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