Even more melodramatic and colourful events had been taking place some way North of Indonesia, in Seoul, Korea. At the end of Noverriber 1997, Korea, the 1 1’ largest economy in the world and recently promoted to the OECD, had come within a whisker of defaulting, saved at the 1 1t and three quarterth hour by a combination of the U.S. administration and the IMF. The first days as U.S. Treasury Secretary in December 1994 and January 1995 of Robert Rubin had been a baptism of fire in having to deal with the Mexican currency crisis and its international market ramifications. His already extensive market experience notwithstanding, this period an ideal training ground for the task of leading the decidedly more complex international effort to speed up the loan packages, particularly to Korea and to persuade commercial and investment banks to roll over debt obligations owed to them. On December 24, subsequent to the announcement by the Korean government of a package of reforms designed to restructure the financial system, accelerate and deepen capital account liberalisation, introduce market-based measures to stem the outflow of short-term capital and speed up measures to open the real economy to foreign trade and investment, Rubin made the following statement:
‘We have supported a broad international effort to restore stability in Asia. This effort is critically important to U.S. economic and national security interests. We welcome the steps announced today to the Korean government to strengthen and accelerate its reform programme. These important steps demonstrate the commitment to sustained reform that is essential to a successful programme to restore confidence and return Korea to a path of growth and stability.. The G7 and other nations have announced today their support of action to advance by early January existing commitments of official finance, in the context of a sustained commitment by the Korean authorities to implement an intensified programme and in the context of a significant voluntary extension of the maturities of the existing claims by international bank creditors on Korean financial institutions and adequate progress by Korea towards accessing new sources of private international finance. The United States is prepared to join with the G-7 and other countries in this effort”2
The efforts by the U.S. financial authorities, in the form of the Treasury and the Federal Reserve, along with other Western nations has been crucial in seeking to avoid mass Asian corporate and banking defaults - and, for that matter, a consequent spike in Western bank loan write-offs. Indeed, without these efforts, the IMF loan packages would not have been enough.
rhe model adopted by the IMF for the bailout package of Korea did not quite reflect the subsequent U-turn in its fundamental macroeconomic thinking which was to come, but it did represent an important change, perhaps, in that direction. For the international (i.e. Western) community, it also represented an important change. Up until then, the response from the U.S. and Europe had been sympathetic, but far from unequivocal in terms of concrete support. The U.S. sought to ensure strict terms and conditions for the IMF packages, as fundamental analysis might indeed justify however this was also in full knowledge that U.S. banks had only moderate loan exposure to Asian debtors - the lessons of Mexico 1982 and Mexico 1995 having been well, if painfully learned. The EU, meanwhile, had far greater loan exposure to Asia, European banks having greedily sought to fill the gap left by Japanese banks who quietly started to depart the scene or at least to reduce their exposure in 1996. The option of demanding tough terms was thereby not open to EU officials, not in any case given to demonstrations of resolve against any but the weakest of emerging market countries. On the contrary, they pleaded for softer terms than their U.S. counterparts, fearful that Asian debtors might default, while paying the greater share of IMF contributions, the purpose of which was of course to ensure that default did not occur.
Korea was different in many respects to Thailand and Indonesia, most notably because it had vital geopolitical and strategic interest to the U.S., in addition to its new-found economic status. Put simply, Korea was vital to U.S. national security interests - seen most visibly by the U.S. military presence on the DMZ - and Thailand and Indonesia were not, or not so much. Korea could not be allowed to fail. The bailout was arranged along two lines, the first concerning the IMF negotiations with the Korean government, the second regarding pressure from the Federal Reserve, Bank of England, Bundesbank and others to persuade the international banking community to roll over short-term foreign currency debts, allowing the Korean government the time theoretically to fill the gap through new debt issues.
For Korea, the avoidance of default in December 1997 had been a very close run thing indeed. The New York Fed has summoned senior officials of the 6 largest banks to its Liberty Street headquarters for a meeting on the Korean situation. Korea was experiencing net outflows of over USD1 billion a day and its usual foreign exchange reserves were not much more than USD5 billion. The banks were encouraged to maintain credit lines to Korea on the view that it was in their own interest given that a Korean default would pose systemic risk to the global financial system. The banks’ agreement on this and subsequent agreement by UK and Europe provided Korea with the necessary, though brief breathing space in which to seek options for funding itself, stopping the outflows and boosting reserves.
The devaluation of the Korean won from around 800 to the dollar to a record low of 1985 had meant the amount of won needed to repay dollar debt had more than doubled and given that just under USD30 billion in short-term debt was due by the end of March 1998, this meant potential bankruptcy without outside aid. Korean corporate foreign currency debt from the top 30 chaebol and their numerous affiliates amounted to around USD60 billion. Following the foreign banks’ agreement to maintain credit lines, the Korean parliament in the first week of January passed the government’s proposal to extend some USD20 billion in government guarantees and to issue a total of USD10 billion in new debt. In late January it was announced that the Korean banks and a group of 13 leading international banks had agreed to extend the maturities of almost USD25 billion in short-term debts to the Korean banks, a further major step in the stabilisation of Korea.
On the Korean side, at one and the same time, the Koreans treated the crisis much like any other crisis of their history, as a national struggle for survival, and simultaneously as an opportunity for more hard-bargaining. On the edge of a financial precipice Korea might be, but its new government under President Kim Dae-jung was not without skill or guile in seeking to obtain more favourable terms. Kim was particularly well aware of the country’s need for new international private finance. One of his first acts as President was to invite George Soros, founder and head of the Soros Fund management, for a private meeting. In a press briefing afterwards, Soros reportedly said that he was seeking to increase significantly” the investment of his lead fund, the Quantum Fund, in Korean asset markets, though he first wanted to see significant corporate restructuring - which would inevitably result in painful but necessary heavy layoffs - greater corporate balance sheet transparency through the consolidation of accounts and labour market flexibility.3 ‘Ihat statement worked wonders for improving Kim Dae-jung’s reputation as a free-market reformer, and at the same time potentially attracting the interest of other Western institutional investors to the country. It was a masterstroke. Kim went further, reintroducing the concept of anonymous bank accounts which his predecessor had banned. The initial ban had caused discreet and black money to flee the country, putting pressure on the currency and interest rate markets. In opening up the economy to foreign ownership, while simultaneously promoting Korean national interests, Kim had to walk a tightrope. It was a high-wire act done with consummate skill, but not without compromise. A reformer he was - and is - but he was not about to tear down the structure, the very fabric of Korean corporate or political society. Kim’s other major success was in getting the unions, militant and moderate alike to agree to mass layoffs in return for unemployment pay, a concept inconceivable under previous Korean administrations.
Yet, while he led the reform element in the hope of attracting the necessary foreign capital to keep the economy and the financial system afloat, not all elements within Korea supported his efforts. The ruling party prior to Kim, which now formed a majority in the national Assembly did not appreciate seeing its corporate allies of long year forcibly restructured or rendered bankrupt and sought to frustrate the restucturing process through stalling bills in the parliament. Equally, the chaebol themselves, having gorged for years on cheap credit were hardly keen to go on a forced diet which in many cases involved the forced sale or liquidation of many of their own affiliates and subsidiaries. Many did not fulfil their part of Kim’s compact with the unions by paying unemployment pay, either because they wouldn’t or because they couldn’t meet such obligations. Meanwhile, the economic cost of the fiscal belt tightening which the IME demanded continued to bite into the soft flesh of the aconomy, hurting healthy and insolvent companies alike.
วันอังคารที่ 3 สิงหาคม พ.ศ. 2553
INDONESIA
The second country to go to the IMF for financial aid, in November of 1997, Indonesia under the leadership of President Soeharto, prevaricated, stalled, delayed, changed and twisted like a chameleon, infuriating IMF officials and Western governments alike. At once accepting the strictures of the initial IMF programme approved by the IMF board on November 5, 1997, Soeharto seemingly reversed course without warning, announcing budgetary measures including the reopening of banks which were shut down supposedly as part of that fiscal rationalisation and which were subsequently re-opened.
