Part 1 of 2 IMF inhibiting RI's improvement, inflating inequity

Part 1 of 2 IMF inhibiting RI's improvement, inflating inequity

Rizal Ramli, Former Coordinating, Minister for the Economy, Jakarta

Five years into our International Monetary Fund (IMF)
tutelage, we have very little to show for efforts beyond a a wave
of corporate bankruptcies, the devastation of the domestic
banking sector, an increase in unemployment and a sharp rise in
the international and domestic debt burden. Growth has stagnated
and inequality has worsened. The wealthy shelter their assets
abroad, while ordinary Indonesians struggle to get by.

The political situation has deteriorated to the point where
violence and organized crime are well established features of
political life. The reasons for the IMF's failure in Indonesia
and elsewhere are not difficult to detect.

First, wherever the Fund operates, it comes up with the same
diagnosis and prescribes the same generic medicine. All IMF
programs include tight fiscal and monetary policies. Poor
countries are forced to pursue fiscal austerity to produce a
surplus that can service international debt.

Second, the Fund imposes excessive conditions on its loans
that are often unrelated, or at least not directly related, to
monetary stabilization. One result of these excessive conditions
is that IMF programs quickly lose focus. For example, the
agreement signed by President Soeharto on Jan. 15, 1998 contained
130 conditions covering the full range of economic sectors. Some
of these conditions were, in fact, reasonable and necessary.

The result was a fatal loss of focus and the further crippling
of the financial system, leading inexorably to political crisis,
violence, reaction and economic collapse.

Third, the IMF routinely addresses subjects outside of the
professional expertise and technical competence of its staff. The
IMF's main areas of competence are macro and monetary economics.
Yet the conditions and policy recommendations contained in the
various Letters of Intent signed by successive Indonesian
governments mostly concern areas such as banking, agriculture,
corporate restructuring, industry and so on. But IMF staff have
no special claim to expertise or even professional competence in
these areas. It is therefore not surprising that the IMF's
recommendations for the banking sector failed to stabilize
Indonesia's banking crisis. The recommendation to close 16 banks
in November 1997 without adequate preparation in fact undermined
public confidence in the banking sector and destabilized the
financial system, eventually leading to the insolvency of the
entire banking system.

Fourth, and perhaps most importantly, the IMF has yet to
establish appropriate systems of internal governance within the
organization, with the result that the Fund is largely
unaccountable to its shareholders and to client governments.
Although the IMF never tires of lecturing Indonesians on the
importance of good governance and accountability, the Fund does
not practice what it preaches. IMF staff who have demonstrably
failed in their efforts to stabilize crisis-hit countries are
routinely promoted, and staff are never penalized for dispensing
bad advice or designing unsuccessful stabilization programs.

If the IMF has such a poor track record, why do countries
continue to invite them in? Despite years of evidence to the
contrary, many people still hold to the naive view that the
presence of the IMF is itself a good thing regardless of the
damage that IMF policies do to the economy. In other words,
policy makers believe that the IMF has sufficient influence on
world financial markets to swing them behind, or in the absence
of an agreement, turn them against any country experiencing
financial stress.

This naive belief is based on three myths. The first myth is
that the presence of an IMF agreement instills confidence in
foreign and domestic investors. This myth was actively propagated
by the New Order technocrats in 1997 to persuade the Soeharto
regime to ask for IMF assistance as the financial crisis
intensified. It would appear that despite all that has happened
they still believe it to be true. But nearly six years after the
first IMF Letter of Intent, investors are less confident than
ever in Indonesia's economic prospects.

The main problems are political instability, insecurity and
the absence of rule of law. If progress were made on these three
issues, then investor confidence would increase with or without
the IMF.

The second, and closely related myth, also actively
disseminated by the New Order mafia, is that the presence of the
IMF stimulates private capital flows. But in fact the reverse has
been true in Indonesia, and in other countries. Over the past
five years, multilateral flows have been decoupled from private
capital flows to Indonesia as private capital has withdrawn in
response to political instability, insecurity and the absence of
rule of law.

The third myth is that the IMF works together with other
creditors to allocate or withhold credit depending on the
presence or absence of an IMF program and the status of
negotiations with the IMF over existing programs. Although some
creditors do consider IMF positions when making lending
decisions, the actual influence of the Fund is quite limited.
Each lender, whether or public or private, has its own strategic
and economic interests in Indonesia.

In fact, for some time now Indonesia has not needed IMF money.
IMF borrowing is a second tier defense, which means that the
loans are only used as a supplement to the country's foreign
currency reserves. These loans would only be used if Indonesia
had already used up its reserves, which currently stand at some
US$28 billion. This is unlikely to happen in the presence of a
flexible exchange rate system, under which the value of the
rupiah will adjust downward long before reserves are depleted. In
other words, we cannot use IMF loans but we still pay interest on
them.

Indonesia therefore must bring the IMF program to an end as
soon as possible. Indonesia's economic recovery requires greater
flexibility and room for maneuvering than can be obtained within
the limits of the current IMF program. The 2002 MPR session, in
accordance with Decision No VI, has resolved that the government
must bring the IMF program to an end in 2003. The government must
respect this decision. We can expect that the officials and
economists who have served as local "mouthpieces" for the IMF in
Indonesia -- particularly the New Order mafia -- will try to find
new excuses to extend the agreement.

Indonesia must engage in strategic negotiations with our main
creditors, including the World Bank, the Asian Development Bank
(ADB), Japan, the U.S. and European countries. These negotiations
must extend beyond tactical issues. During the Consultative Group
on Indonesia (CGI) meetings, as well as other international and
bilateral meetings, Indonesia has taken a technical, rather than
strategic approach. Experience has shown that decisions reached
on the basis of technical discussions carried out by technical
staff of the relevant ministries are very limited. Indonesia has
not made use of its considerable leverage in these meetings.

The above article is an excerpt from the writer's paper,
presented at The Jakarta Post's seminar on Strategy for
Indonesia's Economic Development, on Monday.