IMF surveillance capacities questioned

By Vincent Lingga

HONG KONG, China (JP): The Southeast Asian currency crisis has raised questions about the International Monetary Fund's surveillance capabilities.

A seminar on Asia and the IMF, held here yesterday on the eve of the IMF and World Bank annual meetings next week, highlighted the IMF's role as a macroeconomic doctor.

But the currency crisis in several Southeast Asian countries unraveled some deficiencies on part of the IMF in convincing its 181 member governments to take its bitter pills and give an early warning on the health condition of its "patients".

Article IV of the agreement on the establishment of the International Monetary Fund stipulates the IMF surveillance responsibility that includes promoting exchange rate stability, orderly economic growth with reasonable price stability and orderly economic and financial conditions.

To carry out its surveillance function, the IMF conducts annual consultations with each member government to review economic policies and performance and prepare confidential reports for careful review by the IMF's 24-member executive board which represents the general membership.

But as IMF Director for Research Michael Mussa said at the seminar yesterday, the IMF faces two critical limitations in fulfilling its surveillance responsibilities.

"First, we are restricted by the accumulated wisdom of the economics profession which is continually advancing and being revised," Mussa said.

The economics profession, he added, has not discovered the magic formula that assures rapid and steady growth, low inflation, financial stability and social progress.

"What we have so far is mostly a consensus on the broad guidelines for policies that serve these goals," Mussa said.

Second, the IMF's role is limited to giving policy advice which each member is free to adopt or ignore, he said.

"The effectiveness of economic policies depends on the governments' judgment and on the willingness and capacity of the political systems to pursue appropriate policies," Mussa added.

The currency turmoil hit Thailand in July and its spillover effect has caused recent turbulence in the Indonesian, Malaysian and Philippine financial markets.

But Massa said these countries had been warned as early as the middle of last year.

"Thailand could have reduced the damages if they had taken appropriate policy adjustments earlier," he said.

India's Finance Secretary Montek Singh Ahluwalia, one of the speakers at the seminar, admitted that his country had benefited greatly from the policy advice given by IMF.

"But the problems, I think, start when IMF pursues so many objectives at the same time within a globalized economy which has become increasingly complex," Ahluwalia said.

He conceded that some member governments might despise the IMF policy advice as external scrutiny.

The latest IMF annual report carries the summaries of the annual consultations between the IMF staff and its member governments, including Indonesia, Thailand and Malaysia.

The summaries show that the IMF did warn these countries between June and August, 1996 about impending problems if they did not take appropriate policy adjustments as advised by the IMF (see article on warning to Indonesia on Page 10).

"We warned them about the structural deficiencies in their financial sector," Mussa said, adding steady economic growth seemed to be stronger than the warning.

"I think complacency is the mother of crisis," he added.

The latest IMF briefing sheet on Indonesia which was distributed here yesterday suggests the following: "The floating of the rupiah needs to be supported by prudent fiscal and monetary policies along with further measures to improve the soundness and efficiency of the banking system to safeguard confidence, reduce external debt and raise national savings.

"Further trade liberalization and deregulation of domestic markets is necessary to increase competitiveness and enhance economic efficiency. A more level playing field for domestic and foreign investors will be critical to sustain direct investment flows and productivity gains."

Mussa added that the political effectiveness and acceptability of good policies is growing among its members as the benefits of such policies are increasingly recognized.

Mussa acknowledged that IMF was also aware of some deficiencies in its surveillance and had taken measures to improve it.

"Important reforms have been undertaken, including more sharply focused surveillance reports and promulgation of data dissemination standards to be adopted by member governments," he added.

"But the responsibility applies to member governments which are not often enthusiastic to hear about potential crises that may beset their economies," Mussa said.