IMF applies inept conditions to Asia: Critics

IMF applies inept conditions to Asia: Critics

HONG KONG (Reuters): Asian critics of the International Monetary Fund were gathering steam as the economic crisis intensified over the weekend, hitting out at conditions attached to aid packages that were not working.

"The IMF's position is to give an aspirin for every ailment," said Ajay Kapur, regional strategist at UBS Securities. "They dug into their little medicine kit and started handing out aspirins. And that is the problem."

The IMF applied inappropriate conditions to Asia because it relied on its experience with nations in Latin America and Africa, where economies were characterized by raging inflation, high budget deficits and public sector debt, analysts said.

Martin Khor, director of international policy group Third World Network wrote in the latest edition of the Far Eastern Economic Review that the IMF did not understand Asia.

Regardless of accusations of cronyism, governments in this region can, on the whole, boast of balanced budgets, low public debt levels and high savings rates.

Rather than the wrecked national economies typical of nations under IMF guidance elsewhere, Asia's problems lay in the private sector, with private businesses responsible for building up mountains of foreign-denominated corporate debt.

With currencies under attack, this debt burden has become unmanageable -- and this is the problem that must now be dealt with effectively and urgently, Asian analysts said.

"The IMF has failed," said one Hong Kong economist. "It's failed in both Thailand and Indonesia, that is clear, in that it was supposed to stabilize the balance of payments and provide currency stability. It has done that in neither case."

Asian currencies, and the rupiah in particular, were still under intense pressure despite gargantuan aid packages in South Korea (US$57 billion), Indonesia (up to US$40 billion) and Thailand (US$17.2 billion).

Until the over-riding issue of bad debt was confronted, perhaps through a region-wide debt rescheduling, there was scant hope that confidence could be restored soon, analysts said.

And a debt accord would be difficult in Indonesia, where bad debt is spread among hundreds of corporations.

Harvard economist Jeffrey Sachs said on Saturday the IMF was aggravating Asia's financial crisis, but he added that regional economies should recover before long.

Sachs, director of the Harvard Institute of International Development, told an international business conference in southern India that the crisis in East Asian economies had resulted from a "panic withdrawal" of funds from their markets.

"My sense is that the IMF added to the panic," he said. The fund had erred by using the same rescue techniques employed in the past instead of specific remedies tailored to the differing needs of Asian economies, he added.

"The IMF took its normal remedy off the shelf and started to apply it," he said. He criticized the Fund's demand for bank closures in Indonesia, Thailand and South Korea as part of its recent bail-out packages.

Some analysts said an urgent rethink of the IMF approach could already be underway, with IMF officials expected to approve the release of another tranche of aid while in Jakarta despite Indonesia's failure to comply with conditions for a budget surplus in its 1998/99 budget tabled last week.

In a bid to kill the threat of global contagion, the IMF also relaxed aid conditions in South Korea. The Korean won soon stabilized, proving the inappropriateness of IMF conditions and its overall policy prescription, said Kapur.

"I think the IMF will back off," he said. "I think they'll get a lesson in political reality in Jakarta, along with Asian economics 101."

But other analysts said South Korea stabilized because it did what Indonesia has failed to do -- take action to implement structural reform, such as opening up its markets to foreigners.

But the IMF's demands for a further opening up of markets have also come under attack in Asia, which views foreign ownership of markets or industries with suspicion, considering it a loss of economic sovereignty.

"What the rich couldn't do through bilateral or multilateral pressures, they are now extracting by using the IMF loans as leverage," wrote Khor, referring to strong Western interest in owning Asian banks and financial institutions.