Re IMF; " U.S. a culprit in Indonesia crisis
Tuesday, May 26, 1998
By Terence Corcoran
PAUL Martin and the finance ministers of 18 other Asia-Pacific nations
wrapped up their weekend meeting in the Alberta resort village of
Kananaskis on Sunday with a sweeping ministerial statement that dodged
most of the economic bullets. Emerging with an especially clean record
was the International Monetary Fund. In a section of the statement titled
"Causes of the Financial Instability in Asia," the IMF rated not one
reference, even though the fund has played a serious trouble-making role
as Asian currencies collapsed and the region was plunged into recession.
Also glossed over is the deteriorating political and economic situation in
Indonesia. The ministers noted the rising levels of unemployment
throughout Asia and the impact on the poor, especially women and
children. "In Indonesia," the statement said, "there is even evidence of
food shortages and inadequate medical supplies." No mention, however,
of 500 deaths, looting, rioting, prerevolutionary fever, and grave risk to the
Chinese business class. And there was no reference to the two major
consequences of IMF-imposed economic medicine: a currency devalued
by 80 per cent and an inflation rate forecast to hit 45 per cent this year on
the heals of 35 per cent last year.
No doubt the deposing of a dictator is stimulating sport, especially if
you're thousands of kilometres away, CNN reception is good and the golf
is fine. But the economic upheaval in Indonesia has done more than force
out a dictator. The lives of 200 million people have been financially ruined,
the risk of violent revolution has increased, and the economic situation is
even more precarious. Is this brinkmanship a justifiable purpose of
international economic policy making?
One of the few people with inside knowledge of Indonesia's economic
collapse who's also willing to talk about it is Steve Hanke, economics
professor at Johns Hopkins University in Baltimore, vice-chairman of
Friedberg Mercantile Group's U.S. subsidiary, and, briefly, an adviser to
former Indonesian president Suharto. In an interview from Paris, Mr.
Hanke laid the blame for riots, violence and the extreme economic
hardship at the door of the IMF and the major economic powers --
especially the United States -- that dominate the international agency.
"The IMF was told what to do, and they did it. Foreign policy is run in the
United States by Secretary [Robert] Rubin in Treasury. . . . It's the U.S.
operating in an imperialistic way as [it] did in the last part of the 19th
century."
Mr. Hanke, an expert in currency boards, was called in by Suharto at the
end of January to attempt to set up an Indonesian currency board that
would halt the rupiah's fall, and set the stage for reform. At that time, the
IMF had already imposed two reform programs that had created nothing
but more turmoil and more panic. The first program in November of last
year called for bank reorganizations, trade liberalization and tax increases.
Through tight money and a flexible exchange rate, the IMF also
envisaged "stabilizing the rupiah."
Rather than save it, the program caused the currency to crash. "It just set
off a huge financial panic, and the capital flight started occurring big
time," Mr. Hanke said. Another reform package was assembled in early
January by the IMF with backing of the United States and other members
of the Group of Seven nations. Infrastructure projects were cancelled.
More banks were to be closed. Monopolies ended. But the package "had
nothing to address the immediate problem, which was a financial panic
and impending currency crisis. So when the market saw that agreement,
literally the day it was signed, the rupiah started heading south," Mr.
Hanke said.
By mid-January, the rupiah, which the IMF kept saying it wanted to
stabilize, had been devalued by 70 per cent. Mr. Hanke said Suharto
called in the last week in January. "He knew he had to stabilize the
currency, and he knew he'd get blown out of the there -- we actually
talked about this -- if he couldn't."
The Hanke plan, which included many of the IMF reforms but with a
currency board added on, was designed to reverse the financial panic,
draw capital back into Indonesia, and restore some of the purchasing
power of the people of Indonesia. But the IMF and the United States
resisted the currency board reform. "The pressure was just too much, and
Suharto caved."
The objective of the currency board was to establish the value of the
rupiah against the U.S. dollar by replacing the central bank with a board
that would maintain reserves of dollars equal to 100 per cent of the rupiah
in circulation. Similar boards exist in Argentina and Hong Kong, two
nations that have avoided currency panics over the past few years. "My
objective was to stabilize the currency, because if you didn't . . . I
concluded that there would be riots and a lot of blood on the streets."
Ignoring this possibility, on April 10 the IMF announced another plan that
included what it called "a strong monetary policy to ensure stabilization of
the rupiah." That was followed by fuel price increases, and another major
currency retreat. Thus, after months of IMF ministrations, Indonesia
today is in worse shape than it was in January, and, until the currency
crisis is addressed, the country will remain a political and economic
shambles."
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