The same pattern occurred with the IMF demand for the closure of 16 out of the country’s 260-odd banks. Several of these were to re-open, some simply by virtue of changing their name. This was a further issue which could have been better handled by the IMF given that it played an undoubted part in the complete meltdown of the Indonesian banking system as panicked depositors, unsure of which banks were to be closed, withdrew their funds en masse. The issue is not whether the closure of the 16 banks concerned was correct, but rather that the demand for closure should have been pre-empted by a national guarantee by the Indonesian authorities, with multilateral assistance if necessary, of Indonesian banking deposits. The specific disaster which was visited upon the country’s banking system as a result of this demand need not have happened and the IMF and the Indonesian authorities themselves must share the blame for this.
The IMF made further demands in the latter months of 1997 and early January 1998, more specifically concerning the complete dismantling of the state cartels on primary products, such as palm oil, wood and so forth, and the lifting of subsidies on oil, flour and other basic commodities. In the context of free trade theory, this made perfect sense. Yet applying this theory to the case of Indonesia at the end of 1997 and early 1998 was perhaps not best appropriate. In practice, the dismantling of price and trade controls on palm oil resulted in a massive spike in its price, leading to violent bursts of social unrest from a domestic peasantry, already bemused by mounting job losses. In reaction to this, Soeharto then ordered the banning of palm oil exports, in complete breach of the IMF trade requirements. Soeharto’s dealings with the IMF can best be characterised by a combination of expediency and evasion. Oversight b a Western multilateral organisation such as the IMF was certainly not deemed desirable in the first place, but in the latter months of 1997, when the rupiah was in free-fall and Indonesia’s economy was steadily being destroyed on a daily basis, such oversight - and more to the point, financial aid - was deemed necessary.
Evasion was also necessary, in part because many of the IMF programme demands clashed with the financial and economic interests of the Soeharto family, in part because Soeharto was after all the leader of a nation which had rid itself of colonial domination by the force of arms. It is in this context that the January 15, 1998 signing of the second IMF agreement by Soeharto, seemingly cowering before the erect figure of a grim-faced Michel Camdessus should be seen. To many in Indonesia, this was a humiliating replication of colonisation. For many in the West, this may seem an extreme analogy, but it was not the West which was suffering from its greatest economic catastrophe since the war. A leader of Indonesia who could be so humbled by the West, who could be seen dS so powerless to defend his country’s interests was potentially a leader who was dispensable and expendable. Soeharto came to power in 1966, after all, as a result of a military coup - historical purists will point out here that elements of the military deemed leftists staged a coup against the Sukarno regime, possibly aided by the PKI, the Indonesian Communist Party. There is little question however that the Soeharto faction in the military knew ahead of time of such plans, allowed them to be played out, only to use these as an excuse for a military take-over of the country and a bloody putsch of perceived opposition elements, or more specifically anyone who was thought to be a Communist.
Actions by Asian governments emerging from colonial domination and subsequent internal turmoil cannot be seen exclusive to that historical backdrop, particularly those undertaken by the Soeharto government. It is in this context that we find ourselves on January 20, 1998, with Soeharto stunning the world by announcing the appointment of BJ Habibie as Vice President. At the time, the parliamentary confirmation of this appointment through the MPR was merely a rubber stamp. International reaction was at first bemused and then highly critical. As a minister responsible for national industry and technology, Habibie had been responsible for the creation of a number of industrial projects, including a national aircraft manufacturer, using substantial public investment. He was also responsible for the wholesale acquisition of the (rusting) East German military fleet after the unification of Germany and finally for the economic thought process which many dubbed “Habibienomics”, characterised most clearly by the idea of alternating interest rate loosening and tightening.
Rightly or wrongly, his appointment as Vice President was viewed in the West, in the governments of the U.S. and Europe, and in the IMF, as an unmitigated disaster. Soeharto was showing his hand, that he and he alone was the supreme ruler in Indonesia. Yet, the appointment of Habibie had wider implications. As well as being a champion of national industrial projects (however ill-advised given that most of them lost money), Habibie was also an active promoter of “pribumi” (indigenous Indonesians) and Islamic interests. He was after all head of an important Islamist group, the ICMI (Indonesian Association of Muslim Intellectuals). As such, he had reportedly on occasion openly promoted “pribumi” and Islamic interests over those of the Christian religions and Chinese ethnic minorities. His elevation was thus seen also as an elevation of Islam in the national political psyche, an important departure from the previous government’s policies which had brutally if effectively dealt with any Islamist elements deemed fundamentalist or against the binding national ideology of “pancasila”.
Subsequently, elements of the Indonesian society appeared to see this as a green light for the public promotion of ‘pribumi” interests with some calling for the expropriation or redistribution of ethnic Chinese wealth among the pribumis. What had started as an economic recession was rapidly developing nasty and serious sociopolitical and ethnic overtones. While sporadic rioting outside of Jakarta was gradually taking on an ethnic, anti-Chinese flavour, minorities were initially protected by the security forces in the capital itself. Coincidence? Surely not! It was most likely a graphic demonstration by Soeharto again of who was in charge and the chaos that might ensue if that iron grip on control was ever let slip.
Yet, Soeharto had other tricks up his sleeve, on the economic as well as the political side. In particular, he stumbled upon one trick, the idea of a currency board. It is unknown quite how Soeharto came upon this idea, though it seems doubtful that it originated from his own economic and financial technocracy, particularly since the very concept of a currency board necessitates the theoretical elimination of discretionary control by a country’s central bank over its monetary policy, if not the complete elimination of the central bank itself. For a central bank or a finance ministry to suggest such an idea would be tantamount to suicide. Whatever the case, Soeharto’s discovery” of the idea of a currency board coincided with the public promotion of the same idea by a university professor at John Hopkins University in the U.S., one Stephen Hanke. The IMF programme conditions were not only against the financial interests of the Soeharto Family. The full implementation of liberalisation, the shutting down of debt-ridden corporations and banks and the elimination of price controls were tantamount to a demand for the regime itself to commit political suicide given the social and political backlash which would inevitably result from these policies. Yet, Soeharto undoubtedly needed the significant funds attached to that IMF programme. Hence, he needed to be seen to be willing to go along with the programme, thus attracting initial loan commitments, if not actual disbursements from the programme while at the same time playing for time in terms of applying the terms and conditions of the programme, to avoid the worst consequences of these conditions for the regime itself and at the same time to seek a classical, economic alternative to those conditions.
The currency board idea thus suited Soeharto’s objectives perfectly. Hanke was soon invited to Soeharto’s “court” - given that Soeharto seemed in every respect the modern incarnation of a traditional Javanese King, this analogy seems apposite - where one must presume he discussed the intracacies of the currency board concept with the great man and his hangers-on, and its application to the Indonesian situation.
It must also be presumed that the IMF, which seems to deem itself the economic arbiter of the last resort, is not used to or tolerant of economic alternative ideas, to its stated policy recommendations. Certainly, the IMF public reaction to the currency board idea was far from positive, not only because it was deemed unworkable, but because the very fact of an alternative idea was unwelcome. A currency board requires the subjugation of monetary control to a fixed peg or exchange rate, extreme fiscal discipline, the backing of the monetary base by foreign currency reserves and the national resolve to accept that the economy henceforth takes the pain of adjustment rather than the exchange rate resulting from financial over-valuation. On its own, Indonesia did not have the reserves to back its monetary base commitment to a currency board. In order to do so, it would need extra funds from the international community and the IMP nas at that time ideologically opposed to the idea of a currency board in Indonesia since this ran in direct opposition to its existing policy prescription. Even if it had the necessary funds for this purpose, given the shattered state of its economy and more importantly of its banking sector, the market would most likely test Indonesia’s commitment to a currency board, necessitating initially sharply higher interest rates to defend the currency board peg. Those who argue that Indonesia’s banking system could not under any circumstances have withstood the requirements of a currency board system ignore the precedent of Argentina whose banking system was in similarly perilous state before the implementation of a currency board in 1991 and equally the fact that the discipline of the currency board saved both the economy and the financial system of that country.
