The IMF predicament

The IMF predicament

Yanuar Nugroho, General Secretary, Uni Sosial Demokrat, Jakarta,
yanuar-n@unisosdem.org

It has been five years since the first intervention of the IMF
in Indonesia in October 1997. Based on its prescription, the
structural adjustment program (SAP) devised to assist Indonesia
in its recovery from the severe economic crises, the
International Monetary Fund has dictated its policies to the
government using the sacred vows of the Letter of Intent (LoI)
and Memorandum of Economic and Financial Policy.

However, both the prescription and the mantras do not seem to
be working properly. Indonesia is further trapped into deeper
debt. Worse still, under the SAP, which introduced policies like
import liberalization, free money regime, devaluation, monetary
and fiscal contraction and foreign investment, neoliberal
economics flushed away local economies by minimizing the
government's role, facilitating foreign investment and promoting
privatization and trade liberalization without any protection.

The economy has been stranded in a no-way-out situation that
leads to the very serious question of whether the IMF
prescription is efficacious.

Yet, this is a fact. On June 12 the Coordinating Minister for
the Economy Dorodjatun Kuntjoro-Jakti, without consulting the
legislature, extended the LoI with the IMF until December 2003.
It simply means that we are going to be more deeply trapped in
debt we can never pay.

Minister Kwik Kian Gie angrily expressed his fears that
Indonesia will never be able to emerge from the crises and pay
its international debt, which has reached Rp 700 trillion
(US$71.4 billion) -- and which will grow under this LoI
extension.

The world has changed so dramatically in the last half century
that it is nearly impossible to believe that only four decades
ago the newly emerging colonies of Africa and Asia were joining
their brethren in Latin America to push for a New International
Economic Order (NIEO).

Galvanized by centuries-old colonial injustices and sparked by
the radical ideas of such men as Sukarno in Indonesia, Gandhi in
India, Nkrumah in Ghana, Nyerere in Tanzania and Castro in Cuba,
these "Third World" nations set out to challenge the entrenched
power of the United States and Western Europe.

The NIEO was a collection of progressive intellectuals and
politicians who believed that, left on their own, free markets
would never reduce global inequalities. These leaders argued for
improved terms of trade and a more just international economic
system.

These developing countries fought for fairer terms of trade
and pushed their case through producer cartels like OPEC and the
UN by forming the Group 77, which was instrumental in
establishing the UN Conference on Trade and Development (UNCTAD).

But when petrodollars flooded northern financial centers,
president Nixon floated the dollar, sabotaging the Bretton Woods
fixed exchange-rate system. The Third World debt expanded and the
IMF and World Bank bailed out debt-strapped nations. Yet, in
return these nations had to adopt structural adjustment policies
which favored cheap exports and spread poverty throughout the
South, including Indonesia.

Indonesia saw its rupiah devalued to an actual 400 percent,
making it impossible to pay the debt. The debt has therefore been
rescheduled through the groups of donors in the Paris Club and
London Club. Yet, one condition for rescheduling applies. It is
the LoI, which also becomes a precondition in getting support
from other financial institutions like the Consultative Group on
Indonesia, the Asia Development Bank, and the World Bank.

If the debt payment is not rescheduled the national budget
will surely swell because of deficit. And if we renege on the
obligation to pay the debt, we will be shunned by international
businesses. Even without being "watched" or "controlled" by the
IMF, Indonesia is reluctant to commit itself to reform nd
transparency. But for the IMF, this also means a way to impose
liberalization through the SAP.

Unfortunately, we have little choice -- and we are bankrupt.
So what's wrong with an IMF prescription?

Together with the World Bank, the IMF launched a policy to
structurally adjust the Third World by deflating economies and
demanding a withdrawal of government -- not only from public
enterprise but also from compassionate support of the basic
health and welfare of the most vulnerable. Exports to earn
foreign exchange were privileged over basic necessities, food
production and other goods for domestic use.

In 1986 IMF set up its first formal Structural Adjustment
Facility, followed by the World Bank in 1989 by having contracted
adjustment loans to 75 percent of the countries that already had
similar IMF loans in place.

The Bank's conditions both extended and reinforced the IMF
prescription for financial liberalization and open markets. They
included privatizing state-owned enterprises, massive public
sector layoffs, cutting basic social services and subsidies on
basic foodstuffs, and reducing trade barriers.

In Indonesia, one of the policies imposed by the IMF is a
bailout for banks' debt, which transforms private debt into
public debt under the responsibility of the government, which has
to issue obligation letters. This domestic debt, which is Rp
164.53 trillion, in addition to debt-guarantee certificates worth
Rp 53.77 trillion -- most of which has been corrupted -- has to
be paid annually. And it is taken from 36 percent allocation of
the state budget, or the people's money.

Marooned in this vicious circle, the IMF prescriptions look
great and it seems to have been the right choice to hand over the
economy to the market.

But as the market says, there is no such thing as a free
lunch. So, probably the neck-strangling debt we have now is the
price we have to pay.