January 7, 1998 (NYT)
Aid Programs for Thailand, Indonesia Show Signs of Faltering
By DAVID E. SANGER
ASHINGTON -- As the United States has focused on rescuing South Korea, the emergency
programs to stabilize Thailand and Indonesia have begun to unravel, raising new fears about the
effectiveness of the International Monetary Fund's prescriptions for stabilizing large regions of Asia.
With investors still stampeding out of Asian markets, the currencies of Thailand and Indonesia have
plummeted to new lows, defying months of efforts to restore confidence and making it far more costly
for companies to repay crushing debts denominated in dollars and Japanese yen.
On Monday, Thailand announced that it would be forced to ask the IMF to ease the terms of a $17.2
billion bailout package. Indonesia has so far refused to honor several key conditions of its nearly $40
billion rescue package. And Tuesday, President Suharto announced that the government would increase
spending by 24 percent next year despite pledges of austerity.
Clinton administration officials insist it is premature to call the bailout efforts a failure, noting that
Mexico fell into months of economic pain after a restructuring of its economy began early in 1995. But
while the officials seem optimistic that Thailand has belatedly begun to honor its loan terms, they make
no secret of rising tension with Indonesia.
At the end of December, the IMF sent President Suharto, Asia's longest-serving leader, a strongly
worded letter urging his government to carry out economic changes. Members of the Suharto family
and close friends of the president, who hold huge financial stakes in the country's most lucrative
businesses, have sought to dilute or evade such reforms.
Twice in the last week, Indonesian military officials, projecting unemployment soon of two million
workers, said the armed forces stood ready to suppress protests that "disturb national stability."
"There's no question that we're in deep trouble again in Southeast Asia," a senior adviser to President
Clinton said Tuesday. "The political problems are getting a lot more complicated. And the markets are
having trouble sorting out which countries are tackling their problems, and which are not."
Yet the economic magnitude of Thailand and Indonesia pale by comparison to that of South Korea,
and all three pale in size compared to Japan. The real concern in Washington is that renewed economic
instability among the relatively small Asian countries could spread beyond anyone's control.
Early in July, Thailand's decision to abandon the longtime link between its currency and the dollar set in
motion a domino effect that brought down the currencies of Indonesia, Malaysia, the Philippines and
eventually South Korea. That cycle can accelerate because each devaluation makes a country's exports
less expensive overseas, forcing other nations to devalue to stay competitive.
But it is less clear that a similar pattern is about to be repeated. Each of the countries entangled in the
Asian crisis has distinct problems, and eventually, administration officials and economists say, investors
will recognize the differences.
"We are dealing with a self-reinforcing process," George Soros, the billionaire hedge-fund manager and
a central figure in the three-dimensional chess game under way between investors, governments and the
IMF, wrote last week. "Once it is reversed, it could become self-reinforcing in the opposite direction.
The trouble is that the process is still moving away from equilibrium."
Soros' announcement Tuesday that he would again start investing in South Korea temporarily reversed
sentiments, and the currency and stock markets in Seoul rose. But many investors are still fleeing the
major Southeast Asian currencies. Now, the Thai baht and the Indonesian rupiah have fallen lower than
before the IMF intervened.
The IMF's five-month old economic plan for Thailand, for example, assumed that the baht would
stabilize to a rate of about 32 to the dollar. It is currently trading at 52 to the dollar, a huge difference
that makes it far more expensive for the Thais to pay their foreign debts.
A company that owed $1 million at the IMF's projected rate, for example, would have to raise 32
million baht to pay it back. But if that $1 million loan was due today, it would require 52 million baht to
repay it.
Unsurprisingly, such wildly off-the-mark forecasts have fueled criticism of the IMF's approach -- and
by extension the Clinton administration's approach -- to solving the Asian crisis. Equally unsurprisingly,
the critics disagree among themselves about what Washington and the IMF may be doing wrong.
The Clinton administration and its backers say the mixture of high interest rates, economic austerity,
more financial disclosure and the closing of weak banks will work, given enough time and the
commitment of political leaders. "These programs work best when governments adopt them as their
own," Treasury Secretary Robert Rubin said a few weeks ago. "That is the beginning of restoring
market confidence."
Administration officials say that while Thailand formally agreed to the IMF package last summer, it did
not begin to honor its terms until November, after a weak and divided government was replaced.
"We've really only seen a month or so of real action in Thailand," a senior administration official said.
"And you cannot blame the IMF for worsening the problems in Indonesia," he said, where the
government has complied with only a few of the key conditions for its loan package. IMF experts are
planning to travel to Indonesia in two weeks, and its findings may result in a threat to cut off the next
stage of aid.
The dominant group of IMF critics is led by Jeffrey Sachs of the Harvard Institute for International
Development. In opinion pieces widely reprinted and often endorsed in Asia, Sachs has argued that the
IMF strategy of raising interest rates only worsens a nation's economic troubles, turning minor
disturbances into panic.
As an example, he noted that in February 1995, the IMF predicted the Mexican economy would grow
1.5 percent for the year; it shrank 6.1 percent.
"The same is happening now," he said. "We're lowering the estimates of how much Thailand and South
Korea will grow. And that turns into a self-fulfilling panic."
In contrast, Soros argues that high interest rates "are essential to prevent the currency from going into a
free fall" and have forestalled disaster in recent months in Hong Kong and Russia.
He argues that the IMF is failing to address what he considers the more fundamental problem that
banks and other international lenders "move in a herd-like fashion in both directions," lavishing cheap
money on countries deemed promising, then fleeing at bad news.
In a long essay last week in The Financial Times, Soros advocated creation of an international
organization to help allocate loans to countries. It would guarantee a certain number of international
loans in return for an insurance premium.
The country borrowing the cash would be required to provide a range of data about its economy, and
the authority would use that information to "set a ceiling on the amounts it is willing to insure." Beyond
that, lenders would be taking their own risks. Neither the IMF nor the United States would bail them
out.
Such a system would outrage free-market advocates, who argue that if the market is working well,
nations that handle their economies badly must pay more to borrow. But the Asian crisis has shown
that countries are increasingly adept at hiding bad news -- both the Thais and the South Koreans misled
investors about the size of their currency reserves.
A last school of critics argue that the United States should not send a signal that it will bail out countries
and their creditors -- in this case some of the largest banks in New York, Tokyo and the capitals of
Europe.
The right course, they argue, is to allow some big defaults so that the banks learn what it feels like to
take a huge loss. The problem, though, is that it could be years before investors return, and in the
interim, countries like Thailand, Indonesia and South Korea may suffer widespread joblessness and
social unrest. |
