IMF Role Under Threat as Asia Boosts Own Bailout Plan
By Christopher Swann and Arijit Ghosh
Sept. 19 (Bloomberg) -- The International Monetary Fund's decision to give China and South Korea more clout may not be enough to reverse a loss of influence in Asia.
Asian nations are forging ahead with plans to develop the Chiang Mai Initiative, a web of agreements to bail out neighbors in case of a financial crisis. Indonesia also plans to repay IMF loans early to free itself from the fund's policy restrictions.
``Chiang Mai is already starting to look like a shadow IMF and it may already be too late for the fund to stop this trend,'' Fred Bergsten, director of the Washington-based Institute for International Economics, said in an interview. ``If Asia continues to break away, the IMF's role as a global body would be greatly weakened.''
Asian governments, stung by the lending conditions imposed by the IMF during the 1997 financial crisis, have cut dependence on the fund and more than tripled reserves to $1.7 trillion. Asia contains the world's fastest-growing major economies.
The 184-member fund yesterday decided to give China, Mexico, Turkey and South Korea greater voting power to reflect their growing clout. IMF Managing Director Rodrigo de Rato reckons that giving developing nations more influence will make them more likely to follow the fund's advice.
Changes still have ``a long way to go'' before the fund reflects Asia's economic weight, said Sri Mulyani Indrawati, Indonesia's finance minister and a former IMF executive director. She said Asian governments still view the IMF as dominated by the U.S., whose 17 percent stake is the largest of any country and gives it a veto.
War Chest
The Chiang Mai Initiative, named for the Thai city where it formed in 2000, will be cemented as a multilateral agreement, Thailand's Finance Minister Thanong Bidaya said. The arrangement to swap currency reserves in case of crisis includes Southeast Asian nations along with Japan, South Korea and China. The group's war chest expanded to $75 billion as of May 2006 from $200 million in 2000.
The IMF, conceived in 1944 at a conference in Bretton Woods, New Hampshire, aims to promote global economic cooperation and stability. It has drawn on the money contributed by members, currently $317 billion, to lead bailouts in Mexico in 1994-1995 and in East Asia in 1997-1998.
Asian Crisis
The fund's handling of the Asian crisis raised hackles in the region. In return for aid, the IMF forced governments from Indonesia to South Korea to cut spending, raise interest rates and sell state-owned companies. The IMF arranged about $100 billion to bail out Thailand, Indonesia and South Korea.
Critics including former World Bank chief economist Joseph Stiglitz, a Nobel laureate, say IMF policies needlessly deepened the region's recession.
Malaysia's former prime minister, Mahathir Mohamad, ignored the IMF's advice and introduced capital controls in September 1998 and pegged the ringgit at 3.8 to the U.S. dollar. The IMF, which called the ringgit peg a ``retrograde step'' at the time, later acknowledged it was a ``stability anchor.''
In Thailand, Prime Minister Thaksin Shinawatra asked his countrymen to fly the national flag on offices, homes and factories after making the last payment in 2003 of the $12.3 billion it drew from the IMF, Japan and other countries during the crisis.
Reserves Grow
``I believe the IMF played a very positive role in taking the continent from the crisis situation,'' said Bank of Israel Governor Stanley Fischer and former IMF managing director.
Asian nations have also reduced their dependence on the IMF by building up currency reserves. South Korea, whose reserves were almost depleted when it received $57 billion in aid arranged by the IMF, now has $227 billion. Total Asian reserves have risen from $485 billion in 1997, according to the World Bank.
Policy makers from the region are also resisting IMF demands that they say are too coercive.
``The era is over when big missions from Washington are needed to diagnose our problem and suggest solutions all within two weeks,'' Indonesia's Sri Mulyani said in a speech today.
The Chiang Mai group is broadening its scope to move independently of the IMF. When the group formed, any country could draw only 10 percent of the money available to it without also seeking IMF aid. The limit has been raised to 20 percent.
`First Step'
``We do not rule out increasing the sums that can be dispersed without an IMF program beyond 20 percent,'' said Philippine central bank Governor Amando Tetangco, who added that the group isn't intended to compete with the fund.
David Burton, IMF director for the Asia-Pacific, said the Chiang Mai group doesn't represent a threat.
``The IMF supports the Chiang Mai initiative, and efforts to turn it into a more effective reserve-pooling arrangement,'' Burton said. We ``hope that it will continue to be closely coordinated with fund lending.''
The voting change the fund agreed yesterday was ``a first small installment'' for the region, Burton said. The next step may not come soon enough.
``The IMF should recognize that it has low leverage,'' said Thai Finance Minister Thanong, whose decision in 1997 to devalue the baht triggered the regional crisis.
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