So much for theory. There can be little doubt that Indonesia, unlike in the case of Argentina, did not have the resolve to follow through on the currency board idea. When Soeharto learned the requirements of a currency board, he most probably would have dismissed the idea out of hand, albeit privately given that the stratospheric interest rates needed to defend the currency board initially would have caused potentially explosive social unrest. The best that can be said of the currency board idea in Indonesia was that it could have worked theoretically if the government had had the unswerving resolve to implement it fully, but in the end Soeharto rejected the idea for very practical reasons. In the meantime, however, Soeharto pretended to continue to consider the idea. This served two useful purposes. On the one hand, it kept the IMF occupied, and away from demanding the implementation of their own programme conditions. On the other, it had the hitherto unexpected benefit of causing the Indonesian rupiah to stabilise and even strengthen. The rupicth had by that time hit a distant and record low of 17,000 to the dollar (as against around 2,400 before the devaluation), only to slowly crawl its way back from that abyss after the signing of the second IMF agreement. At a time when it was still trading around 12,000 to the dollar, official leaks suggested that a currency board might be implemented at between 5,000-8,000 to the dollar, immediately causing currency traders to cover short rupiah, long dollar positions, by buying back the rupiah, just in case such a seemingly far fetched idea was actually implemented. This provided at least some degree of platform for economic stabilisation while Soeharto tried to keep the IMF at bay.
While the Western media speculated that Soeharto might actually implement a currency board at an exchange rate of 5,000 to the dollar, as per official leaks, in order to bail out much of the Indonesian corporate base linked to the First Family - a policy which would have seemed eminently reasonable on the face of it to a javanese King - it seems likely that Soeharto, at least in the latter stages after he had been made to understand its implications, had no intention whatsoever of actually implementing a currency board given the likely consequences to the banking system and the country as a result of yet higher interest rates. Soeharto was thus, yet again, the Javanese puppet master in an elaborate puppet game. Neither Hanke nor Soeharto were to remain unscathed from this episode. In the case of the former, he was publicly castigated by many commentators, most famously by the MIT Professor Paul Krugman as the “rupiah Rasputin”, a description seemingly aimed more at capturing the media’s headlines rather than adding to the level of economic debate.
Meanwhile. Soeharto continued to court alternatives to the IMF In March 1998, Habibie toured Japan, pleading for financial aid. The then Japanese Prime Minister Hashimoto followed this up with a visit to Jakarta in April, bringing commitments of financial and food aid, notably of basic commodities such as rice. Japan had a major vested interest in not allowing Indonesia to go under since its banks were thought to be exposed in Indonesia to the tune of USD24 billion. Japan’s trading houses were thought to be even more exposed than their Japanese banking counterparts. Japan’s commitment to helping Asia up until then had met with significant controversy. In mid-1997, it had proposed an idea subsequently to be dubbed an Asian Monetary Fund, reflecting a reserve facility upon which Asian authorities could draw in times of need. This idea had gone down like a lead balloon in Washington, publicly because there was no need to replace the existing facilities of the IMF, and privately because it represented a fundamental challenge to U.S. dominance of the global financial system. Japan’s loans to Indonesia and Thailand and the subsequent Miyazawa Initiative, named after Finance Minister Kiichi Miyazawa and reflective of this initial idea of a Japanese-dominated and created loan fund for Asian countries in need, were controversial with Western governments because they too represented a key challenge to Western domination in Asia. Yet, they were surely reflective merely of what the West had long since demanded, namely a more assertive Japanese presence on the world’s political and financial stage.
Japan’s loans were the catalyst for donations from other Asian countries, but though they delayed the IMP’s demands on Indonesia, they did not serve to deflect them. The IMF continued to demand its trademark brand of fiscal and monetary austerity coupled with market opening and supervisory regulations. Without these, IMF loan commitments would not become actual disbursements. Soeharto’s delaying tactics had frustrated and fooled many, but they did nothing to solve the underlying problem. The Indonesian corporate base was to all intents and purposes completely bankrupt, its banking system in tatters. Unemployed urban workers were being herded into trucks by the military in order to avoid major public demonstrations or unrest. Soeharto faced two alternatives, both potentially unpalatable. One was to give in completely to the IMF demands and thus risk complete social and political disintegration and more importantly his own removal. The other was not to give in and to continue to delay, thus getting IMF and international loan commitments but few actual disbursements. The country would thus continue to stagnate, more companies would continue to go bankrupt. In the end, Soeharto seems to have chosen a combination of going down fighting, while protecting his own.
In this regard, Soeharto’s last hurrah was his move on May 5, as he left for an emerging market summit in Cairo, to eliminate all price controls on basic commodities for a year which he had up until then been delaying on the view that such price control elimination would be socially disastrous. The result should have been predictable. Within a week, Jakarta’s Chinatown district was in flames as the city’s primarily Muslim disadvantaged used the perceived wealthier ethnic Chinese Indonesians as the scapegoats of their own misfortune. At the time, several newswires reported the suspicion that elements of Indonesia’s special forces, then under the command of Soeharto’s son-in-law Lieutenant General Prabowo, were responsible for fuelling and inciting the riots which wracked Jakarta in May of 1998, involving the killing and raping of ethnic Chinese. Subsequently, an Indonesian military court ruling confirmed this reported suspicion. In total, around 1,120 people died in the May riots, including several hundred looters who perished in a building which they were in the process of looting and which was mysteriously set on fire. Subsequently theories abounded that Prabowo had been attempting a coup while Soeharto was away. This view - denied by Prabowo - gained prominence because ABRI (Armed Forces of Indonesia) Commander General Wiranto was also away from Jakarta at the time. Whatever the case, Wiranto returned and restored order to the streets of Jakarta through a combination of stern orders that looters would be shot on sight, and attempts to negotiate with demonstrators and student groups. When Soeharto returned to Jakarta, his capital was effectively under martial law. Once more, he had demonstrated that he - and by implication the military from which he came - were “the only game in town”. Yet again, he had “proved” himself indispensable to the West (i.e. the IMF) in keeping Indonesia in one piece. Yet, the underlying fundamental condition of Indonesia continued to worsen. Indeed, that degree of deterioration had just been multiplied several times over as a result of the May riots. The essential calamity which was destroying the very fabric of Indonesian society, let alone its economy, could not be outrun by Soeharto’s delaying tactics.
On May 17, Soeharto had claimed emergency powers from the MPR, only for House Speaker Harmoko to call for Soeharto’s resignation the following day. Daily student demonstrations climaxed in the storming of the parliament itself. ABRI Commander General Wiranto had plenty of opportunity to shed significant blood if he had wanted to, but instead he seemed reluctant to fight such public expression of discontent through force of arms on the streets of the capital.
The bottom line had been that Indonesia, its fiscal and current accounts badly holed below the water line was sinking fast and needed money immediately to plug the gaps. With Soeharto in power, Indonesia was unlikely to get it. This realisation now coincided with widespread public demands for Soeharto’s resignation. On May 20, the unthinkable happened. Soeharto stood before the world’s media and announced his resignation, handing over to his Vice President BJ Habibie. The Western media recounted the end of a 32-year reign, as if the old man, now stripped of formal office, was also stripped of all influence. This was very far from the truth and to many a case of wishful thinking. Habibie was after all like an adopted son to Soeharto, dating back to the time when Soeharto as a young army officer had stayed at the Habibie home in the outer islands. Despite having his own financial resources, Habibie owed his elevation in government circles almost entirely to his “father” figure. To then say that Habibie mounted a coup against Soeharto is thus nonsense. General Wiranto almost let slip the reality when he stated publicly that no member of the Soeharto Family nor their assets would be allowed to come to harm, this while the houses of rich ethnic Chinese who had done much to finance the regime were allowed to be ransacked and burned, It is in this context that the initial elevation of Habibie to Vice President should be seen. Yes, he was put in place as a transition President, but also one who would protect the interests of his “father” Soeharto, either deliberately or otherwise. In the Javanese puppet game, Habibie played his part, an important part to be sure, but the puppet-master had not changed. Soeharto still pulled the strings. To be sure, there had to be sacrifices, examples which could be held as proving the new administration’s reforming spirit. Right after Habibie was handed the reigns of power (subsequently to be confirmed by a vote of parliament), he removed from ministerial office ‘Bob” Hasan, Soeharto’s golfing partner, and “Tutut”, his daughter, a very public gesture of reducing the influence of the First Family. While filling technocratic positions with his own supporters, Habibie did everything possible in the public arena to please the U.S. administration and the IMF, promising free and fair elections the following year. He made the Bank of Indonesia separate and independent from the government by an act of parliament. He supervised the setting up of the Indonesian Banking Restructuring Agency and the Indonesian Debt Restructuring Agency. Western officials must have been pleasantly surprised. Certainly, the markets were. In truth, however, little had changed. Soeharto still held considerable influence, if only by his sheer presence and force of personality. The interests of his family had not been realistically threatened let alone expropriated. Meanwhile, the economy continued to deteriorate, the debt burden to get ever larger.
