IMF again comes to the rescue, this time to Asia

IMF again comes to the rescue, this time to Asia

Five months after Asian markets were knocked downed by a
serious financial flu, the debate over what really happened is
still raging. Martin Khor reports for Inter Press Service.

KUALA LUMPUR: Depending on who makes the diagnosis, Asia's
financial illness is either the result of capitalism gone out of
control or the wrong application of the right formula for
economic success.

Five months after the region's financial contagion began in
Thailand and spread to countries from South Korea to Indonesia,
the debate on the nature of the crisis and how to cure it
continues to rage.

Meantime, Asia's financial jitters continue. The South Korean
government in early December signed an agreement for an
International Monetary Fund led bailout fund to tide it over its
financial storm. The package -- $55 billion -- is the biggest
ever assembled by the Fund. Mexico got $50 billion in 1995.

Amid Asia's woes, steadfast proponents of the wisdom of free
market, like the IMF, say the region's financial instability is
the result of countries' ill advised policies, complacency and
failure to cure problems at an early stage.

"After being over-complacent, they became over-anxious, and
this is part of human nature," IMF Managing Director Michel
Camdessus told the Association of Southeast Asian Nations
(ASEAN) Business Forum in December. "Markets looked at
weaknesses which they earlier saw as minor and became less
forgiving."

He said the causes of Thailand's meltdown lay in high real
exchange rates, large current account deficits, unhedged private
sector foreign borrowing, weak banking system and a "denial
syndrome" by authorities that delayed needed policy changes.

But Malaysian Prime Minister Mahathir Mohamad, among the most
vocal critics of unregulated speculation in currency and
financial markets, sees a different picture. Seeking controls on
unproductive speculation, he said currency trading has "obviously
impoverished millions of people".

At a separate meeting of Southeast Asian finance ministers
this month, Mahathir said: "It has impoverished countries and
regions. It has wiped out decades and years of hard work."
Camdessus and Mahathir's remarks, which represent the two poles
of the debate over Asia's crisis, overshadowed the few new and
mostly minor initiatives taken by Southeast Asian finance
officials and experts at the twin meetings in Kuala Lumpur in
early December.

Indeed, business leaders and analysts questioned the wisdom of
rapid liberalization, and the freedom and power enjoyed by
financial speculators beyond the reach of governments. A Filipino
analyst remarked that the IMF's prescriptions are "just blind
faith that markers are good and governments are bad. We need a
way to defend against speculation".

But the meetings produced but a few strategies to counter
excessive speculation. These included the creation of a regional
bond market in which surplus Asian funds could be placed instead
of being invested in bonds in western countries. Southeast Asian
governments also agreed to put up a new surveillance mechanism
with the help of the Asian Development Bank, which would discuss
potential economic and financial risks of countries and encourage
early action to minimize them.

Finance ministers reaffirmed the November creation of a
standby mechanism or a "cooperative financing arrangement", under
which countries can contribute to an IMF led bailout of
countries struck by speculative attacks. This is the watered down
version of a Japan proposed Asian bailout fund, which had been
vigorously opposed by the IMF and the U.S.

But these measures far from settle the discussion about how
Asia got to this crisis and what factors were to blame. "We have
not yet the full response to this mystery, but we know the key
elements," said Camdessus. The IMF chief conceded it was easy for
countries to blame the free market. "When we are in the midst of
crisis we fear invisible hands strangling you, and you're tempted
to say you are not ready, and you need protection."

But the cause of the problem is not the hedge funds that
invest in Asian currencies and cause havoc when they leave, he
said. Instead, Camdessus says fault lay in adopting faulty
measures that "expose your policy to speculation".

The solution, he said, was to "exorcise this devil" by
"sitting together among peers and confess our temptation and see
how we can resist it together". He said he was not pressing for
immediate, full liberalization and dismantling of governments,
but said liberalization could be done with wisdom and ambition.

Mahathir, however, says that while there may be no conspiracy
to undermine the growth of East Asian countries, "obviously their
troubles have afforded an opportunity for forcing open their
economies and possible domination by strong and powerful
nations".

Mahathir argued that currency trading should be curbed because
while trade contributed tangibly to development and well being,
currency trading did not create growth in employment, business or
wealth. Currency trading is estimated to be 20 times bigger in
money terms that world trade in goods and services.

At a time when governments and businesses are told to be open
and transparent, currency trading operates in almost absolute
secrecy and without regulations, unlike trading stocks and shares
and commodities.

Mahathir added that the IMF's solution to Asia's woes
austerity measures and budget cuts that come with the bailout
funds it cobbles together with other countries make the disease
worse.

As their currencies fell in the last few months, Asian
countries have had to cope with a slowdown in investor capital
and foreign debts bloated by more expensive U.S. dollars.

Amid these problems, Mahathir said the IMF "offers to lend
money with which to repay loans to foreign lenders. But the loans
come a string of conditions, principal among which is the opening
of the financial sector full foreign participation". He added:
"It is likely that this will result in foreign banks eventually
dominating the finances of the country concerned."

This is why IMF assistance, viewed by donor countries and many
businessmen as crucial to restoring confidence, was a bitter pill
for economies like South Korea to swallow, he said. For countries
that had already graduated from IMF lending, the Fund's return
meant losing control over financial and economic policy and even
loss of sovereignty.

Still, Camdessus expressed optimism about Asia's future. "To
the prophets of gloom and doom, I reply that with lucidity of
diagnosis, adjustment now and sound future policies, Asia will be
able to reestablish high growth in a more sustainable way."

His words brought little comfort to the growing number of
doubters of IMF wisdom. "Even if they do recover they would have
lost a lot of their wealth and the fruits of their struggle. In
addition, they may have lost their economic sovereignty as well,"
Mahathir warned.

And whatever critics say of the IMF, Asia's economies often
find they but have little choice but to seek its help. For
instance, the Philippines is on the verge of graduating from IMF
tutelage but made it a point to say it wants to be sure it can go
back for help should the need arise.

-- IPS