IMF policies leading to foreign control of Asian countries

One of the greatest fears of a country that is forced to seek IMF assistance is that the policy conditions that come with such loans would spell the end of that nation's economic sovereignty. These fears are already becoming a reality in Thailand and South Korea, where conditions attached to their IMF loans have led to policy changes that pave the way for foreign institutions to take over the domestic financial sector as well as other parts of their economies. Foreign banks and companies are already going through the wreckage of these economies and beginning to pick up local assets and institutions at bargain prices.

by Martin Khor

PENANG: One of the major criticisms of the recent rescue packages of the International Monetary Fund (IMF) in Asian countries is that they would end the economic sovereignty of the countries having to seek its assistance.

These nations would no longer direct or control their own economic or social policies. In particular, policy conditions tied to IMF loans would pave the way to foreign ownership and domination of the economy, especially in the financial sector.

One of the most outspoken critics of the IMF, Malaysian Prime Minister, Dr Mahathir Mohamad, recently warned that powerful nations had been given the opportunity of the present financial problems to force open the economies of East Asian developing countries and to possibly dominate them. He mentioned in particular, that the IMF conditions would include policy changes to enable large foreign banks to take over the financial sector.

These predictions are already coming true.

The IMF has imposed on Thailand and South Korea, the condition that they must allow higher foreign ownership of their economy, especially in the financial sector. According to domestic and international media reports, the market access conditions were believed to be placed in the IMF package (at least, for South Korea) at the insistence of the United States.

This, in fact, was strategically the most crucial of the IMF conditions, which was also an "extra bonus", outside of the IMF's normal macro-economic conditions (such as raising interest rates, reductions in government expenditure, economic growth and the current account deficit).

As part of its deal with the IMF, Thailand was asked to allow foreign banks to own more equity in the local banking sector.

In October, the government announced it would allow foreign institutions to hold a majority stake in operating financial institutions for up to ten years, after which any further capital increases would have to be sold to local investors, if the foreign share is more than 49%. (Bangkok Post, 12 November 1997).

Foreign banks seeking to take over local financial institutions

This opened the door for foreign banks to take advantage of the present situation and quickly raise their share of the banking business. The local Thai banks are reeling from overdue loans and many are suffering from a weak capital base. Foreign banks are now swooping in to take over the local banks, taking advantage of the latter's present vulnerable situation.

According to the Wall Street Journal (5-6 December 1997), the restructuring of Thailand's financial system "is expected to result in foreign majority ownership in many of the country's 15 commercial banks."

On 26 November, the American financial institution, Citibank signed a memorandum of understanding with First Bangkok City Bank and said it planned to buy a stake of at least 50.1%, although the price was not yet fixed.

This was the first salvo. According to the International Herald Tribune (6-7 December 1997): "Meanwhile, word is emerging almost daily of foreign concerns that want to buy finance companies or banks." The foreign companies mentioned are American International Group Inc., Development Bank of Singapore, Credit Suisse First Boston and Westdeutsche Landesbank Girozentrale.

All but two of the 58 troubled finance companies have been closed by the government. One of the survivors, Bangkok Investment Co. has proposed being 80% acquired by the American International Assurance subsidiary, AIG Consumer Finance Group. (Asian Wall Street Journal, 9 December 1997).

The latest news is that the Development Bank of Singapore, together with two other Singapore-owned companies, is taking over a majority share in one of the local Thai banks.

In South Korea, the IMF also forced the government to allow foreigners to have a larger share of the Korean economy, which had till then been relatively protected.

According to a Reuters report (5 December 1997) on the IMF terms: "Foreign investment in the capital markets will be liberalised and direct foreign investment procedures will be simplified and made more transparent. Foreign entities will be allowed to buy 50% of the equity of a listed Korean company by end-1997 and 55% by end-1998, paving the way for foreign takeovers of Korean firms. Foreign banks could be allowed to form joint ventures and set up subsidiaries."

Before the IMF deal, the shareholding limit for foreign individuals was 7% in a specific Korean company stock, while the combined foreign shareholding limit was 26% in a stock. On 11 December, the ceiling on a combined or individual basis was raised to 50%.

Potential winners are foreign financial firms

According to the Asian Wall Street Journal (9 December 1997), US businesses are now scrutinising opportunities created by the IMF measures, which would "open South Korea's financial sector and allow greater foreign ownership of South Korean companies." The biggest potential winners are financial firms, including commercial banks and brokerage houses. "For these companies, the bailout means short-term advisory business and long-term investment opportunities, and expansion of existing operations and investment in Korean firms."

