New York Times February 1, 1998
Second-Guessing the Economic Doctor
By DAVID E. SANGER and RICHARD W. STEVENSON
WASHINGTON -- All over Southeast Asia, people are complaining that a cabal of heartless bureaucrats at an institution many have come to loathe -- the International Monetary Fund -- is worsening their economic misery. Here in Washington, the IMF isn't a lot more popular, but for very different reasons.
Almost every night in Thailand, a stream of television commentators chafe at the humiliation of witnessing their country's leaders negotiate every element of national economic policy -- from interest rates to budget deficits -- with economists who work largely in secrecy out of the I.M.F.'s offices off Pennsylvania Avenue here.
Outside a McDonald's in Jakarta, Indonesia, last month, a clutch of young professionals argued that the fund, which had just forced President Suharto to terminate government subsidies that kept the price of fuel and food low, is simply a tool of Treasury Secretary Robert E. Rubin.
"There's a rumor that this is all a game started by America," said a 27-year-old advertising executive name Doli, repeating a version of an oft-heard conspiracy theory in which Washington secretly plotted to destroy Asian competitors. "America should not have let the rupiah keep dropping," he said, dismissing suggestions that Indonesia might bear some responsibility for the 80 percent plunge in its currency.
Indeed, throughout Asia these days, people talk about the IMF as if it were a branch of the Clinton administration, and as if it -- with Washington's connivance -- aspires to run the region today the way Gen. Douglas MacArthur ran it a half-century ago. Around Asia, one hears variants of the same lament: The fund is imposing too many conditions, often the wrong ones, and providing too little real financial support in Asia's moment of need.
Seven thousand miles away, on Capitol Hill, the IMF is also a target of growing criticism -- but for exactly the opposite reasons. Here, the call is for far more American intrusiveness in IMF programs, and a far smaller American contribution to solving Asia-style crises. At the extreme ends of both parties, there are calls to kill off the IMF altogether. While that is hardly likely, Congress has the opportunity in the next few months to send a message that will be heard in markets around the globe. It will be debating the question of whether the United States should fulfill its commitment to provide $18 billion in additional contributions to the fund so that it can handle new outbreaks of the kind of the economic contagion that is still whipping through Asia. If Congress balks, few doubt that the rest of the world will, too.
Rarely in its 52-year history has the fund been under such concerted attack from so many quarters. Liberals complain that its actions in Asia chiefly benefit the likes of Citibank and J.P. Morgan, to say nothing of Japan's biggest banks, often at the expense of workers -- both abroad and in the United States -- whose jobs are threatened by its policies. Conservatives say that the emergency help for South Korea, Indonesia and Thailand interferes with free markets, and that they undercut American jobs by encouraging the afflicted countries to export their way out of trouble. Many economists say the IMF's prescriptions are only making things worse, though since they are economists, they disagree forcefully on what prescriptions would make things better.
Caught in the uncomfortable middle is Rubin. For three years, since the United States stepped in to rescue Mexico, he has been struggling to get nations around the world to prepare for future crises by bolstering their contributions to the IMF and agreeing that international consortiums, not the United States, serve as the lender of last resort. In Asia, the IMF has taken the lead -- with plenty of behind-the-scenes coaching from Rubin and his deputy, Lawrence H. Summers -- although the United States has committed several billion dollars in backup financing, called a "second line of defense," to South Korea and Indonesia. (None has been dispersed.)
The backup financing is chiefly an exercise in market psychology, intended to reassure investors that the United States is willing to play a major role in stabilizing markets. But that same act of symbolism only incenses many American lawmakers, who ask why taxpayers should bail out faraway nations. The Administration fears that the more it supplements the IMF, the greater the risk that Congress will pull the plug on contributions altogether.
The public case for deeper American participation was made by President Clinton in his State of the Union address on Tuesday, when he argued that a prosperous Asia will help American exporters. "These countries are our customers," he said, "and if Asia sinks into recession, they won't be able to buy the goods we'd like to sell them." The private case, one of Clinton's top aides noted recently, will have to be made by Rubin. "Basically, it comes down to this," the aide said. "Bob is going to have to say: "If the Asian meltdown comes to Wall Street, do you want the blame?"
On the streets of Bangkok, Jakarta and Seoul, the IMF era looks pretty grim -- and the popular sentiment, right or wrong, is that the IMF is making it grimmer.
The search for a scapegoat is understandable: Economic activity has ground to a halt. The cranes towering over half-completed buildings don't move, and tens of thousands of workers who headed back to their hometowns last week for the end of Ramadan and the Chinese New Year have been told not to return. The Thai stock market, which had a market capitalization of $133 billion in 1993, the height of the Southeast Asian boom, is now worth about $22 billion. When it comes to buying overseas goods, Indonesia's currency buys 20 percent of what it purchased a few months ago. The crisis, in short, has hit the streets.
