IMF pressed to review its Asian strategy

IMF pressed to review its Asian strategy

HONG KONG (Dow Jones): Asia's economies are choking on the
harsh medicine ordered by the International Monetary Fund. As a
result, more and more economists are saying it's time to rewrite
the IMF prescriptions of high rates and anemic government
spending, which is spawning a new debate on how to rescue Asia.

The high rates were intended to stabilize battered currencies
and economies. But with currencies tumbling yet again, the
stabilizing effect of high rates appears to be wearing thin.

Unlike earlier IMF critics, who argued the IMF had bungled
Asia's rescue, these economists say it was right to raise
interest rates in the early days of the crisis. Tight monetary
policy aims to cut off profligate spending and attract capital
with the promise of higher returns -- thus helping to stabilize
economies.

But the benefits of those high rates now are looking illusory.
That's mainly because the effects of Japan's recession are
filtering into the region, causing expectations across Asia to
tumble.

"The market mechanisms you need for high interest rates to
work have broken down," said Bill Belchere, economist at Merrill
Lynch in Singapore. "There's an unwillingness, even if the
channels are open, from investors to put money in because they're
not confident that the IMF restructuring is going to work."

Meanwhile, deflation and collapsing domestic demand are
strangling the region's economies, and easier credit could help
to end the downward spiral, the economists said.

"You want to have currency stability," said Tim Condon,
regional economist at Morgan Stanley Dean Witter in Hong Kong.
But the costs of the current "strong currency, weak economy"
policies outweigh the benefits. "They're just destroying their
economies. The middle class is being wiped out," Condon said.

Not just the middle class. The World Bank's vice president for
East Asia and the Pacific, Jean-Michel Severino, painted a bleak
picture of job losses and growing poverty, and he warned this
could trigger political trouble. "Let us remember that the hungry
can become angry," he told a conference Tuesday in Australia.

The IMF is sticking to its guns. David Nellor, the IMF's
assistant director for Asian and Pacific Affairs, warned at the
same conference that higher government spending could ignite
inflation. "I think maybe we are talking about a matter of
degrees," he said. "I think it's a matter of finding a way to
balance the objectives" of government support for the economy and
suppressing inflation.

Hubert Neiss, the IMF's director for Asian and Pacific
affairs, said Monday in Jakarta that "the rupiah would have
fallen further if the interest rates were lower than the current
level."

The IMF's recovery recipe for Asia has been repeatedly
attacked by academics and politicians. However, private-sector
economists have generally toed the IMF line, at least publicly.
So have most of the countries the IMF has aided.

Indonesia

Even Indonesia is coming around -- the government will maintain
high interest rates even though they haven't provided support to
the nation's beleaguered currency, according to central bank
Governor Sjahril Sabirin.

Lowering rates, he said, would only serve to weaken the rupiah
against the U.S. dollar. The Indonesian currency weakened in
Asian trading yesterday, falling to more than 16,700 rupiah to
the dollar.

The IMF's recovery recipe goes something like this. High
interest rates attract capital flows and prevent outflows,
relieving the immediate pressure on exchange rates. High interest
rates and tight credit also chill domestic demand, thereby
reducing imports and prompting a shift of resources to export
industries. Eventually, the currency steadies and the balance of
payments comes back into balance, allowing interest rates to come
down.

Trade balances are swinging into surplus, due almost entirely
to stunning declines in imports, rather than export growth. The
overall balance-of-payments situation still looks fairly grim,
however, because capital isn't flowing to Asia's crisis-struck
economies.

The economic contractions are so severe that currencies and
stock markets across Asia were sliding even before the yen
swooned last week.

Nobody is arguing against the virtues of stable currencies.
Instead, advocates of easier credit are simply arguing that
exchange rates shouldn't be the main issue right now. The focus,
they say, should be on credit, which is the fuel that drives the
economic engine -- and Asia's economies are running on empty.

"Yes, there is absolutely a need to ease domestic monetary
conditions," said Chris Tinker, chief economist at ING Baring
Securities in Hong Kong. However, he said that won't be enough to
revive credit flows. Stuffed with bad loans, many Asian banks are
unable or unwilling to lend. "The ability of the authorities to
change that is limited," Tinker said.

Indeed, the main measure of progress shouldn't be interest-
rate levels -- it should be access to credit, argued Linda Tsao
Yang, the U.S. representative to the Asian Development Bank in
Manila.

"You need to damp this investment boom and indiscriminate
borrowing, and high interest rates do serve that purpose," she
said. "But if the small and medium enterprises -- especially the
export-oriented ones that drive the economy -- don't have access
to credit, then it's a big problem." That can happen even in
Japan, she noted, where interest rates are less than 1%.

High rates also exacerbate Asia's mountains of domestic debt,
which in Thailand, South Korea and Malaysia far exceed foreign
liabilities. A new study by Deutsche Bank argues that domestic
savings have played a far bigger role in generating economic
growth in Asia than international capital flows. But if interest
rates don't come down, these savings could be wiped out along
with the banking systems they are kept in.

High rates were the right idea at first, said Deutsche Bank
economist Angus Armstrong. "Interest rates should have been
allowed to come down," he said, adding: "We think they're not
attacking the big problem, which is the debt."