The first effort in Tokyo in May 1998 to restructure and rollover foreign bank loans to the domestic banking system had seen its talks come to nothing. Subsequently, in June of that year in Frankfurt, an agreement was tentatively reached with Indonesia’s leading creditors, allowing a 3-5 year grace period for the repayment of the principal. Indonesian Debt Restructuring Agency (INDRA) was set up to provide foreign currency, though in a crucial departure from the Mexico 1982 bailout INDRA did not guarantee to subsidise the translation exchange rate to be used for debt restructuring. There was thus little incentive for an Indonesian corporation or bank to use INDRA.
The same pattern occurred with the IMF demand for the closure of 16 out of the country’s 260-odd banks. Several of these were to re-open, some simply by virtue of changing their name. This was a further issue which could have been better handled by the IMF given that it played an undoubted part in the complete meltdown of the Indonesian banking system as panicked depositors, unsure of which banks were to be closed, withdrew their funds en masse. The issue is not whether the closure of the 16 banks concerned was correct, but rather that the demand for closure should have been pre-empted by a national guarantee by the Indonesian authorities, with multilateral assistance if necessary, of Indonesian banking deposits. The specific disaster which was visited upon the country’s banking system as a result of this demand need not have happened and the IMF and the Indonesian authorities themselves must share the blame for this.
The IMF made further demands in the latter months of 1997 and early January 1998, more specifically concerning the complete dismantling of the state cartels on primary products, such as palm oil, wood and so forth, and the lifting of subsidies on oil, flour and other basic commodities. In the context of free trade theory, this made perfect sense. Yet applying this theory to the case of Indonesia at the end of 1997 and early 1998 was perhaps not best appropriate. In practice, the dismantling of price and trade controls on palm oil resulted in a massive spike in its price, leading to violent bursts of social unrest from a domestic peasantry, already bemused by mounting job losses. In reaction to this, Soeharto then ordered the banning of palm oil exports, in complete breach of the IMF trade requirements. Soeharto’s dealings with the IMF can best be characterised by a combination of expediency and evasion. Oversight b a Western multilateral organisation such as the IMF was certainly not deemed desirable in the first place, but in the latter months of 1997, when the rupiah was in free-fall and Indonesia’s economy was steadily being destroyed on a daily basis, such oversight - and more to the point, financial aid - was deemed necessary.
Evasion was also necessary, in part because many of the IMF programme demands clashed with the financial and economic interests of the Soeharto family, in part because Soeharto was after all the leader of a nation which had rid itself of colonial domination by the force of arms. It is in this context that the January 15, 1998 signing of the second IMF agreement by Soeharto, seemingly cowering before the erect figure of a grim-faced Michel Camdessus should be seen. To many in Indonesia, this was a humiliating replication of colonisation. For many in the West, this may seem an extreme analogy, but it was not the West which was suffering from its greatest economic catastrophe since the war. A leader of Indonesia who could be so humbled by the West, who could be seen dS so powerless to defend his country’s interests was potentially a leader who was dispensable and expendable. Soeharto came to power in 1966, after all, as a result of a military coup - historical purists will point out here that elements of the military deemed leftists staged a coup against the Sukarno regime, possibly aided by the PKI, the Indonesian Communist Party. There is little question however that the Soeharto faction in the military knew ahead of time of such plans, allowed them to be played out, only to use these as an excuse for a military take-over of the country and a bloody putsch of perceived opposition elements, or more specifically anyone who was thought to be a Communist.
Actions by Asian governments emerging from colonial domination and subsequent internal turmoil cannot be seen exclusive to that historical backdrop, particularly those undertaken by the Soeharto government. It is in this context that we find ourselves on January 20, 1998, with Soeharto stunning the world by announcing the appointment of BJ Habibie as Vice President. At the time, the parliamentary confirmation of this appointment through the MPR was merely a rubber stamp. International reaction was at first bemused and then highly critical. As a minister responsible for national industry and technology, Habibie had been responsible for the creation of a number of industrial projects, including a national aircraft manufacturer, using substantial public investment. He was also responsible for the wholesale acquisition of the (rusting) East German military fleet after the unification of Germany and finally for the economic thought process which many dubbed “Habibienomics”, characterised most clearly by the idea of alternating interest rate loosening and tightening.
Rightly or wrongly, his appointment as Vice President was viewed in the West, in the governments of the U.S. and Europe, and in the IMF, as an unmitigated disaster. Soeharto was showing his hand, that he and he alone was the supreme ruler in Indonesia. Yet, the appointment of Habibie had wider implications. As well as being a champion of national industrial projects (however ill-advised given that most of them lost money), Habibie was also an active promoter of “pribumi” (indigenous Indonesians) and Islamic interests. He was after all head of an important Islamist group, the ICMI (Indonesian Association of Muslim Intellectuals). As such, he had reportedly on occasion openly promoted “pribumi” and Islamic interests over those of the Christian religions and Chinese ethnic minorities. His elevation was thus seen also as an elevation of Islam in the national political psyche, an important departure from the previous government’s policies which had brutally if effectively dealt with any Islamist elements deemed fundamentalist or against the binding national ideology of “pancasila”.
Subsequently, elements of the Indonesian society appeared to see this as a green light for the public promotion of ‘pribumi” interests with some calling for the expropriation or redistribution of ethnic Chinese wealth among the pribumis. What had started as an economic recession was rapidly developing nasty and serious sociopolitical and ethnic overtones. While sporadic rioting outside of Jakarta was gradually taking on an ethnic, anti-Chinese flavour, minorities were initially protected by the security forces in the capital itself. Coincidence? Surely not! It was most likely a graphic demonstration by Soeharto again of who was in charge and the chaos that might ensue if that iron grip on control was ever let slip.
Yet, Soeharto had other tricks up his sleeve, on the economic as well as the political side. In particular, he stumbled upon one trick, the idea of a currency board. It is unknown quite how Soeharto came upon this idea, though it seems doubtful that it originated from his own economic and financial technocracy, particularly since the very concept of a currency board necessitates the theoretical elimination of discretionary control by a country’s central bank over its monetary policy, if not the complete elimination of the central bank itself. For a central bank or a finance ministry to suggest such an idea would be tantamount to suicide. Whatever the case, Soeharto’s discovery” of the idea of a currency board coincided with the public promotion of the same idea by a university professor at John Hopkins University in the U.S., one Stephen Hanke. The IMF programme conditions were not only against the financial interests of the Soeharto Family. The full implementation of liberalisation, the shutting down of debt-ridden corporations and banks and the elimination of price controls were tantamount to a demand for the regime itself to commit political suicide given the social and political backlash which would inevitably result from these policies. Yet, Soeharto undoubtedly needed the significant funds attached to that IMF programme. Hence, he needed to be seen to be willing to go along with the programme, thus attracting initial loan commitments, if not actual disbursements from the programme while at the same time playing for time in terms of applying the terms and conditions of the programme, to avoid the worst consequences of these conditions for the regime itself and at the same time to seek a classical, economic alternative to those conditions.