"Things are a lot worse than people expected, and they could get worse yet," said Teera Phutrakul, who runs an investment firm along one of Bangkok's busiest commercial streets. "That's because of a lot of bad decisions made here in Thailand. But now, along comes the IMF to impose some discipline, and it's very, very politically convenient. The government can say, 'We have no choice -- Michel Camdessus made us do this,"' he said, referring to the IMF's managing director.
In Thailand, though, Camdessus comes off a lot better than President Clinton and Rubin, whom many in the country's leadership charge were were indifferent to Thailand's call for help last summer, and only got serious about the Asian crisis when it began to sweep through the continent and around the world. "The Thais felt quite hurt that they saw no signs of support from the U.S.," Defense Secretary William Cohen said after returning from his tour through Asia. "It left some wounds" -- including some suggestions from Thai officials that they may not be so accommodating the next time the United States needs to move its military forces through Thai air bases.
The IMF program in Thailand is typical of the institution's approach in Asia. Weak financial institutions are being closed down. Interest rates have been pushed up sharply, so that investors have an incentive to buy the local currency. To comply with the IMF's mandate against budget deficits, the Thais have cut their spending by roughly 30 percent, killing off many social programs and public-works projects.
Financial firms are being required to use internationally accepted accounting procedures and to disclose far more data than they ever have before. The new rules are designed to expose the kind of under-the-table deals that have long fueled Asian economies while enriching the politically connected. Real regulation is being imposed, including bank supervisors who are supposed to make sure money is being lent to sound projects, rather than to cronies.
But this new regime of openness in business, and a war on crony capitalism, requires a huge cultural change in the way Asia has always operated -- a change that is hard to impose from half a world away. And it carries with it a lecturing tone that is already stirring up a popular and political backlash. The United States, of course, is celebrating any reforms that move the Asian economies closer to the American model of capitalism and further from the Japanese model. But for ordinary people, the benefits of such a shift are hard to see now through the swirl of fleeing foreign money and plummeting currencies.
So it is hardly surprising that Asians of all stripes are seizing on criticisms of the IMF. Jeffrey D. Sachs, the Harvard economist who is a longtime critic of the fund, attracts more Asian reporters than a Hong Kong pop star when he shows up at conferences to make his case that the policies are only making matters worse. High interest rates and rampant bank closures, he says, have simply frozen economic activity. "Even healthy companies cannot get letters of credit to make the exports they need to generate revenue," he says. "Does this make sense?"
Other critics, however, say the problem is the IMF's inability to handle the huge overhang of private, dollar-denominated debt that local companies cannot pay back. In South Korea, this problem is being addressed through an accord with foreign banks that resulted in a tentative deal last week, but there has been no equivalent process in Thailand and Indonesia.
Still other IMF critics, including George Soros, the international financier, say the real problem is the absence of global regulation of global markets. In their view, the international economic and financial order created in the aftermath of World War II at the Bretton Woods Conference in New Hampshire needs to be overhauled. That system, of which the IMF and its sister institution, the World Bank, are central elements, worked well for most of the last half-century. But today, these people argue, it has been overwhelmed by 24-hour trading and needs to be updated so it can keep up with the terrifying speed at which money flows in and out of countries.
All of this has left the IMF reeling. It has adjusted its programs slightly to quiet some of the criticism. But its defenders, including Rubin, say that while Asia is burning, no one should be reorganizing the fire department.
Meanwhile, IMF officials are starting to answer their critics. "None of this will be easy," Stanley Fischer, the No.2 official in the IMF, said in a speech last week. The currency depreciations, Fischer said, have not "occurred by IMF design" and clearly have gone too far. But "without IMF support as a part of an international effort to stabilize these economies, it is likely that these currencies would have lost still more of their value," he added.
Turning to congressional critics -- whom he was careful not to name -- he said, "Simply letting the chips fall where they may would surely cause more bankruptcies, larger layoffs, deeper recession and even deeper depreciations than would otherwise be necessary to put these economies back on a sound footing."
The IMF's troubles in Washington start with the conservative right in Congress, which has long mixed a suspicion of Wall Street and big banks with a streak of isolationism. To some on the right, the problem with the IMF is not just the way it has dealt with the Asian crisis, but the institution's very existence.
Republican critics, like Senator Lauch Faircloth of North Carolina and Rep.e Ron Paul of Texas. say IMF bailouts have proved ineffective and, worse, have distorted the workings of the free market.
They are a form of welfare for the rich, these skeptics contend, insulating banks and investors from losses they deserve to suffer for misjudging risks in overseas markets. Furthermore, the critics say, the rescue efforts sow the seeds of future disasters by reassuring lenders and investors that even if they repeat their mistakes, the fund will always be there to cushion the blow.
By this line of reasoning, the much-hailed Mexican bailout was actually a failure, encouraging investors to roll the dice again in Asia.
