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.