The currency board idea thus suited Soeharto’s objectives perfectly. Hanke was soon invited to Soeharto’s “court” - given that Soeharto seemed in every respect the modern incarnation of a traditional Javanese King, this analogy seems apposite - where one must presume he discussed the intracacies of the currency board concept with the great man and his hangers-on, and its application to the Indonesian situation.
It must also be presumed that the IMF, which seems to deem itself the economic arbiter of the last resort, is not used to or tolerant of economic alternative ideas, to its stated policy recommendations. Certainly, the IMF public reaction to the currency board idea was far from positive, not only because it was deemed unworkable, but because the very fact of an alternative idea was unwelcome. A currency board requires the subjugation of monetary control to a fixed peg or exchange rate, extreme fiscal discipline, the backing of the monetary base by foreign currency reserves and the national resolve to accept that the economy henceforth takes the pain of adjustment rather than the exchange rate resulting from financial over-valuation. On its own, Indonesia did not have the reserves to back its monetary base commitment to a currency board. In order to do so, it would need extra funds from the international community and the IMP nas at that time ideologically opposed to the idea of a currency board in Indonesia since this ran in direct opposition to its existing policy prescription. Even if it had the necessary funds for this purpose, given the shattered state of its economy and more importantly of its banking sector, the market would most likely test Indonesia’s commitment to a currency board, necessitating initially sharply higher interest rates to defend the currency board peg. Those who argue that Indonesia’s banking system could not under any circumstances have withstood the requirements of a currency board system ignore the precedent of Argentina whose banking system was in similarly perilous state before the implementation of a currency board in 1991 and equally the fact that the discipline of the currency board saved both the economy and the financial system of that country.
So much for theory. There can be little doubt that Indonesia, unlike in the case of Argentina, did not have the resolve to follow through on the currency board idea. When Soeharto learned the requirements of a currency board, he most probably would have dismissed the idea out of hand, albeit privately given that the stratospheric interest rates needed to defend the currency board initially would have caused potentially explosive social unrest. The best that can be said of the currency board idea in Indonesia was that it could have worked theoretically if the government had had the unswerving resolve to implement it fully, but in the end Soeharto rejected the idea for very practical reasons. In the meantime, however, Soeharto pretended to continue to consider the idea. This served two useful purposes. On the one hand, it kept the IMF occupied, and away from demanding the implementation of their own programme conditions. On the other, it had the hitherto unexpected benefit of causing the Indonesian rupiah to stabilise and even strengthen. The rupicth had by that time hit a distant and record low of 17,000 to the dollar (as against around 2,400 before the devaluation), only to slowly crawl its way back from that abyss after the signing of the second IMF agreement. At a time when it was still trading around 12,000 to the dollar, official leaks suggested that a currency board might be implemented at between 5,000-8,000 to the dollar, immediately causing currency traders to cover short rupiah, long dollar positions, by buying back the rupiah, just in case such a seemingly far fetched idea was actually implemented. This provided at least some degree of platform for economic stabilisation while Soeharto tried to keep the IMF at bay.
While the Western media speculated that Soeharto might actually implement a currency board at an exchange rate of 5,000 to the dollar, as per official leaks, in order to bail out much of the Indonesian corporate base linked to the First Family - a policy which would have seemed eminently reasonable on the face of it to a javanese King - it seems likely that Soeharto, at least in the latter stages after he had been made to understand its implications, had no intention whatsoever of actually implementing a currency board given the likely consequences to the banking system and the country as a result of yet higher interest rates. Soeharto was thus, yet again, the Javanese puppet master in an elaborate puppet game. Neither Hanke nor Soeharto were to remain unscathed from this episode. In the case of the former, he was publicly castigated by many commentators, most famously by the MIT Professor Paul Krugman as the “rupiah Rasputin”, a description seemingly aimed more at capturing the media’s headlines rather than adding to the level of economic debate.
Meanwhile. Soeharto continued to court alternatives to the IMF In March 1998, Habibie toured Japan, pleading for financial aid. The then Japanese Prime Minister Hashimoto followed this up with a visit to Jakarta in April, bringing commitments of financial and food aid, notably of basic commodities such as rice. Japan had a major vested interest in not allowing Indonesia to go under since its banks were thought to be exposed in Indonesia to the tune of USD24 billion. Japan’s trading houses were thought to be even more exposed than their Japanese banking counterparts. Japan’s commitment to helping Asia up until then had met with significant controversy. In mid-1997, it had proposed an idea subsequently to be dubbed an Asian Monetary Fund, reflecting a reserve facility upon which Asian authorities could draw in times of need. This idea had gone down like a lead balloon in Washington, publicly because there was no need to replace the existing facilities of the IMF, and privately because it represented a fundamental challenge to U.S. dominance of the global financial system. Japan’s loans to Indonesia and Thailand and the subsequent Miyazawa Initiative, named after Finance Minister Kiichi Miyazawa and reflective of this initial idea of a Japanese-dominated and created loan fund for Asian countries in need, were controversial with Western governments because they too represented a key challenge to Western domination in Asia. Yet, they were surely reflective merely of what the West had long since demanded, namely a more assertive Japanese presence on the world’s political and financial stage.
Japan’s loans were the catalyst for donations from other Asian countries, but though they delayed the IMP’s demands on Indonesia, they did not serve to deflect them. The IMF continued to demand its trademark brand of fiscal and monetary austerity coupled with market opening and supervisory regulations. Without these, IMF loan commitments would not become actual disbursements. Soeharto’s delaying tactics had frustrated and fooled many, but they did nothing to solve the underlying problem. The Indonesian corporate base was to all intents and purposes completely bankrupt, its banking system in tatters. Unemployed urban workers were being herded into trucks by the military in order to avoid major public demonstrations or unrest. Soeharto faced two alternatives, both potentially unpalatable. One was to give in completely to the IMF demands and thus risk complete social and political disintegration and more importantly his own removal. The other was not to give in and to continue to delay, thus getting IMF and international loan commitments but few actual disbursements. The country would thus continue to stagnate, more companies would continue to go bankrupt. In the end, Soeharto seems to have chosen a combination of going down fighting, while protecting his own.
In this regard, Soeharto’s last hurrah was his move on May 5, as he left for an emerging market summit in Cairo, to eliminate all price controls on basic commodities for a year which he had up until then been delaying on the view that such price control elimination would be socially disastrous. The result should have been predictable. Within a week, Jakarta’s Chinatown district was in flames as the city’s primarily Muslim disadvantaged used the perceived wealthier ethnic Chinese Indonesians as the scapegoats of their own misfortune. At the time, several newswires reported the suspicion that elements of Indonesia’s special forces, then under the command of Soeharto’s son-in-law Lieutenant General Prabowo, were responsible for fuelling and inciting the riots which wracked Jakarta in May of 1998, involving the killing and raping of ethnic Chinese. Subsequently, an Indonesian military court ruling confirmed this reported suspicion. In total, around 1,120 people died in the May riots, including several hundred looters who perished in a building which they were in the process of looting and which was mysteriously set on fire. Subsequently theories abounded that Prabowo had been attempting a coup while Soeharto was away. This view - denied by Prabowo - gained prominence because ABRI (Armed Forces of Indonesia) Commander General Wiranto was also away from Jakarta at the time. Whatever the case, Wiranto returned and restored order to the streets of Jakarta through a combination of stern orders that looters would be shot on sight, and attempts to negotiate with demonstrators and student groups. When Soeharto returned to Jakarta, his capital was effectively under martial law. Once more, he had demonstrated that he - and by implication the military from which he came - were “the only game in town”. Yet again, he had “proved” himself indispensable to the West (i.e. the IMF) in keeping Indonesia in one piece. Yet, the underlying fundamental condition of Indonesia continued to worsen. Indeed, that degree of deterioration had just been multiplied several times over as a result of the May riots. The essential calamity which was destroying the very fabric of Indonesian society, let alone its economy, could not be outrun by Soeharto’s delaying tactics.
