Laying the blame

Thailand, South Korea and especially Indonesia should not resort to complacency after the International Monetary Fund (IMF) admitted last week to errors in its handling of their economic crises. Rather than conveniently lumping part of the blame on the Fund, introspection is a much more fruitful tack for the three, serving as a reminder that their financial fiasco was first and foremost of their own making. They must realize that the efficacy of the emergency prescriptions depended largely on the accuracy of economic data available to the IMF experts, combined with the countries' willingness and capability to swallow the bitter pills of economic reform.

The IMF, while persistently, and rightly we should say, defending the merits of its basic strategy in addressing the Asian financial crisis since September 1997, now seems to have owned up to several misjudgments which initially worsened the financial problems as the countries careened toward a full-blown crisis.

The timing of the IMF's gesture of humility could not be better as it came soon after Brazil -- the latest country hit by financial crisis -- admitted defeat and allowed its currency, the real, to devalue by more than 8 percent only two months after it secured a US$41.5 billion IMF-packaged bailout. The realization of areas where improvement is needed will hopefully bolster the IMF in improving its crisis management capabilities.

In its report on the three countries, the Fund's policy development and review department conceded the IMF incorrectly structured its programs and assumed overly optimistic projections.

The IMF's standard, basic strategy in its bailout program is to restore balance of payments' viability and macroeconomic stability and, consequently, calm a panicked financial market. It is the course taken because any country seeking its aid is usually caught amid a rapid erosion of domestic and international confidence.

However, because such crises are always rooted in structural deficiencies, the fund's aid packages also encompass structural reforms such as price and foreign exchange market liberalization, privatization, bank restructuring, subsidy cuts, monetary control and changes in the structure of government spending. That is why IMF bailout programs always involve the World Bank, which is more experienced and better equipped to handle structural reforms.

The problem, as the IMF now concedes, was that the programs in its aid packages were not appropriately molded to fit specific conditions of the countries. A wrong sequencing of measures, especially those which inadvertently contributed to devastating social suffering, further chipped away at domestic and international confidence in the crisis-hit countries and accelerated, rather than stemmed, capital outflow from the jittery financial market.

Incorrect structuring, which in turn caused disjointed sequencing of reform measures, seemed rooted in the overly optimistic assumptions used by the IMF. This led the fund to initially underestimate the magnitude of the financial crisis and was probably responsible for what it now admits was the "too slow and too small disbursement of bailout funds".

An example was the closing of 16 banks in Indonesia in November 1997. This drastic measure, though urgently needed, was woefully ill-timed. It eroded public confidence in the banking sector because it was taken before a deposit guarantee scheme was in place. Likewise, the slashing of fuel subsidies last May was disastrously premature, and should have been implemented after a comprehensive social-safety net program had been put in place.

These errors are not, however, to blame for the crisis in Indonesia. Primarily responsible were Indonesia's own failings brought about by an authoritarian president, Soeharto, who was too arrogant to show any sense of crisis and too nepotistic to consider taking vitally needed medicine for a gravely ill economy. The Soeharto administration's obstinate pussyfooting completely stamped out whatever confidence which arose from the IMF's involvement in the country's economic management in November.

In hindsight, it is obvious the IMF's biggest mistake in Indonesia was its misjudgment that the rotten, self-serving political system under Soeharto was willing and capable to do what was needed to right the economy.

There is no room for government smugness in reading the IMF's contrition. The only way for us to get out of the crisis and regain domestic and international confidence continues to be scheduled, full implementation of all the reform measures already agreed upon with the fund.