Debt trap and dependence in Argentina, Indonesia

Rizal Ramli, Economist, Jakarta

For Indonesians, the images of the Argentine riots broadcast by the international news media recall the horrific mass violence that erupted in our country on May 12, 1998. The events were similar, although the scale of the violence was much greater in Indonesia.

Whereas 26 people died and hundreds were injured in the Argentine riots, Indonesia's May 12 tragedy claimed hundreds of lives and left thousands with serious injuries. In both countries, looting and arson destroyed million of dollars worth of property, although again the scale of destruction was much greater in Indonesia.

The difference in the scale and dimension of violence is best understood in the context of the tremendous differences in wealth between the two countries.

GNP per capita in Argentina in 2000 was about US$7,500 as compared to only $570 in Indonesia. The potential for violence and anarchy is typically greater in poor countries, where millions of people struggle to survive at the edge of subsistence. Another important factor in Indonesia was the pernicious effects of racism related to the country's huge inter- ethnic disparities in income that fan the flames of racist hatred.

Economic crises have led to violence not only in Argentina and Indonesia, but also in many other Latin American and African countries subject to IMF adjustment programs. The IMF, which "professes" a strict separation between politics and economics, is totally unconcerned with the social, political and humanitarian consequences of its policies and recommendations.

In early October 1997 I wrote that the IMF would not resolve the impending financial crisis, but would instead plunge Indonesia into a deeper economic crisis. The IMF acts as surgeon, not savior. The IMF would cut the limbs from the Indonesian economy, and after the amputation had been carried out the doctor would present us with a hefty bill for its services.

In 2001, for example, Indonesia received US$400 million in loans from the IMF but had to pay the institution US$2.3 billion, consisting of US$1.8 billion in repayment of principal and $500 million in interest. These are payments to a doctor that is guilty of malpractice but still demands payment for services plus interest.

Many cases in Latin America and Asia have shown that the effectiveness of the IMF's generic prescription for crisis-hit countries is very low. Indeed, many of the IMF's patients have recovered temporarily, only to relapse into another crisis within a short period of time. Few have escaped the cycle of repeated crises and have remained on the IMF's critical list for decades.

Argentina is a prominent example of a repeat patient of the IMF. Since the 1970s, the country has experienced a number of economic crises interspersed with short periods of recovery. The main causes of this cycle of relapse and recovery are misdiagnosis, inappropriate IMF policy recommendations focusing on short term recovery without addressing structural factors, and an increasing debt burden resulting from repeated short-term lending programs.

With every crisis the country's debt burden has increased, which creates a time bomb leading to the next economic crisis. Argentina has now defaulted on its US$ 132 billion debt, a debt burden resulting directly from the continuing cycle of crisis, short-term crisis management, accumulation of additional debt leading to economic relapse.

This pattern of economic crisis leading to higher levels of debt has been duplicated in Indonesia based on IMF recommendations.

Indonesia's debt burden has doubled during the four years of the economic crisis, and now the stock of debt stands as a time bomb that threatens to bring on a new crisis. IMF policies have resulted in an extraordinary increase in public debt, particularly public domestic debt, which did not exist prior to 1997.

Before the crisis, Indonesia's total international debt was US$136 billion, consisting of US$54 billion in the public sector $82 billion in the private sector. By the end of 2001, the public sector international debt had risen to $74 billion.

In addition, the government had taken on Rp 647 trillion (about US$65 billion) in domestic debt. Meanwhile, private sector international debt had decreased to US$67 billion as a result of debt restructuring and accelerated repayments. Total public debt is now approximately equal to annual gross domestic product. As a result of the financial crisis and IMF malpractice, Indonesia's debt burden has doubled over the past four years.

Macroeconomic factors were indeed responsible for the onset of the crisis, but they cannot be blamed for triggering political upheaval and street violence. Political unrest in Argentina, Indonesia and other crisis-hit countries follows directly from the IMF-sponsored policies of fiscal austerity. The IMF demands fiscal restraint to enable crisis-ridden states to produce the surplus needed to repay the countries overseas creditors, including to pay the IMF itself.

Fiscal austerity at a time of declining purchasing power gives rise to desperation and hopelessness, which in turn is the main cause of social unrest like that experienced in Argentina on Oct. 20 2001.

Similarly, the preconditions for the violence of May 12, 1998 were put in place in Indonesia by IMF-sponsored fiscal policies. To be sure, there was no shortage of domestic political actors anxious to exploit the situation. Political tension was steadily mounting, and only the smallest spark was needed to set the country ablaze.

At the time, the IMF was preparing its recommendation to the government to cut fuel subsidies as a way to reduce the budget deficit. As an independent analyst, I was invited by Hubert Neiss, the IMF's Asia director, to an informal discussion of the situation at the Grand Hyatt in Jakarta.

When Neiss asked for my opinion on the proposed policy, I said that the policy may be correct but the timing is wrong. Political tensions were running so high that the proposed increase in fuel prices would likely trigger some kind of extreme reaction. Demonstrations started one day after the new policy was announced, leading to the riots and violence of May 12 in less than two weeks.

But Neiss' response to my words of caution was instructive. "That is not true", he said. "You are over-reacting. Every morning I go jogging around the Grand Hyatt, and the Indonesian people that I see are always smiling". It was then that I realized that not only did the IMF have no understanding of the Indonesian political situation, but that they basically did not think that it was important.

The fiscal austerity and tight money policies pushed by the IMF only serve to drive crisis-hit economies into deeper recessions and to delay on the onset of the recovery.

According to Joseph Stiglitz, the winner of the 2001 Nobel Prize for economics,"advanced countries through the multilateral institutions preach to the developing countries about the need for higher interest rates, while the advanced countries themselves do the opposite".

Stiglitz also argued monetary tightening during a recession as job destroying rather than job creating.

It is strange that the Indonesian central bank, which professes to be independent, has slavishly followed the IMF's tight money policy, raising interest rates in the midsts of a prolonged and serious recession.

The time has come for us to learn from the Argentine experience and from our own recent history. Dependence on the IMF can only achieve a temporary and superficial stability. Short- term relief comes at the expense of a growing debt burden, which represents a time bomb lying in wait to set off the next crisis.

We must prepare ourselves to declare a "Second Independence Movement"; that is, a movement dedicated to realizing Indonesia's potential as a modern, leading nation in Asia. We must now find the courage to declare our economic independence and make the necessary sacrifices to achieve it.