On May 17, Soeharto had claimed emergency powers from the MPR, only for House Speaker Harmoko to call for Soeharto’s resignation the following day. Daily student demonstrations climaxed in the storming of the parliament itself. ABRI Commander General Wiranto had plenty of opportunity to shed significant blood if he had wanted to, but instead he seemed reluctant to fight such public expression of discontent through force of arms on the streets of the capital.
The bottom line had been that Indonesia, its fiscal and current accounts badly holed below the water line was sinking fast and needed money immediately to plug the gaps. With Soeharto in power, Indonesia was unlikely to get it. This realisation now coincided with widespread public demands for Soeharto’s resignation. On May 20, the unthinkable happened. Soeharto stood before the world’s media and announced his resignation, handing over to his Vice President BJ Habibie. The Western media recounted the end of a 32-year reign, as if the old man, now stripped of formal office, was also stripped of all influence. This was very far from the truth and to many a case of wishful thinking. Habibie was after all like an adopted son to Soeharto, dating back to the time when Soeharto as a young army officer had stayed at the Habibie home in the outer islands. Despite having his own financial resources, Habibie owed his elevation in government circles almost entirely to his “father” figure. To then say that Habibie mounted a coup against Soeharto is thus nonsense. General Wiranto almost let slip the reality when he stated publicly that no member of the Soeharto Family nor their assets would be allowed to come to harm, this while the houses of rich ethnic Chinese who had done much to finance the regime were allowed to be ransacked and burned, It is in this context that the initial elevation of Habibie to Vice President should be seen. Yes, he was put in place as a transition President, but also one who would protect the interests of his “father” Soeharto, either deliberately or otherwise. In the Javanese puppet game, Habibie played his part, an important part to be sure, but the puppet-master had not changed. Soeharto still pulled the strings. To be sure, there had to be sacrifices, examples which could be held as proving the new administration’s reforming spirit. Right after Habibie was handed the reigns of power (subsequently to be confirmed by a vote of parliament), he removed from ministerial office ‘Bob” Hasan, Soeharto’s golfing partner, and “Tutut”, his daughter, a very public gesture of reducing the influence of the First Family. While filling technocratic positions with his own supporters, Habibie did everything possible in the public arena to please the U.S. administration and the IMF, promising free and fair elections the following year. He made the Bank of Indonesia separate and independent from the government by an act of parliament. He supervised the setting up of the Indonesian Banking Restructuring Agency and the Indonesian Debt Restructuring Agency. Western officials must have been pleasantly surprised. Certainly, the markets were. In truth, however, little had changed. Soeharto still held considerable influence, if only by his sheer presence and force of personality. The interests of his family had not been realistically threatened let alone expropriated. Meanwhile, the economy continued to deteriorate, the debt burden to get ever larger.
The first effort in Tokyo in May 1998 to restructure and rollover foreign bank loans to the domestic banking system had seen its talks come to nothing. Subsequently, in June of that year in Frankfurt, an agreement was tentatively reached with Indonesia’s leading creditors, allowing a 3-5 year grace period for the repayment of the principal. Indonesian Debt Restructuring Agency (INDRA) was set up to provide foreign currency, though in a crucial departure from the Mexico 1982 bailout INDRA did not guarantee to subsidise the translation exchange rate to be used for debt restructuring. There was thus little incentive for an Indonesian corporation or bank to use INDRA.
THAILAND
Returning to the example of Thailand, whatever the theory, the Thai government set about in a decidedly practical fashion to follow the IMF polic prescription to the letter. Taxes were raised and spending programmes were savaged. Shortly after the initial devaluation of the baht, the Thai government increased the ceiling for foreign ownership in Thai corporations from 2S to 10000. Along with the fiscal strait jacket which it applied, the Thai authorities, albeit with some reluctance, closed down 56 finance companies which had found themselves over-exposed to the domestic property sector in the wake of the asset market crash which took place before and after the devaluation of the bout. Subsequently, the authorities allowed foreigners to own a majority stake in the 56 finance companies - if anyone wanted to
There can be no question that the Thai authorities applied the terms of their bailout package with the IMF most rigorously and fully. Indeed, such was the determination of Thailand to take the medicine given to it, however bitter, that it did not shirk the cost, and the cost was high. Indeed, in addition to the middle classes and Northern peasants demonstrating in the streets of Bangkok, in addition to what one commentator called the decapitation” of the Thai middle classes, the bankruptcies, the hundreds of thousands who lost their jobs and were forced into poverty, it cost the very existence of the Thai government itself. New coalitions were formed and once the presence of the Chavalit government had been removed, Chuan
Leepkai of the Democrats returned to power. This caused jubilation and hope among offshore markets, though some investors with long memories would recall that it was the same Chuan Leepkai who as part of his programme of financial liberalisation created the BIBF, the well-spring of so much of the short-term dollar debt and therefore of the resulting financial chaos in the first place.
Still, with Thai asset markets seemingly being priced at bargain- basement value, one or two foreign investors started to return, started to sift through the rubble of shattered balance sheets for occasional gems. Thailand saw a contraction in 1997 of -1.3 only for this to increase dramatically to -9.4 in 1998 as the initial government programme of fiscal rationalisation and monetary tightening added to the collapse in domestic demand resulting from the currency devaluation. As a consequence, the external gap was more than closed, indeed Thailand produced substantial trade and current account surpluses for 1998. The cost of that was the domestic economy, but in large part that was precisely the aim of the IMF programme. The domestic economy had to bear the brunt of the adjustment in order for the current account deficit to be reduced and ultimately eliminated. At the macroeconomic level, that swing in the Thai current account balance to a surplus of 12.8 of GDP in 1998 from a deficit of -2.1 in 1997 and -7.9 in 1996 represented a healthy improvement in medium-term fundamentals, albeit at the expense, temporarily of the domestic consumer. Left at that, things would have been fine. The economy would have gradually recovered by itself. Yet, the degree of current account surplus in 1998 and equally the degree of economic growth contraction betrayed deeper ills that might otherwise be solved by such general, sweeping macroeconomic measures. At the microeconomic level, the deterioration of the Thai balit and the consequent revaluation of dollar debts had eviscerated most Thai corporate and banking balance sheets, bringing low even renowned Thai conglomerates or at the very least burdening them with massive foreign exchange losses.
With the Thai banking system saddled with bad debts of 400o of total and rising, local banks were neither able nor willing to lend to the corporate base or to consumers. Instead, they sought first to seek to repair their own shattered balance sheets by buying up every long- dated government bond issue they could find at auction and in turn borrowing the funds for those purchases from the bank of Thailand through its repo window, thus making the spread between those two interest rates. The fiscal side was being tightened, interest rates were being kept high in order to support the weakened currency and in addition banks were showing no willingness to lend whatsoever.
From a financial crisis, Thailand had been thrown into a deep economic recession, verging on outright depression. Meanwhile, if it were possible, the situation in Indonesia was even worse.
There can be no question that the Thai authorities applied the terms of their bailout package with the IMF most rigorously and fully. Indeed, such was the determination of Thailand to take the medicine given to it, however bitter, that it did not shirk the cost, and the cost was high. Indeed, in addition to the middle classes and Northern peasants demonstrating in the streets of Bangkok, in addition to what one commentator called the decapitation” of the Thai middle classes, the bankruptcies, the hundreds of thousands who lost their jobs and were forced into poverty, it cost the very existence of the Thai government itself. New coalitions were formed and once the presence of the Chavalit government had been removed, Chuan
Leepkai of the Democrats returned to power. This caused jubilation and hope among offshore markets, though some investors with long memories would recall that it was the same Chuan Leepkai who as part of his programme of financial liberalisation created the BIBF, the well-spring of so much of the short-term dollar debt and therefore of the resulting financial chaos in the first place.
