Timely parting ways with IMF

Timely parting ways with IMF

Arya B. Gaduh, Centre for Strategic and International Studies (CSIS),
Jakarta, abgaduh@csis.or.id

Last Thursday a coalition of economists reportedly stated that
Indonesia's economic growth would return to the pre-crisis level,
if only we would part with the International Monetary Fund (IMF)
immediately. Their scenario predicted a 6 percent to 7 percent
post-IMF growth in 2005, and total domestic revenue of Rp 524
trillion in the next three years.

With such numbers, no sensible economist would want the IMF
consultants around. So, now that we have the economic
justification, it's time send them packing, right?

Alas, the devil is in the details. Even without discussing the
plausibility of the numbers, a careful scrutiny of the plan
(Media Indonesia, Feb. 27-Feb. 28, March 1) suggests two
important omissions. These omissions put into question the
effectiveness of the economic argument, and hence, the conclusion
that the IMF must go immediately.

For one, there is no such thing as a free lunch. Yet, the
plan's description of the post-IMF earnings -- increased revenue
from taxation, natural resources, etc. -- falls short of
mentioning the price tags for each initiative. Without the price
tags, there is no way to know whether the scenario, which calls
for a bigger government, is realistic or sustainable under our
post-IMF, post-Paris Club, liquidity (and budget) constraints.

The plan's second omission -- a crucial one, as it is the
raison d'etre for the scenario -- would have stood as a
convincing argument against IMF involvement.

Its authors argued that the IMF programs had effectively
straitjacketed Indonesia's policymakers, disabling them from
implementing what was necessary for an accelerated growth. After
such a bold assertion, one would next expect a set of innovative
policy recommendations that would have been ruled out by the IMF
programs.

No such recommendations were provided. Aside from the debt
restructuring recommendation -- a financial engineering effort
that is unlikely to solve problems -- most of their
recommendations can be found in the IMF's letter of intent (LOI)
at one time or another.

Why, then, have we not seen these policies implemented?
Perhaps, it's a matter of price.

The more important reason, however, which suggests the second
problem with their argument, is the fact that a strong government
is elusive in our post-Soeharto era.

Their scenario's weakest aspect is its assumptions. Its
success is conveniently based on assumptions of "a strong
government" and "democratic consolidation". This is wishful
thinking -- at least, until the next change of government. The
recent fuel and electricity subsidies debacle suggests that
"strong government" is currently an oxymoron.

Always insecure about its political support, the government of
Megawati Soekarnoputri will avoid making more unpopular decisions
in this election year, despite their necessity.

With this political reality, the real cost of leaving the IMF
program now (instead of, say, after the elections next year) is
the government's economic credibility.

Domestically, the IMF can often act as a "scapegoat" that
allows policymakers to make difficult, yet necessary, rational
economic decisions in an election year. Internationally, its
presence is perceived by investors as a reasonable restraint to
the government's tendency towards populist, yet economically
unsound, policies throughout the election year.

This aspect, investor confidence, is critical for growth. Most
other macroeconomic indicators have shown healthy growth.

If the immediate departure of the IMF is perceived as the
departure of prudence, we risk further delays in improving
investment. This will have a negative effect on growth.

As such, the straitjacket argument does not hold water. On the
contrary, the IMF actually extends the range of policies
available to our weak, and some might add incompetent,
government. We still the IMF -- both as a technical assistant and
a policy instrument.

Self-reliance is a noble idea. Yet we need to acknowledge our
strengths and weaknesses, and work on our weaknesses by any means
-- including the use of foreign instruments like the IMF, if
necessary. True, we should not let the IMF overstay its welcome;
yet, sending it home when we can still make use of it is, well,
wasteful.

A decision on the timely parting with the IMF must be based on
an analysis founded, neither on wishful thinking nor political
expediency, but on economic and political realities.