IMF policies in Asia come under fire

There has been a mounting wave of severe criticisms of the IMF's mode of operations, policy conditions and even motives, for the "rescue packages" that it has coordinated for Thailand, South Korea and Indonesia. The IMF policies have not restored stability but may instead have contributed to further erosion of confidence, as evidenced by the further sharp downturn in the region's currencies, stock markets and economies since the IMF aid came into operation. Even establishment economists and media have turned their guns on the IMF, once regarded as the oracle of financial and economic wisdom.

by Martin Khor

PENANG: Doubts and criticisms are mounting about the role and policies of the International Monetary Fund (IMF) in Asia as the region's economies continue to reel from currency and stock market declines despite the IMF-managed "bail-out" of Thailand, Indonesia and South Korea.

On 14 December 1997, the political leaders of Thailand, Malaysia and China attending an ASEAN Summit meeting in Kuala Lumpur, expressed concern that the recent IMF aid had not brought recovery to the region.

Reporting on the bilateral talks between Malaysian Prime Minister, Dr Mahathir Mohamad with Chinese President, Jiang Zemin and Thai Prime Minister, Chuan Leekpai, Malaysian Foreign Minister, Abdullah Badawi said: "The IMF has not brought immediate recovery...It is a fact that the situation has worsened. We thought that when the IMF got in, things would improve. However, the situation is getting more difficult."

A torrent of criticism

He added that questions were being raised, whether the IMF was helping the situation or causing more problems. "The IMF has been successful in Mexico but it doesn't seem to work for us. Maybe we can't give Panadol to everyone...Some are allergic to it and the illness becomes worse."

Abdullah also reported that the Thai Premier said the IMF's assistance to Thailand had not borne any significant result and that he feared the assistance may be "too late" to rejuvenate the country's economy.

In the past few weeks, there has been a torrent of increasingly sharp attacks on how the IMF is operating in Asia, the negative effects of its policies, and even its motives, or in whose interests it is actually working.

Significantly, the criticisms are coming not only from politicians, labour unions and consumer groups of the region, but also from establishment economists and the mainstream international media.

One reason for this swing in opinion is the spectacular failure of the IMF rescue packages in restoring confidence or stability in the currency and stock markets of South Korea, Thailand and Indonesia, the three recipient countries.

It had been expected that a recovery process would begin once these countries fell under the discipline of the IMF. Instead, the policies imposed on them by the IMF (including severe economic contraction and a prohibition on aiding troubled local financial institutions and corporations) seem to have created more (rather than less) fears of impending economic collapse.

In December 1997, the region suffered further financial stress and turmoil as the currencies in South Korea, Thailand and Indonesia fell to new lows several times during the month.

The South Korean won fell continuously on news of merchant bank closures, fears of coming collapses of its giant corporations, and speculation on impending debt default. Tough policies forbidding official help to ailing local institutions are part of the IMF's conditions.

Ironically, the fears fuelling the currencies' fall are becoming a self-fulfilling prophecy as it is the sharp decline in currency values that is a main factor in driving the region's indebted companies and countries into deep trouble.

When the Malaysian Prime Minister, Dr Mahathir Mohamad declared his nation's intention to avoid seeking loans from the IMF, he became the first political leader in the region to explicitly criticize the policies that the agency attaches to its rescue package for Asian countries.

At an interview with senior Japanese journalists in Tokyo on 28 November, Mahathir said, although he could not discount the possibility of Malaysia having to seek IMF aid, "we will resist it as much as possible."

IMF loans with conditions attached

He criticized three conditions tied to IMF loans: that the country must open up its financial market, resulting in powerful foreign banks buying up local ones; interest rates would have to be raised, which would stifle business growth; and taxes would be raised, burdening the people already hit by a depreciated currency. "All these conditions are designed to enable the countries to pay back their debts to foreign banks and institutions so that they will get back their money but the people will suffer," he commented.

On 1 December, speaking at the ASEAN Finance Ministers' meeting in Kuala Lumpur, Mahathir said that the IMF offers to lend money with which to repay loans to foreign lenders. "But the loans come with a string of conditions, principal among which is the opening of the financial sector to full foreign participation. It is likely that this will result in foreign banks eventually dominating the finances of the country concerned."

Some observers felt that the Prime Minister had been too outspoken in attacking an institution that many people consider the oracle of economic truth and the guardian of financial prudence. Instead, it appears he started a trend.

The IMF is increasingly being blamed not only by the local people in affected Asian countries, but also by the international media that normally supports the kind of free- market orthodoxy championed by the IMF.

