probably and hopefully) be the wrong assessment by the IMF of the situation in Asia, very much so in Indonesia.