Good governance or illusion?

By Makmur Keliat

Will the International Monetary Fund help bring good governance to Indonesia or is it only a political illusion? This is the first of two articles.

SURABAYA (JP): There have been divergent views raised by Indonesian observers regarding the recent government decision to request International Monetary Fund (IMF) assistance.

The existing views range from a full endorsement, to a halfhearted acceptance so long as the assistance does not put Indonesian sovereignty at jeopardy, to a candid rejection.

This article attempts to analyze the plausibility of reasons behind this critical view of IMF policy prescription.

The IMF, since its very inception in 1944, was conceived as an institution to promote liberal world trade order.

The underlying assumption behind its establishment was that there should be an institution acting as a credit provider to countries which suffer from acute problems in their balance of trade and payments.

It is feared that such difficulties could push countries into relying on protectionism in their foreign trade policies, this is perceived to be a contravention of the basic tenets of liberal trade. Protectionism is considered destructive to the well-being of the international community.

It is from this concept that the IMF has come to exist as a lending institution. Its fund resources are taken from contributions given by all members and redistributed to members which are in need of financial assistance.

However, the largest chunk of IMF fund resources does not come from developing countries, despite the fact that the institution now consists of more than 180 members.

The total contribution given by the United States, the United Kingdom, Germany, France, Japan, Canada and Italy remains paramount and accounts for more than 50 percent of the IMF's total fund resources.

Accordingly, it is difficult to erase the impression that the IMF -- initially consisting of 44 members -- can continue to do its job appropriately due to the fund commitment shown by developed countries. This, however, has resulted in developed nations playing the dominant role in shaping IMF policies.

It is noteworthy that the IMF is not a democratic institution. Voting power is not equally distributed among members, it is determined by the magnitude of funds provided by each member.

Since fund contribution from developed countries is larger than that of developing countries, it is therefore natural that the voting power of developed countries is also greater than that of developing countries.

Seen from this viewpoint it is reasonable to say that any change to the IMF procedures -- which require 85 percent approval -- will be largely determined by the political will of developed countries.

The IMF's scheme for providing financial assistance is arranged through a short-term standby arrangement with an average repayment period ranging from 12 months to 18 months, but it can sometimes be extended up to three years.

The disbursement, however, is made in the form of a series of installments and depends on certain performance criteria and conditions, be they qualitative or quantitative.

Therefore, it is possible for financial assistance not to continue if the performance criteria and conditions determined by the IMF are not fulfilled by debtor countries.

It is this performance criteria and conditionality that leads to IMF assistance being a hotly debated issue.

In general when countries receive IMF financial assistance, they should accept the introduction of a variety of policies such as the removal of government subsidies, placing a ceiling on external borrowing and the adjustment of the exchange rate, the so-called devaluation.

Besides implying a reduction of the state's role and encouraging an expanded role for the private sector in the economy, all these economic measures indicate the importance of an export-oriented economy.

This prescription can certainly be considered harsh. Nevertheless, the tendency since the 1970s has been for the cumulative amount of IMF assistance, with high conditionality, to become more and more significant.

There are three plausible reasons behind this phenomenon. First, there have been an increasing number of developing countries beset with great difficulties due to their balance of payments.

Such difficulties may have arisen from debt payment or because of prolonged deficit in their balance of trade.

Second, IMF's appraisal and its policy prescription are closely knit with the international finance market. It seems to have become convention that if developing countries decline to accept the IMF prescription, other international institutions such as the World Bank and international private banks will automatically be reluctant to provide credit facilities.

As a consequence, though IMF conditionality is considered painful, developing countries are put in a position of having no choice.

Third, the arguments most often put forward by those who support the IMF prescription have to some extent gained ground. High conditionality is said to have become a must in the name of equal rights between member countries and with a view to evolving a mechanism for the revolving fund.

They argue that high conditionality will avoid the possibility of debt rescheduling and this, in turn, can be used to maintain a mechanism for fund recycling to help other countries which need financial assistance.

However, criticism against the IMF policy prescription continues unabated. The criticism mainly relates to the suggestion that developing countries should seek to boost exports and reduce imports.

As Paul Stern's study (1991) has proved, not all developing countries that followed this IMF prescription in the early 1980s succeeded in achieving the objective.

What happened to some of them is that the reduction in imports took place along with a decrease in export revenue. One of the reasons behind the decrease in export revenue stemmed from the deterioration in terms of trade for their exports, which is beyond the control of developing countries.

At the same time, the reduction in imports had a severe impact for developing countries. The problem of unemployment became exacerbated and economic potential could not be fully realized.

Moreover, the success of an export-led economy largely depends on the global economic situation. This means that a failure to increase exports is bound to occur if other countries refuse to absorb developing countries' exports.

Therefore, it is not an exaggeration to say that an export-led economy is not a short-cut or instant formula for the economic problems faced by developing countries.

The writer is a teacher at the Department of International Relations, Faculty of Social and Political Sciences, Airlangga University, Surabaya.