Laying the blame
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.