Still, with Thai asset markets seemingly being priced at bargain- basement value, one or two foreign investors started to return, started to sift through the rubble of shattered balance sheets for occasional gems. Thailand saw a contraction in 1997 of -1.3 only for this to increase dramatically to -9.4 in 1998 as the initial government programme of fiscal rationalisation and monetary tightening added to the collapse in domestic demand resulting from the currency devaluation. As a consequence, the external gap was more than closed, indeed Thailand produced substantial trade and current account surpluses for 1998. The cost of that was the domestic economy, but in large part that was precisely the aim of the IMF programme. The domestic economy had to bear the brunt of the adjustment in order for the current account deficit to be reduced and ultimately eliminated. At the macroeconomic level, that swing in the Thai current account balance to a surplus of 12.8 of GDP in 1998 from a deficit of -2.1 in 1997 and -7.9 in 1996 represented a healthy improvement in medium-term fundamentals, albeit at the expense, temporarily of the domestic consumer. Left at that, things would have been fine. The economy would have gradually recovered by itself. Yet, the degree of current account surplus in 1998 and equally the degree of economic growth contraction betrayed deeper ills that might otherwise be solved by such general, sweeping macroeconomic measures. At the microeconomic level, the deterioration of the Thai balit and the consequent revaluation of dollar debts had eviscerated most Thai corporate and banking balance sheets, bringing low even renowned Thai conglomerates or at the very least burdening them with massive foreign exchange losses.
With the Thai banking system saddled with bad debts of 400o of total and rising, local banks were neither able nor willing to lend to the corporate base or to consumers. Instead, they sought first to seek to repair their own shattered balance sheets by buying up every long- dated government bond issue they could find at auction and in turn borrowing the funds for those purchases from the bank of Thailand through its repo window, thus making the spread between those two interest rates. The fiscal side was being tightened, interest rates were being kept high in order to support the weakened currency and in addition banks were showing no willingness to lend whatsoever.
From a financial crisis, Thailand had been thrown into a deep economic recession, verging on outright depression. Meanwhile, if it were possible, the situation in Indonesia was even worse.
วันอาทิตย์ที่ 1 สิงหาคม พ.ศ. 2553
Debt for Debt: 'Financing the American Family' (Into Oblivion?)
THE QUESTION OF APPROPRIATE IMF POLICY RESPONSE
The IMF itself responded to the criticisms it received for its programme focus in several reports, notably in “The IMF’s Response to the Asian Crisis” (January 17, 1999) which gave a preliminary assessment of its programmes for Indonesia, Korea and Thailand, for the most part defending its actions although it admitted that lessons had been learned during the crisis. In the case of the Asian crisis, the IMF saw its role primarily remaining in the defence and safety of the global financial system, and secondly helping to restore confidence to the economies affected by the crisis. Its goal was thus to provide financial programmes which might provide the foundation for economic stabilisation - and this is indeed exactly what it did. The pillars of this platform were consequently:
1. Temporary monetary tightening to stop exchange rate depreciation
2. Concerted action to correct the weaknesses in the financial system, which contributed significantly to the crisis
3. Structural reforms to remove features of the economy that had become impediments to growth (such as monopolies, trade barriers, and nontransparent corporate practices) and to improve the efficiency of financial inter-mediation and the future soundness of financial systems
4. Efforts to assist in reopening or maintaining lines of external financing
3. The maintenance of a sound fiscal policy, including through providing for rising budgetary costs of financial sector restructuring, while protecting social spending. Once the severity of the economic downturn in the affected countries became clear, fiscal policy was oriented toward supporting economic activity and expanding the social sector safety net.’
It was consequently NOT the IMF’s specific job to attempt or help with the stabilisation of the financial markets through the implementation of short-term measures, which could well prove contrary to the medium-term economic stabilisation requirements. That said, a key lesson of the crisis which the IMP did take on board was the need to co-ordinate with the private sector, particularly with regard to private debt rollovers and restructuring, providing key support in particular to the roll-over of Korean short-term debt, negotiations which took place between December 1997 - March 1998.
Many of these points are well made. It most certainly was not the job of the IMP to bail out the Thai, Korean and Indonesian corporate sectors after these had found themselves both over-leveraged and under-hedged. Equally, the IMF cannot be blamed for inadequate regulatory supervision in several Asian countries affected by the crisis, for those countries are lack of sufficient institutional infrastructure for the lack of corporate, market and data transparency. It also cannot be held accountable for the lack of checks and balances which existed in several Asian countries, resulting in significant levels of corruption and vested interests in the case of some. Indeed, the IMF programmes sought to address many of these important issues. Throughout the Asian crisis, IMP policies and programmes attracted substantial criticism from a host of different quarters, some in the U.S. taking the view that it should not provide any bailouts, others in Asia saying that the bailouts were too little too late, yet others who said its key focus on fiscal austerity was misplaced since Asia’s public finances were already in surplus, and finally those who argued that the IMF should have stopped the crisis from happening in the first place. Some of these criticisms were reasonable, some ridiculous, and some betraying the most profound ignorance of the situation. The point about fiscal austerity is notable, and a criticism with some validity given that Asian countries were by no means fiscally lax, that the deficits were at the corporate rather than the public level, yet this was a key aspect of the policy programme aimed at closing Asian external gaps (trade and current account deficits). Granted, this was a brutal way to do it given that it implied that the domestic economy had to pay the price, bad to take the adjustment required to achieve this. But then so be it. The IMF did not create the debts problems. The IMF did not create the current account deficits, indeed in the case of Thailand it issued several warnings on that score. Indeed, the IMF is not a global financial supervisor as some take it. In the event of a financial crisis, it arrives after the fact and whatever its power and influence it cannot order the implementation of its programmes if a programme member is not fearful of getting the loan disbursement ceased.
THE IMF TO THE RESCUE
Returning to stage 1, we find ourselves at the scene of battle, the victors - of whatever nationality or origin - riding off into the sunset with their spoils, the vanquished left to survey a vista of devastation, of bitter defeat. After initially refusing to accept the prospect of having its nation rescued by external elements, the Thai government capitulated on August 20th 1997, financial support for Thailand in the form of a USD17.2 billion aid package that was approved by the IMF. Indonesia followed suit on November 20t and Korea on December 4t of that year. For Thailand, a nation which has never in its history been colonised, succumbing to the pressures of the global market and requiring a national bailout package must have equated to national surrender and subjugation. A package of some USD17.2 billion was put together by the IMF involving multilateral aid from itself, the World Bank and the ADB, plus bilateral aid from Japan, Australia and a number of Asian countries. The specific break up of this is as follows:
Thailand:
commitments
Multilateral USD6.6 billion
IMF 3.9
World Bank 1.5
ADB 1.2
Bilateral USD10.5 billion
Japan 4.0
Australia 1
China 1
Hong Kong 1
Malaysia 1
Indonesia 0.5
Brunei 0.5
Korea 0.5
Total USD17.2 billion
Source: Official Data
Yet, the IMF-arranged bailout package did not come with out strings attached, without a strict programme of terms and conditions which governments had to follow in order to receive further loan disbursements from the package. The IMF stepped into the crisis, armed with its standard programme of belt tightening and austerity measures to cure the ills of any emerging market crisis. In the specific case of Thailand, this is interesting because IMF officials had warned that country’s government on several occasions that the size of their current account deficit was becoming unsustainably large and that it would eventually cause economic dislocation. One must presume that the economists concerned conducting this analysis, whether in Washington or Bangkok extended that analysis to the reasons behind such a significant expansion of the current account deficit and in addition that deficit’s implications. If they had extended that analysis - and surely the presumption is not unreasonable - they would have discovered that the underlying ‘cause et effet” was over-investment in private sector projects relative to what was already stratospheric savings’ rates by Western standards. Armed with this knowledge, they might subsequently have examined the public fiscal account for evidence of imbalance - and found little or none. How to explain this? This surely did not fit the standard model?! Here, one has to say that such an extension of what is pretty basic economic analysis is itself relatively elementary and basic. No great leap of intellect or imagination is required, though admittedly data transparency was an important issue. It is mere logic to assume that someone seeing substantial imbalance and taking the trouble to note that would look for the causes of that imbalance and - bearing in mind the many lessons of the Mexican currency crisis of 1995 - would equally examine for imbalance elsewhere, notably in the fiscal account. Let us assume then that the IMF did exactly that. And as a result, they brought out a report warning the Thai government as to the danger of running such a large current account deficit. They might not have known the size or degree of the Thai corporate short- term foreign currency debt - indeed they probably had no idea of this given that the Thai government seemed similarly unaware - but they must have known that the current account deficit was produced by private rather than public over-investment - remember, that one way of expressing the current account balance is simply savings minus investment. The fact that the public accounts had been in surplus for a decade up until the fourth quarter of 1996 would have confirmed this.
