Ignoring The Obvious In Indonesia
In order to understand just how ridiculous the IMF’s handling of Indonesia has been over the last two years it is only necessary to consider that on last Friday, June 2, the IMF released $372 million to the struggling nation after conducting its first review of Indonesia’s performance under its 3-year arrangement with Indonesia. Under the agreement, the country will receive $5 billion in total loans from the IMF if it satisfactorily implements fiscal and monetary policies demanded by the multilateral institution.
According to a news brief released by the IMF and which quotes liberally from Stanley Fischer, First Deputy Managing Director of the IMF, Indonesia received the $372 million because the IMF’s Executive Directors “ welcomed Indonesia’s recent progress in implementing important fiscal and structural reform measures. The key macroeconomic objectives for 2000 set out in the original program remain within reach. Prices are stable; the rebuilding of foreign exchange reserves has exceeded program targets; real GDP growth has become significantly positive in the last two quarters; and there is evidence that the poverty rate has come down from its 1998 peak.”
Sounds good right? But nothing could be further from the truth. The people of Indonesia are as poor as they ever have been and Fisher is being nothing short of disingenuous when he says prices are stable. Prices are not stable and what good is price stability if the prices are inflated so high and income so low that people can hardly afford to make purchases?
Fisher even belies his own praise for Indonesia’s improvements (which of course he would like the world to believe are due to Indonesia’s implementation of IMF-endorsed policies) when in the very next paragraph he writes, “ nevertheless, the recent deterioration in market sentiment, and the resultant declines in the rupiah and in the stock market, underscore the need for clear and consistent implementation of the program” Huh? Fisher speaks as if the “ recent deterioration in market sentiment, and the resultant declines in the rupiah and in the stock market” didn’t occur while Indonesia was doing what the IMF was telling it to. No, far from conceding that these woes took place on the IMF’s watch, Fisher says that these signs of failure actually make the case for more IMF program-implementation.
One question that Fisher doesn’t address because he wants the world to believe that Indonesia is doing just great is that the instability of Indonesia’s currency, the rupiah, is the very cause of inflation and price instability. What Fisher fails to inform the world of, in his news release, is that in August of 1998 Indonesia and the IMF set the goal of an exchange rate of 6,000 rupiah to every U.S. dollar. From August of 1998 until just last week, the exchange rate has averaged 8143 rupiah to 1 dollar. Currency stability the prerequisite to price stability has not occurred since 1998, even at inflated levels. And the exchange rate has not even approached that worthwhile objective of 6,000 rupiah to 1 dollar. Furthermore, the conditions the IMF demanded that Indonesia meet in order to qualify for the $5 billion it agreed to disburse earlier this year, did not address the problem of the rupiah’s instability; they did not address the rupiah’s dramatic depreciation nor outline steps that would prevent it from happening again. And unfortunately, Fisher and the IMF know all of this to be true.
To understand what is going on and to try to make sense where there appears to be none, we must go back to 1997. In July of 1997 the currency of Thailand, the bath, collapsed. That collapse put downward pressures on every other currency in South East Asia. But Indonesia’s currency suffered the most and for the longest. From July 1997 to April 1998 the Indonesian rupiah lost nearly 80% of its value. Throughout the crisis the IMF advised countries to devalue their currencies, at a time when the goal should have been to stabilize them. On August 14, 1997, after feeling the effects from the bath’s collapse, Indonesia allowed the value of its currency to float (previously Indonesia had loosely maintained a fixed rate of exchange between the rupiah and the U.S. dollar) and no one applauded that decision any louder than the IMF’s Stanley Fisher who publicly stated that the move would allow Indonesia to continue its positive economic performance. Actually the decision ensured that Indonesia would not be able to sustain its rate of economic growth. The currency collapsed.
Recognizing that his country’s most pressing need was to stabilize his country’s currency, Indonesian leader, President Suharto sought help from abroad. He reached out for John Hopkins Economics professor Steve Hanke who has expertise in the establishment of currency boards, which have shown success in stabilizing currencies that were previously fluctuating in value. Steve Hanke’s version of a currency board would have fixed Indonesia’s currency to the U.S. dollar at a definite rate of exchange (interestingly, the country in South East Asia, whose currency fared the best in the turbulent 1997-1998 period was Hong Kong – which has a currency board).
Hanke flew to Indonesia in order to advise Suharto and he developed a full-fledged plan on how the country could implement a currency board. The dialogue between Hanke and Suharto as well as Hanke’s plan were met with fierce resistance by the IMF, which stated that it would not aid Indonesia if it established a currency board. But, unlike the IMF, the markets applauded the possibility that Indonesia would move to a currency board. In fact, after Hanke was appointed as a counselor to President Suharto, the rupiah’s value appreciated by 30 % in one day. If the IMF was as interested in the confidence that investors hold for Indonesian economic policy as they claim, they should have viewed the market applause for Hanke’s currency board idea favorably. But they did not and argued to Suharto that there were more pressing structural reforms that he should make to the nation’s economy, and in particular its banking system, prior to the instituting of a currency board. Suharto caved in to their pressure and agreed to the IMF’s “solution” to Indonesia’s problems. And by the end of 1998, Suharto was out of power and with him went any hope for the establishment of a currency board. But the inflation remained.
In recent weeks, the media has focused on corruption probes in Indonesia, the house arrest of Suharto and the turn of the nation’s electoral process and of course the continued economic suffering that has gripped Indonesia. But the cause of much of the upheaval in that country continues to be ignored. The crisis in Indonesia initially started out as a currency crisis and with a little window dressing it continues to be a currency crisis. In May alone the rupiah steeply inflated from 7930 rupiah to the dollar on May 1 to 8625 to the dollar on May 31. It has become virtually impossible to plan investments and business activities from month-to-month and years in advance under such conditions. Until that problem is solved all of the corruption removed, leaders replaced and banks restructured will not improve Indonesia’s economy.
Monday, June 5, 2000