Getting Asia Out of Trouble
Are IMF bailouts the solution for countries in severe economic difficulties?
May 18, 2002
Crony capitalism, corruption and inadequate supervision of banks occur all too frequently in developing countries. They were surely present in Asia in the 1990s. But they were not the cause of the financial crisis that struck the Asian Tiger economies in 1997.
Until the very eve of the crisis, Asia was the fastest growing region in the world, its progress sustained by high savings rates, a disciplined work ethic and responsible fiscal behavior on the part of the governments — though not of the private sector. What triggered the actual crisis were the factors largely out of national or regional control.
When the IMF, backed by the United States, intervened with its standard remedies of massive austerity, a political crisis was inevitable.
Thailand’s democratic institutions proved resilient enough to weather it — though a 42% devaluation of the currency and interest rates as high as 40% wiped out much of the middle class.
By contrast, in Korea, the U.S. Treasury — recognizing the strategic importance of the country — made available additional assistance, moderating the IMF program to one compatible with political stability. Fortunately, an election held in December 1997 brought Kim Dae Jung into the presidency. He had attacked the previous Korean administrations from the left — and was thus in a strong position politically to implement austerity.
However, in Indonesia — the world’s most populous Muslim country, with vast resources and a crucial strategic location — the Clinton administration, facing accusations of campaign support from Indonesian companies, chose to take no political risks. The IMF was encouraged to make assistance conditional on the remedying of virtually every ill from which the society suffered, whether relevant to the crisis or not.
It demanded the closing of 15 banks, the ending of monopolies on food and heating oil and the termination of government subsidies. Each of these measures dealt with a real problem and needed to be solved as part of a long-term program.
Implemented over a period of a few weeks, however, their cumulative impact produced a political debacle. Closing banks in the middle of a crisis made a run on all other banks inevitable.
Ending subsidies raised food and fuel prices, causing riots directed at the Chinese minority that controls much of the economy. As a result, Chinese money fled Indonesia in far greater quantities than the IMF could possibly offset. A currency crisis had been turned into first an economic disaster and then a political vacuum.
Some may argue that the overthrow of the Suharto regime justified the decisions of the IMF (and its sponsors behind the scenes), whatever their motive. But the IMF does not have the political competence to lead political revolutions, nor is this its mission.
For the legacy of political upheaval goes far beyond the immediate economic causes of it. In Indonesia, it has left the danger of a breakup of the country, which could cause this vital region to develop characteristics similar to those accompanying the disintegration of Yugoslavia. There is also a religious conflict in the Molucca Islands, and a contest between four or five major political forces inhibiting stable government involving the danger of a rise of fundamentalism.
With respect to none of these issues has the outside world mustered either the comprehension or the assistance commensurate with the dislocations its pressures and advice have produced.
The social upheaval of Indonesia and Asia in 1997 — repeated with comparable consequences in Russia, Brazil, Argentina, Ecuador and across Africa — occurred at a time of unprecedented growth and wealth creation in the United States and, to a lesser extent, in Europe. After decades of effort to close the gap between emerging and industrialized economies, the financial crises of the 1990s signaled a giant step backward.
How many such roller-coaster rides can the international system withstand without political and social debacle?
Copyright © 2001 by Henry A. Kissinger. Adapted from “Does America Need a Foreign Policy?”. Reprinted with the permission of Simon & Schuster.