Commentary: The IMF Should Quit Playing Politics

By Pete Engardio and Michael Shari

Ever since the 1997 Asian meltdown, officials from global lending agencies have been locked in two kinds of rituals. One is the periodic meeting in Jakarta, where a team from the International Monetary Fund (IMF) assesses the Indonesian government's sorry failure to fulfill its many promises of economic reform in return for billions in aid. The most recent encounter ended on Apr. 24, with the frustrated IMF refusing to release a $400 million installment of its current $5 billion loan package.

The other ritual is getting under way in Washington. It is the twice-annual meeting of the IMF, where delegates ponder ways to fix the shaky global financial system. Atop the agenda: how to rein in the IMF's propensity to heap complicated conditions upon nations that need its help--and respond to critics who say it should stop micromanaging entire economies.

HARSH DEMANDS. The IMF now admits it overreached in the 1990s, when it greatly expanded its role as a driver of sweeping structural overhauls of countries. Under new Managing Director Horst Kohler, and pushed by the Bush Administration, the IMF board has agreed it must reduce the number of conditions, mainly to those directly related to restoring financial stability. "There's a general consensus we need to be more selective and to focus on things that are essential," says Timothy D. Lane, chief of the IMF's policy division.

That will be some challenge. How will the IMF decide when privatizing a company, or cutting a food subsidy, or shelving import protection for a favored industry is vital to resolving a fiscal or monetary crisis? And when is this meddling? One answer: The fund usually crosses the line when it pushes the commercial and political agendas of Western donors or of other interest groups.

Indonesia is a case where the IMF got way too involved. It started with the bailout of January, 1998. To be sure, the IMF had to make some harsh demands: Otherwise, its funds would have been used to bail out businesses of the Suharto family and its cronies--or siphoned offshore. But many of the 100-plus conditions it imposed clearly were designed to destroy Suharto's power base and to open financial and other industries to outsiders. Political and economic convulsions resulted, and many reforms proved impossible to implement given Indonesia's weak institutions.

The IMF could have left in late 1999, when it lent Indonesia the last of its pledged $11.5 billion. The economy was still wobbly, but was out of danger. And a new democratic government, headed by Abdurrahman Wahid, was in control. But in April, 2000, the fund unveiled a new $5 billion loan program to help the transition and prod further reform. These good intentions went awry. Wahid's administration turned out to be a huge disappointment. Lacking both political clout and will, it hasn't lived up to pledges to slash fuel subsidies, oust disgraced central bank leaders, and divest some $47 billion in assets seized from failed companies and banks, among other things.

As the IMF's frustration grew, investor confidence collapsed. Now, political strife and a slowing economy have sent the rupiah reeling, and Jakarta's budget deficit has shot past IMF targets. In December, the Fund suspended its loans after just one $400 million installment. Its latest refusal to release funds could seal Wahid's political demise.

Jakarta must shoulder blame for not fixing its financial system. But by tying payments to too many complex reforms that must be executed in unison, "the IMF set itself up for repeated failure," says Gregory B. Fager, Asia director at Washington's Institute of International Finance Inc. What's more, each time the IMF delays a loan installment, it unleashes a huge ripple effect as other agencies withhold aid and investors recoil. And it's not even clear Jakarta needs IMF cash: It has $29 billion in foreign reserves.

The IMF should not return to Jakarta until there is a government truly committed to reform. Even then it should wait until Indonesia is facing another meltdown. Then, the question will be whether the Fund really can restrain its own impulses--and outside pressures--when imposing conditions. We'll see. In its new programs, the IMF is pushing Argentina to open its health-care and pension systems to outsiders, and spells out how Turkey must cut farm subsidies and privatize industries. Great for business. But hardly evidence of a minimalist IMF.

Engardio writes on the global economy; Shari covers Indonesia from Singapore.

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