Outlook: IMF must stick to its guns

ON making interest rate judgements and the conditions for aid in the far east
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The Independent Online
The International Monetary Fund has six main purposes, according to its last annual report. Purpose five is defined as "to give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity".

It is this last bit which seems to have become the main bone of contention with the IMF's record breaking package of support for the Tiger economies of the Far East. Just what is a measure destructive of national prosperity? To many in the Far East, the enforced closure of banks and corporations, with its consequent loss of wealth and employment, looks like just that. And to what extent does the preservation of international prosperity justify putting up huge amounts of money from the developed world to prop up these semi corrupt economic and political systems?

For members of the Indonesian Government, a measure destructive of national prosperity plainly means most of the conditions the IMF attaches to its support. Indonesia's "denial budget" of a few days back is probably the closest thing the IMF has yet experienced, in recent history anyway, to a smash and grab raid on its money. Indonesia has already drawn on some of its IMF support. Now it is refusing to go through with most of the IMF's conditional economic reforms and threatening to default on its foreign debt to boot. Meanwhile, the Indonesian budget has made the various little bits of creative accounting used by the Europeans to squeeze into Maastricht's monetary corset look positively benign by comparison.

President Suharto is calling the IMF's bluff. We'll have the money but no strings please, he's saying. The IMF's response to this extraordinary piece of brinkmanship should be an obvious one - to withdraw all support until this silly little tin pot dictator comes to his senses. If the IMF sticks to its six defined purposes, that is certainly what it should be doing. The wording gives a little room for debate on this, but not much.

Furthermore, if the IMF gives way on Indonesia, it will have to loosen its conditions for all the others too. Thailand and Malaysia certainly won't be prepared to play ball. The big daddy of the region's stricken economies, South Korea, will also be looking for big concessions. Unfortunately, it is not at all clear that intransigence is actually what the response is going to be. The crisis in the Far East is beginning to move from the economic to the political and in doing so the IMF may be forced to become overtly what it perhaps always has been covertly - a tool of US foreign policy.

We seem fast to be approaching territory where IMF meets CIA. Investment bankers are taking over where the spooks left off, quite literally apparently, for Wall Street bankers are now more common visitors to the Whitehouse's Situation Room than US foreign policy advisers. Maps and satellite spy pictures have been replaced with flip charts, budgetry projections and capital flow diagrams.

As economic crisis degenerates into civil unrest, as it looks unnervingly likely to in Indonesia, the IMF's resolve and worthy purposes are going to be tested to their limits. Is it going to stick to its guns and use its money to drive through the economic reforms the region so desperately needs? Or is it going to chicken out and in the interests of short-term national and international prosperity, pay up regardless? This always looked like being an interested year economically; the political and social implications of what's happening may be more far reaching still.