Barely a month ago, pundits from the International Monetary Fund (IMF) were proclaiming from every soapbox how Southeast Asian leaders had ignored their warnings about an economic meltdown before the house collapsed on them. Then early last month came reports, first in the Wall Street Journal, and then in the New York Times (January 14) that the IMF itself may have precipitated some of the problems. This is especially true of Indonesia where the IMF’s insistence on shutting down over-exposed banks and finance companies led to panic withdrawal from financially-sound institutions as well.
This is even more troubling in view of the much-vaunted IMF economic and fiscal skills as well as its close surveillance of various economies. Its 1997 annual report lauds Korea’s ‘enviable fiscal record’ and Thailand’s ‘sound macroeconomic policies.’ It was these ‘sound policies’ that triggered the run on the baht (the Thai currency) and the Indonesian rupiah which has crashed in value against the US dollar.
The IMF rescue packages - $40 billion for Indonesia and $60 billion for Korea which may go up to $100 billion - have simply exacerbated their problems. Despite its self-proclaimed role as a global financial trouble-shooter, the IMF’s true role is to protect the interests of its major donors - the US, Britain and western lending institutions. The bail-out packages are designed to prevent these countries from defaulting on loans which could trigger the collapse of the western financial system. The harsh conditions IMF has imposed on Asia may yet trigger such a situation.
Criticism of IMF policies is not confined to the ‘third world’ alone - the victims of its dispensation. Critical voices have also been raised in the west. The US-based Heritage Foundation has pointed out that 81 out of the 137 countries that received IMF loans in the 30-year period (1965-1995), actually increased, not decreased, their dependence on the fund. Of the 89 developing countries that borrowed from the IMF in the same period, 48 are no better off, and 32 actually are poorer, than before the fund intervened. This is a disastrous record. Yet the IMF is touted as the one institution that can help countries in economic distress.
Were the Southeast Asian economies really heading for trouble? Their production had not declined; unemployment and inflation were low and domestic savings were high. These are signs of health. The Mexican crisis of 1994 was triggered by the absence of these factors leading to a bail-out package of US$50 billion in early 1995. So what went wrong in Southeast Asia when their ‘economic fundamentals’ - a phrase popularised by the Malaysian prime minister Mahathir Mohamed - were sound?
Jeffrey Sachs, the Harvard economist, and Steven Radelet, have made some astute observations in the fall edition of Foreign Affairs magazine (November/December 1997). The authors predict a bright economic future for the whole of Asia and say the region will overcome its current problems. According to Sachs and Radelet, Southeast Asian countries made a fundamental error in pegging their currencies to the dollar when most of their trade was with other regions - the European Union and Japan.
When the value of the dollar surged vis-a-vis other currencies, Southeast Asia’s currencies rose as well eroding their competitive edge in exports. This was compounded by the fixed exchange rate mechanism. To attract foreign capital, countries such as South Korea, Malaysia and Thailand exchanged their currencies at fixed rates for dollars or other ‘hard’ currencies.
While this assured foreign investors and lenders, the hidden risks in exchange rate ‘pegs’ surfaced once the confidence bubble burst. Currency speculators had a run on these countries’ currencies by demanding conversion into dollars at the fixed rate, plunging them into a deep crisis.
The problem was also exacerbated, at least in the case of South Korea, by the refusal of western banks to roll over short-term loans, something they had done in the past. Another blow was delivered by the American ratings companies Moody’s and Standard & Poor’s, relegating the country’s credit rating to junk bond status in December. This was hardly the kind of ‘help’ South Korea needed.
This is not to suggest that the governments in these countries did not make errors. One is identified as ‘crony capitalism.’ This is a persistent problem in much of Asia, be it Thailand, the Philippines, Indonesia, Malaysia, South Korea or even Pakistan.
During the eighties when the campaign to oust Ferdinand Marcos was at its peak, the world learnt about the activities of his cronies. Old habits die hard. Crony capitalism is a system in which relatives and friends of the rulers are given huge bank loans, often unsecured, simply because their connections. Economic principles are ignored in such cases.
Another weakness in the Southeast Asian economies was their over reliance on the real estate market. This is the easiest way to get rich quick only if people believe that the system is working fine. There is investors’ confidence and banks are amenable to lending money, accepting shares in real estate as collateral.
This works as long as the real estate market is booming. Of all sectors of the economy, real estate is the most volatile after the stock market. Unlike other sectors, however, it is not easy to get out of the real estate market quickly. Properties cannot be sold right away, even at reduced prices. Banks in Southeast Asia found themselves over-exposed when things went sour. They were put under additional pressure when foreign lending institutions refused to roll-over their loans and demanded payment in dollars.
In all the crisis-ridden countries, South Korea’s is the most revealing. Its people are hard-working and willing to make sacrifices. A number of their industries were off-limits to foreign investors. No more. As a result of the IMF rescue package, almost all companies are now open to foreign acquisitions. According to one report, of the 853 companies, only 87 will be safe from foreigners.
This is how capitalism of the American variety works. When Uncle Sam cannot compete in the open market, he resorts to such underhand tactics.
The lesson in all this for people around the world is that western governments and institutions cannot be relied upon to indulge in fair practices. They operate on the basis of self-interest not principles.
Muslimedia: February 1-15, 1998