Monday, August 31, 2015

No Indonesian Welcome Mat for the IMF

                                               The Washington Consensus doesn’t work

On Sept.1 and 2, Managing Director Christine Lagarde and the IMF are scheduled to visit to Indonesia. While President Jokowi and some of his ministers have already rolled out the welcome mat for them, it should be put back in the closet.

This is an organization that in part was behind the Indonesian economic crisis in May 1998, with no apologies. According to a monograph written by economist Stephen Hanke at Johns Hopkins University, a special economic advisor to then President Suharto, Hanke recommended the fast establishment of a currency board (or linking the rupiah to the dollar) to stabilize a falling rupiah. When the markets got wind of this, the rupiah, which at that time was plumbing all time lows (like today), immediately rose in value.

Nonetheless the IMF was dead opposed to establishing any type of dollarization to stabilize the currency at that time. The rupiah continued to slump due to massive capital flight. Frantic calls between then IMF director Michael Camdessus and then US President Bill Clinton in the White House pointed to what the IMF really sought: a political change. Their unified message was clear: there would be no further IMF tranches (loans) to assist Indonesia, currency board or not, unless a leadership change was in store. This apparently stepped past the line of benign ‘economic advice’.

The IMF is an organization that has reflected perfidy and mischief in the economies of the developing world for much of the past 20 years, in particular Southeast Asian states of Malaysia and Thailand. For example, in 1998, Malaysia pegged the ringgit at 3.8 to the dollar to stabilize the currency. This was a decision taken by then PM Mahathir Mohamad and his National Economic Action Council. The IMF was opposed to this idea (as they also were in Indonesia), but later reversed itself after the peg did indeed stabilize the ringgit. Currently the ringgit is trading at 4.25 to the dollar, the worst performing Asian currency this year, and Malaysia is again reconsidering the peg.

Like a bad doctor, IMF prescriptions have consistently misdiagnosed the patient, but this has not been due to incompetence. Quite the contrary, the IMF, World Bank, and ADB attract some of the best talent on the planet, in particular from the developing world, (of which they have also been accused of poaching much needed talent in these areas). A case in point is the appointment of Sri Mulyani Indrawati to Managing Director of the World Bank, talent sorely needed in Indonesia today.

These misdiagnoses have been due to political meddling, albeit from US and EU vested interests. The US is the largest shareholder in the IMF with nearly 17% of the votes, and thus is the only member holding veto power where an 85% consensus is required on decision making. The IMF consistently promotes the ‘Washington Consensus’ by design, not default.

This consensus spearheads economic ideas of free trade, no subsidies, and currency mobility from a US/ EU perspective, namely opening of markets, which in Indonesia’s case may not be the best advice at this time with a falling rupiah. Perhaps a dollar peg or currency board should not be out of the question, but this is something that would have to originate with the Indonesia side. The IMF, with its free markets mantra would certainly not prescribe this, and it would be anathema to foreign investors, especially in finance, on grounds of ‘competitiveness’, ‘capital controls’, and ‘valuation’.

The bigger picture however is that the IMF has outlived its usefulness since its original mandate after the close of WW II in 1945. At that time the world had only one productive and economically sound country, the US, left standing. Any new economic order was going to be dictated on the US terms, with the US dollar as the de-facto world currency.

As a political token, the US allowed a European to head up the IMF. This ‘tradition’ has continued to this day, despite the fact that China is now the world’s second largest economy, with many capable economists in its own right, some that have helped engineer China’s double digit growth for the past 20 years. In a country with 1.3 billion and all types of macro-economic issues, this is a very impressive feat.

Conversely, Christine Lagarde is a career French bureaucrat and a labor lawyer formerly with the French Ministry of Finance, and is not even an economist. Her expertise is these matters from a standpoint of fast-growing, low-wage economies is very questionable. The Greek crisis has spotlighted her incompetence at dealing with economic technical issues. The IMF clearly violated its own rules by loaning money to Greece over obvious insolvency issues due to EU political pressure, particularly from Germany and the European Central Bank.

Yet the same IMF proscribes different standards for Asian countries that are actually in far better growth positions with youthful populations and burgeoning domestic demand than an aging Europe with slow growing markets and an overhang of social expenditures.

It is unclear what ‘good advice’ Lagarde and company can give to Indonesia if they come bearing inherent political agendas (i.e. ‘contain China’). Despite the platitudes, the reception of President Jokowi and his ministers such as Bambang Brodjonegoro and Darmin Nasution of the IMF should be cool at best, without fanfare, well aware that it is not bearing gifts in Indonesia’s time of economic challenges and not forgetting its checkered past meddling.

Considering Lagarde is the main attraction at an elite conference in Jakarta on the Future of Asia’s Finance, it will be interesting to see whose agenda the IMF has really come calling to promote,  especially in regards to any ‘prescription’ for the rupiah, or to promote ‘growth’, and the fact that China, a colossal economy that continues to be snubbed by the IMF and its Washington Consensus (most recently over including the yuan as a reserve currency), may present a bigger future Indonesian opportunity, not an entanglement.
Will Hickey is associate professor and capability advisor for the School of Government and Public Policy in Indonesi

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