They might, or might not have subsequently examined the available data on private debt, more specifically the data from the Bangkok International Banking Facility (BIBF). If they had done so, they would have tied the two ends together - excessive private investment being fuelled by private, short-term debt, most of it in foreign currency
Of course, I admit fully that much of this is speculative. What is a fact however is that the IMP produced several reports warning Thailand as to the potential economic dangers of its unsustainably high current account deficit. A further fact is that Thailand did absolutely nothing about these reports so a considerable degree of blame for the ensuing crisis must be put firmly at the door of the Thai authorities themselves. This does not however detract from what is a reasonable assumption, that the IMP looked at the reasons behind that growing current account deficit. If one can accept that assumption, then one must come to what is an uncomfortable conclusion. After all, the IMP implemented its standard programme of conditions in Thailand, yet the assumption that the IMP examined specific reasons for Thailand’s current account deficit requires an expectation that they found those reasons, and equally the realisation that these said reasons potentially required different policies and conditions for implementation within the overall bailout programme. Theoretically, the IMF officials responsible for Thailand might have suggested an entirely different and more specific set of policies, based on their greater knowledge of the situation on the ground and the IMP might have completely ignored this and applied their standard programme of remedies despite this being ill suited to the crisis concerned. This is the uncomfortable conclusion that one might come to, armed only with the words and deeds of the official IMF statements. Speculative? Undoubtedly, but by no means a leap of faith. Either the IMF surveillance procedures in place before the Asian crisis did not work, and thus the IMP must itself accept part of the blame (though we know this was not the case given the IMF warning to Thailand), or they did work. But if they did work, why did the crisis happen in the first place? There are two possible reasons: one is that the IMF board ignored their reports, the other is that the countries concerned ignored the warnings. In all likelihood, both were the case.
This had profound implications not only for the initial onset of the crisis, but for its subsequent worsening and for the policies aimed at stopping its progress. Those policies, whatever the findings of IMF staffers or their surveillance procedures, were the same, standard IMF medicine, the same policy responses which the IMF would use in most if not all crises no matter what their characteristics, above all the same IMF mind-set:
• Tighten fiscal policy
• Tighten monetary policy
• Liberalise and deregulate capital markets
• Strengthen supervisory institutions
Most or all of these might seem eminently reasonable to readers, yet the combination of these was not necessarily appropriate in the case of the Asian crisis. For one thing, they were aimed at public spending profligacy, a characteristic of the typical Latin American debt and currency crisis. For another, by combining loan bailouts and tightening the fiscal and monetary policy with the additional requirement of market opening and tighter supervision, they potentially confused the essential aim of the bailout plan itself. Was it to stop the slide, or was it to manage the economy? Here, the criticisms of some Asian countries, namely that more should have been done at an earlier stage, that more money should have been lent and without conditions are potentially valid. If larger loan packages had been arranged at an earlier stage, without market opening conditions and private sector debtors and creditors had been encouraged to negotiate debt rollovers, far less financial and economic chaos might have ensued. If. only. But such criticism is largely self-serving in any case. For one thing, it is not for a beggar to decide the terms of aid. For another, like the CEO of a corporation, a national government is ultimately responsible for the successful running of its country’s policies. Failure is and should be met by summary dismissal.
THREE STAGES OF RESPONSE TO THE CRISIS
Subsequent to the initial devaluations of Asian currencies, the response from Asia in terms of deeds rather than mere words, and externally from multilateral agencies and western governments and institutions came in various stages. We shall look at these various stages in great detail, up until and including present day Asia and current strategies being adopted to try and secure economic recovery in Asia, but first it is important to list the individual stages themselves:
1. Undoubtedly, the first stage reflected no doubt galling capitulation, the humiliation of having to go cap in hand to the IMF and other multilateral financial organisations for financial and economic aid. First, Thailand, then Indonesia and finally Korea went down this route. Armed with its standard approaches to systemic crises, the IMF arranged massive bailout packages for these three countries concerned, but attached severe criteria and conditions, necessitating that a clear programme of macro- and microeconomic measures needed to be strictly followed for regular loan disbursement to ensue. To summarise, these criteria reflected an emphasis on tight fiscal and monetary discipline to reduce economic overheating, crush imported inflation, close external imbalances and last but not least to stabilise the currency which up until then had been in free-fall.
Thailand accepted this bitter medicine with grim resignation. Indonesia initially agreed to it, then sought to restructure that agreement and finally accepted a more palatable accord, more for reasons ol face than anything else since the core elements of the agreement remained. As for Korea, it needed extra help in the form of a debt restructuring agreement by the international banks in order to stop the slide.
2. Yet the initial IMF rescue plan was far from the parachute which it professed to be - the ‘chute did open briefly but only for it to “Roman candle, the hapless victim left to plummet to earth with a sickening thud. In financial market terms, the announcement of the IMF bailout programmes did nothing to stop the slide in the Thai baht, the Indonesian rupiah or the Korean won. Indeed, that selling pressure intensified, climaxing in late December of 1997 and early January of 1998 only when most of the capital that could leave those currencies had finally managed to do so. This second wave of the Asian currency crisis despite international rescue efforts - or as some perceived, because of the nature of those efforts and the attached conditions - caused the IMF to come under significant criticism, not only from within Asia, but also from western private sector economists and finally from none other than the chief economist of the World Bank, Joseph Stiglitz, hence resulting in a rather embarrassing and damaging public feud between the two agencies while Asia ‘burned”. Whatever the merits or criticism, to give the IMF credit, it changed tack in 1998, allowing its programme member countries substantially more fiscal and monetary policy leeway than had first been envisaged in order to try and boost growth. Together with the resulting policy loosening by Asian financial authorities, this marks the second stage of the response to the crisis.
3. The third stage concerned those countries which did not put themselves under the IMF loan programme, either because they did not need financial aid or because they refused to accept such indignity. The po1ic responses from these countries varied to some extent though the can largely be grouped into those which applied IMF-tpe policy responses despite not being under the IMF programme, those which sought more specific responses to their own economic needs, and finally the exception to the rule, Malaysia, which changed the rules, doing the unthinkable by imposing capital and exchange controls. Aside from the case of Malaysia, two further cases deserve special mention: Singapore and Hong Kong, the first for superb economic management at a time of extreme financial and economic strain, the second for defeating speculative forces where all others had failed and baring the pain.
4. The fourth stage examines the attempts by the various Asian countries to limit the damage at the micro-economic level and seek to deal with what microeconomic infrastructure there was left standing in the s ake of the crisis. These attempts varied from the vigorous in the case of Korea to the resigned in the case of Indonesia. Not surprisingly, regionwide, these attempts have met with varying degrees of success. Such is the scale of the damage that it will take years in some cases (notably
5. Finally, the fifth and last stage looks at the policies put in place by Asian authorities in 1999 in an attempt to initiate and then to secure economic recovery. Ahead of finalising or developing sufficient microeconomic reform, the emphasis has been on creating a sound macroeconomic platform for economic stabilisation and recovery. The good news, as we shall see in Chapter 3 is that this appears to have been largely successful. The bad news is that inadequate reform and restructuring at the microeconomic level could stall that recovery unless such reforms are accelerated and deepened.
สมัครสมาชิก:
บทความ (Atom)