With or without IMF?

With or without IMF?

Highly debatable are both the rationale used by the team of
more than 30 economists to support their recommendation for
abruptly ending Indonesia's reform program with the International
Monetary Fund (IMF) and the policy measures they outline for
achieving annual economic growth of 6 percent to 7 percent in the
post-IMF program period.

The team of economists, headed by former chief economics
minister Rizal Ramli, asserted last week that the IMF-supervised
program, instead of helping to stimulate recovery, had driven the
economy into an even deeper crisis because the reforms were based
on a mistaken diagnosis of the economic woes.

The team believes that if Indonesia were unshackled from the
IMF's tight oversight, or IMF policy-making colony, as many
politicians perceive the program, the government could raise Rp
524 trillion (US$58 billion) in additional revenues between 2003
and 2005 for pump priming to raise annual growth to the pre-1997
crisis level of 6 percent to 7 percent.

Strangely though, the policy measures recommended by the team
to achieve the robust-growth scenario are essentially the very
reform programs that Indonesia has endeavored to execute under
the IMF facility, with little progress since 1998.

The robust-growth projection, as the team elaborates in its
post-IMF program, requires, as preconditions: effective, strong
national leadership dedicated to the people's welfare and quicker
realization of tax and civil service reform, institution-
building, reduction in the stock of domestic debt, revision of
the investment law, optimal use of public funds (minimizing
wasteful spending), economic decentralization, debt
renegotiations with major creditors and a conducive investment
climate.

Just peruse the string of government reform agreements with
the IMF and their attachments, known as the Supplementary
Memorandum of Economic and Financial Policies, since early 1998,
including the ones negotiated by Rizal Ramli, while he was the
chief economics minister in 2001. You will find in the documents
similar policy programs, clearly defined with matrices of target
schedules.

The problem, though, is that many of the policy measures have
been delayed. Worse still, the government has often backtracked
on its reform commitments or reversed measures deemed to be
politically or socially unfeasible. Things have also been
complicated by the learning process in democracy and local
autonomy.

Moreover, many of the measures, such as tax and civil service
reform, institution-building and reduction of wasteful spending
(inefficiency and corruption), are meant to be medium-term
processes as they are impossible to achieve fully within one or
two years.

The question, then, is how the end of IMF oversight could
contribute to building a more effective and stronger national
leadership and to accelerating the execution of the desired
reform measures. Would President Megawati Soekarnoputri and her
government benefit from an additional injection of stronger
leadership or would the House of Representatives suddenly profess
a higher sense of urgency and crisis in the absence of IMF
supervision? After all, the IMF has neither obstructed nor
prohibited the government from implementing the kind of reforms
recommended by the economists.
True, as the economists asserted and many other international
analysts have observed, the IMF made several major mistakes in
1997 and 1998 in its simultaneous handling of the economic crises
in Thailand, Indonesia and South Korea.

Most notable of the misguided policies in Indonesia, which
have been extensively discussed, were: too austere fiscal and
monetary policies, which worsened the recession and set off mass
rioting and social and political instability; the ill-timed
closure of 16 banks in November 1997, with no prior establishment
of blanket guarantees for bank deposits, which triggered massive
runs on most other major banks; delayed restructuring of
corporate debts, which crippled most businesses and worsened the
banking crisis.

These mistakes, according to many analysts, made the
Indonesian crisis more severe than it should have been and the
recovery more drawn-out than it needed to be. But these mistakes
would not have been so devastating if then president Soeharto had
not so stubbornly resisted reforms, in order to defend the
interests of his family members and cronies, and subsequent
presidents had been able to deliver on their reform commitments.

Anyway, the IMF has now learnt its lessons. Analysts'
complaints that the IMF programs imposed too many conditions that
were beyond its core competence have been addressed. The IMF has
streamlined and focused its conditions on policies that are
critical to achieving macroeconomic objectives and has
increasingly emphasized the importance of national ownership
(national political consensus) of policy reforms.

The government now has more freedom and leeway in designing
reform measures that it considers socially and politically
feasible.

But then, in retrospect, the IMF should not be blamed entirely
for its too-comprehensive reform (conditions) agenda that it
imposed on Indonesia. In fact, it was the reformist ministers in
the Cabinet who urged the IMF to include in its conditions,
notably in 1997 to 1999, many reform measures against corruption,
collusion and cronyism. The ministers wanted to use IMF leverage
to pressure the government to do what they had long wanted to
implement but had failed to achieve due to strong resistance from
within the government.

It is now futile to continue recrimination and debate on who
is right and wrong in handling the crisis. It is simply an
accumulation of mistakes piled atop other mistakes by both the
IMF and the Indonesian government, with each side's errors
compounding the other's.

There is no benefit to be gained now by abruptly ending or
dropping out of the program with the IMF. There is no other
alternative for stimulating a sustainable recovery than
implementing all the reforms agreed with the IMF, with or without
IMF supervision. The government may, instead, unnecessarily risk
losing market and creditor confidence.

Most importantly, the government should improve its policy-
making credibility and reform-executing ability, to show to the
market that it is capable of putting its own house in order
without the need for international oversight.