In South Korea, there have been almost daily demonstrations, street protests and signature campaigns by labour, consumer and public organisations against the IMF's policies, which are seen to be imposing a new imperial "trusteeship" on the country.

News reports and opinion pieces critical of the IMF's Asian policy have been appearing frequently in newspapers and TV programmes in South Korea, Thailand and Malaysia, as well as in international newspapers such as Financial Times, the Wall Street Journal and the International Herald Tribune. Even an early December issue of Time magazine had a critical cover story with a title that reflects the rising doubts: "The Great Asian Bailout: Will the IMF save the region's economies - or make things worse?"

Some major criticisms

The major criticisms being made by the wide range of critics include the following:

  • Some of the IMF's conditions are forcing the countries to give up their existing policies protecting domestic companies and local interests and instead, to rapidly or fully open up their economies (especially in the financial sector) to foreign corporate ownership.

  • The IMF has been influenced or manipulated by the US and other rich nations to put in these conditions so that their companies can gain market access in the countries concerned, now that they are in a vulnerable state. What these rich countries were unable to do through bilateral or multilateral (particularly the WTO) pressures, they are now getting by using the IMF loans as leverage.

  • The IMF practices double standards in favour of international banks and against local financial institutions, companies, depositors and shareholders. On the one hand, it insists that the governments play by strict market rules and not put in money to aid ailing local financial institutions and companies. But on the other hand, it wants the governments to pay back all the external loans contracted from international banks, including the huge debts of the private sector that have gone sour. The foreign banks, will in other words, be given gigantic subsidies so that they do not have to suffer for their mistakes, whilst local banks and companies are forced to go under.

  • Other key IMF conditions, especially the raising of interest rates, tightening of credit, cuts in government spending and induced general contraction of the economy, are misplaced in the Asian context, as they had been designed for countries (mainly in Latin America and Africa) facing a different set of problems (high budget deficits and large foreign debts originating in the public sector).

Applied to the Asian countries, the standard IMF policies are counter-productive, as the Asian public sector does not have a problem with budget deficits or high external debt. Their problems are centered instead on the private sector. Whilst the real economy had been sound, there was a financial panic partly catalysed by speculators, leading to the crash in currency and stock market levels. This broke the backs of many private companies (which had accumulated high foreign debts) and private banks (which had already faced a high ratio of non-performing loans due to over-extension of credit to non-productive sectors).

What is required in the Asian countries is a restoration of the confidence of investors and depositors (including local ones), and a programme of recovery of private institutions, both of which also require greater stability in the currency rates. However, the IMF policies of tightening fiscal and monetary policies, high interest rates and prohibition of aiding local institutions will cause an economic contraction and further weaken or kill off key local private-sector institutions. Thus, instead of boosting public and investor confidence (what is most needed in Asia), the policies further erode confidence, and this will keep currencies and share values low or make them plunge further.

  • The IMF's policies are made by staff members who do not adequately understand the countries they are presiding over. Yet these staff members are put in a position to (in a very short period of days) design and even radically alter policies of whole economies, which up to now, have been doing so well that they had long been held up as models of economic success.

  • The IMF preaches about the need for governments, banks and companies to be open and transparent, but its own operations are conducted and its policies are made in secrecy. The theoretical basis of its policy conditions are not revealed and even the conditions themselves are not made public, and thus are not subject to review by independent professionals.

The IMF talks about everyone else's need to be open, but the public is not given the chance to participate in its decisions. Leaving aside the issue of public participation, even the governments which are recipients of the IMF loans have little leeway to negotiate on (let alone take part in the design of) the policies that are tied as conditionalities to the loans.

The series of critical comments has become more numerous and more potent because of sinking confidence in the IMF's performance.

Initially, at the start of the Asian crisis, there had been a wide belief that the IMF's policies were tough but necessary to correct previous practices and policies, and they should be taken as a kind of bitter medicine that would eventually cure the patient.

However, independent economists and even market analysts are no longer willing to take the IMF prescription as sacred and are now warning governments and the public against accepting it on the basis of "blind faith."

Even more powerful than the critics in eroding confidence in the IMF's performance is the lack of progress of those economies that have been forced to undergo its medical treatment.

Whilst the markets initially welcomed their seeking IMF help, South Korea, Thailand and Indonesia, in recent weeks and months, have endured even greater agonies of falling currency and stock market levels.

There is a lack of confidence in the market itself that the policy conditions tied to the IMF rescue will lead to recovery.  (Third World Economics No.176, 1-15 January 1998)

Martin Khor is the Director of Third World Network.The above article first appeared in the South-North Development Monitor (SUNS).