"The IMF is welfare for the very rich investors, and serves only to keep afloat reckless political institutions which have policies that destroy their own economies," said Paul, once the Libertarian Party's candidate for President and perhaps the most strident Congressional critic of the fund.
"The big bankers and investors quite correctly support the notion of less government and economic liberty when we talk about their profits, but when losses occur they are quick to call for the government to socialize the burden," he said on Wednesday, introducing a bill calling for the United States to leave the fund.
While the Clinton administration views Paul as the enemy, in private, some officials concede half his point. It is virtually impossible to salvage an ailing economy without also benefiting the banks and investors that poured cash into it. Before the Asian storm clouds turned into a typhoon, Rubin frequently raised alarms about the "moral hazard" of encouraging reckless investments.
Even now, Rubin takes pains to distance himself from saving big banks and burned investors. "I would not give one nickel to help any creditor or investor," he insisted recently, noting that the Asian crisis had hurt profits at J.P. Morgan, Chase and Citibank. But in the next breath, Rubin noted that the issue is "complex" because "any action to force investors and creditors involuntarily to take losses" would cause all investors to pull their money out of a country -- just at the moment that it needed fresh capital.
Conservatives, however, are hardly the IMF's only critics in Washington. Some liberals argue that the agency does not demand enough in the way of political and social reforms in return for its aid. They want to make the assistance contingent on improvements in human rights, working conditions and environmental standards.
"The American people are going to be very skeptical of any plan to bail out international speculators and repressive regimes that simply encourages them to repeat the same pattern of abuse and excess all over again," said Rep. David E. Bonior of Michigan, the Democratic whip. "We cannot support a bailout that imposes an economic stranglehold on working people, tramples democratic rights, ignores the underlying causes of instability and then asks the American taxpayer to foot the bill."
The IMF is increasingly sensitive to the criticism that it is props up dictators. In Indonesia, it has forced the breakup of monopolies and an end to Government aid to business ventures run by President Suharto's family and friends. But it has steered clear of making political demands -- that Suharto, for example, lift the repression in East Timor, which it seized two decades ago. And it has not uttered a word about the delicate question of political succession, even though that is the central issue affecting Indonesia's economic future.
"We can attack crony capitalism," a senior IMF official said. "But it's a stretch to make an economic case for an end to human-rights abuses, beyond urging 'good governance."'
The administration hopes to steer clear of these arguments in its effort to persuade Congress to approve $18 billion in new American contributions to the IMF. But members of both parties say the price it might have to pay is a severe restriction on its freedom to use the Exchange Stabilization Fund, a $40 billion American kitty for dealing with international currency crises. Now, the Administration can lend the money at its discretion -- just as it did to Mexico in 1995. That prompted Congress to impose a restriction on the use of the exchange stabilization fund that expired just as the Asian crisis broke. Legislation introduced last week would reimpose such a restriction, requiring congressional approval for dipping into the fund for more than $250 million.
Congress worries that IMF bailouts are out of control, Asia worries that Washington secretly runs the IMF. And despite Washington's denials, the Asian concerns are not exactly baseless.
The United States has the strongest voice within the Fund, an 18 percent voting share, three times that of any other country and enough to wield a veto over major decisions by the Fund's board. Moreover, it is often able to persuade the other big industrial countries to vote with it, giving Washington a 40 percent voting bloc. Early in the Asian crisis, a senior Administration official boasted this fall, one phone call from Summers changed key conditions on the Thai bailout.
Still, American power is not absolute. The United States pushed the IMF to provide additional financial aid to Russia two years ago to help prop up the government of President Boris Yeltsin, but the agency's management refused, saying it had lent Russia all that its rules allowed.
Other countries have carved out their own spheres of influence. France considers development of French-speaking nations its prerogative, and Britain has championed an initiative to reduce the debt loads of poor nations.
But when a big crisis arises, the United States usually takes charge, as the fund's handling of the most recent crisis in Indonesia illustrated.
Last month, the United States and the Fund worked together to send Camdessus, Summers, Cohen and Fischer, the IMF official, to Jakarta to pound home a crucial message to Suharto. In a series of meetings over two days, they pressed upon the Indonesian leader the need to agree to tough terms for emergency loans -- and to implement them promptly.
IMF officials said it was no accident that they all carried the same message to Jakarta -- a message that had also been backed up by phone calls from Clinton to the Indonesian leader.
"We agreed there had to be a major effort," said a senior Fund official. "We had to get to Suharto, and we had to get him to realize the seriousness of the situation."
That message was put together in the White House at a meeting presided over by Clinton, with Rubin, Summers and a range of State Department and National Security officials in attendance. Soon Suharto received calls from leaders around the world, politely telling him he had no choice.
"A remarkable coincidence of timing," a senior American official deadpanned during Summers's trip to Jakarta.
Copyright 1998 The New York Times Company
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