The report adds: "The IMF is also pushing South Korea to accelerate the schedule for allowing foreign entry into the domestic financial sector, including allowing foreign banks to establish subsidiaries and brokerage houses by mid-1998. The IMF also wants South Korea to remove restrictions on foreign companies' access to domestic money-market instruments and the corporate-bond market. One US banker described the long-term impact of such measures as a "sea change" that could leave US and other non-Korean foreign firms dominating the financial services scene in Korea in a few years, as they have come to do in Japan in recent years."

Another IMF condition is that South Korea must allow Japanese products, greater access to its market. Previously, imports of Japanese goods had been restricted because of Japan's large trade surplus with South Korea.

It was also reported that the conditions forcing South Korea to give greater ownership access to foreign companies and more trade access for Japanese goods were injected into the IMF package at the insistence of the US and Japan.

What the US and Japan could not achieve through bilateral pressures on South Korea (the US, for instance, has been threatening to use its Super 301 trade sanctions to allow its firms greater ease to enter the country), or through negotiations in the World Trade Organisation, they have been able to do in South Korea's moment of weakness and its need for the IMF.

The US is the country which has by far, the largest influence on IMF Secretariat policies. Also, the pledges of US$5 billion by the US and US$10 billion by Japan to the total US$55 billion rescue package gave the two countries the handle with which they could shape IMF conditions.

The South Korean media has criticised how US and Japan used the financial crisis as leverage to force Seoul to open its markets.

"A senior US treasury official...backhandedly manipulated IMF negotiators to push for market opening...while Japan used financial aid as a weapon to prop open the domestic market for their goods," according to an editorial in Dong Ah Ilbo, a big newspaper. "It is highly likely that our economy will be a playground for a handful of international fund managers."

More pressure on South Korea to liberalize its financial sector

The most recent development is that South Korea has again been pressurised to agree to a new package of even more onerous terms of reforms to liberalise its capital markets and to allow complete foreign ownership and participation of its corporate sectors.

Throughout December, the country's currency and stock market faced a continuous slide. With foreign reserves tumbling, the government made desperate attempts to get the IMF, the US and Japan to release more of the US$55 billion loan package, in order to prevent the country having to declare a default or debt moratorium.

However, the US refused the requests on the grounds that the reforms already agreed to were not being implemented well enough. With the presidential elections producing a new President-elect in Mr. Kim Dae-Jung, a senior US official began to negotiate with him on the terms of reform.

Finally, on 25 December, as the financial situation turned even more grave, the Korean government, the IMF and the US Treasury were able to announce that $10 billion of the $55 billion package would be released to South Korea in the next few weeks, including parts of the funds that had been pledged by the IMF, the US, Japan and many other rich nations.

According to news reports, the acceleration of the funds release came with a heavy price, with South Korea having to agree to faster and deeper "policy reforms." The rich countries were able to extract even greater concessions on behalf of their corporations to have greater access to South Korea.

Some new concessions made by South Korea

From media reports, the new concessions include the following:

• Korea agreed to allow foreign investors to acquire 55% of listed companies from 30 December and 100% by the end of 1998. (This compares to 26% before, rising to 50% in mid-December and 55% at end-1998, agreed to less than a month previously).

• The bond market will be fully opened by the end of 1998.

• South Korea is also required to repeal its interest rate ceiling of 40% in two months, decide how to treat insolvent financial institutions within five months, reform labour laws and permit sacking of workers in corporate takeovers.

According to the Financial Times (2-28 December 1997): "The full opening of the capital markets will pave the way for foreign takeovers of Korean companies and increase foreign competition in the financial sector, heralding the end of the nation's protectionist economy."

In Thailand, meanwhile, the American Chamber of Commerce is pressing the government to open up the economy further to foreign firms. On 2 December, it called for additional financial liberalisation, lifting of all restrictions on foreign ownership of assets and participation in the services sector and tariff cuts.

It would not be surprising if further loans to the IMF client countries would come with more conditions promoting the foreign firms' access.

These recent developments in the countries undergoing IMF- imposed conditions are a lesson for other countries, for they give a clear picture of what could happen if the latter were also to fall under the IMF's spell. (Third World Economics No.176, 1-15 January 1998)

Martin Khor is the Director of Third World Network.