IMF learns from 1990s’ Asian economic crisis

Posted on April 23, 2012


The Jakarta Post | Mon, 04/23/2012 8:44 AM

The International Monetary Fund (IMF) seems to be well-remembered by most Indonesians as it played a determining role in helping to restore economic stability in Indonesia during the Asian financial crisis in 1997. 

Following the current global crisis, the role of the IMF is once again assuming center stage, particularly related to its bailout package to tackle the debt crisis in the eurozone.

The Jakarta Post’s Linda Yulisman talked last week with IMF Deputy Managing Director Naoyuki Shinohara on the sidelines of the organization’s spring meeting in Washington, DC about the role of the 188-member body in securing the international monetary system from past to present and other issues relevant to Indonesia. Below are excerpts from the interview.

Question: In tackling a crisis, what will be the IMF’s priority in helping countries improve their economic conditions? 

Answer: Well, I guess the global economy as a whole had a hiccup last year because of the European situation.

There have been several efforts made in Europe, such as the ECB’s [European Central Bank] long-term refinancing operations and the new long-term Greece program, as well as stronger than expected growth in the United States.

The global economy seems to be recovering but, in general, growth will continue to be very slow. We’re expecting the euro to experience a mild recession this year and growth in other advanced economies will be relatively slow compared to that of emerging economies, including in Asia, where they’ll continue to
enjoy relatively strong growth, although there will be a slowdown from last year.

The main risk is still the economic situation in Europe. We hope to keep continuing our efforts to cope with that situation, including building a stronger firewall at the IMF and providing advice to European countries on how to strengthen the financial market situation.

One of the risks is the oil-price increase, which is related to the economy in Indonesia as well. But at the same time, in the case of Asian countries, although their growth is stronger, they have to watch out for risks emanating from Europe as well as the risks of an increase in commodity prices.

So, as a macroeconomic policy-management response, they have to calibrate the right balance between strong domestic growth and the bullish net-price hike from the current situation and whatever materializes with commodity prices.

What is the priority for the IMF in overcoming turbulence in financial markets in general? Is a bailout the IMF’s main tool in tackling the problem?

In order to prepare for potential disruptions in the market, right now we are talking about strengthening the IMF’s firewall, which means increasing our resources at the IMF so that we can cope with the crisis situation if another one comes up in the future. That is a necessary safeguard for providing strategy and that’s what we are working on. [During the spring meeting this week, the IMF received a commitment from the G20 countries of US$430 billion in fresh funds to double its lending capacity amid fears of a continuing eurozone crisis.]

At present, what can the IMF offer to help developing economies like ASEAN countries, particularly Indonesia?

Fortunately, countries like Indonesia do not need IMF programs. Indonesia doesn’t need to borrow from the IMF. Compared to the 1990s, for example, the economic fundamentals are much stronger and, therefore, ASEAN does not need IMF programs.

But, the other function of the IMF is to offer policy advice and consultations, which is part of the relationship that we have with your country. The advantage of the IMF is that we can help with cross-national studies and cross-regional studies, and we can use this expertise to try to give appropriate policy advice to your country.

For example, one contentious issue was the fuel subsidy. We believe that a reduction of the fuel subsidy — a gradual reduction of the fuel subsidy — is important in order to create fiscal space for important infrastructure development and social spending.

Replacing the fuel-subsidy system with the direct support to the poor is a more appropriate way to help economic growth in your country. Of course, you can’t do it immediately, but a gradual reduction of the fuel subsidy is one approach. We’ve also been discussing other issues [with the government].

Is there anything else the government can do to create more fiscal space?

I think it’s important to create enough fiscal space because in the case of Indonesia, the strengthening of infrastructure is especially important, and improving the business climate for private investment is also very important. So for that purpose, creating enough fiscal space in order for the government to be able to spend more money in those areas is crucial.

At the same time, social protection is a very important issue. Fortunately, Indonesia’s fiscal policies have become quite strong and I think they need to continue in the right direction.

In the past, the IMF was criticized for its structural adjustment programs, especially when the Asian crisis hit countries in the region in 1997, and in particular Indonesia. Do you see these adjustment programs still work in other countries in order to solve financial crises?

There are lessons we have learned from the Asian crisis. There are lessons we have learned from the programs we implemented in the late 1990s, and if we look at the content of the programs we have with Europe now, for example, the conditionality we’ve attached to the programs in Greece or Ireland is much more streamlined, with our conditionality focusing on macro-crucial issues in the area of fiscal policies.

Of course, in the case of Europe, labor market reforms are very important, but our conditionality concerns monetary aspects alone, so that what you call “structural adjustment” can be seen to have changed quite a lot over the years.

The purpose is, we try to take advantage of the expertise of business institutions and that expertise lies in macroeconomic approaches