IMF chief here to see for himself
May 31, 2000
Thanong Khanthong previews the fact-finding mission of Horst Kohler, the new managing director of the International Monetary Fund.
When Horst Kohler, the new managing director of the International Monetary Fund, arrives in Bangkok today as part of his regional tour, he'll see a different country from the Thailand of 1997.
Then panicky Thais rushed to withdraw their savings from the financial institutions. Interest rates were reaching for the sky. Stock prices were crashing. The currency was heading for a free-fall. Foreign-exchange reserves were depleted. Capital was flowing fast out of the country. And banks were alarmed by a sudden surge in bad debts.
The financial crisis, which would spread out like a flu to other neighbouring countries, brought an end to the Thai miracle. It forced the Thai government to seek a US$17.2-billion rescue package from the IMF in August that year. That set forth a framework for Thai financial and economic reform. Ever since, the country has gone through the stabilisation period to achieve macroeconomic stability, the banking reform period to shore up the insolvent banks and the current recovery period to bring the economy back to a growth path.
Now Thailand is gradually recovering from the crisis. It is not yet out of the woods. Although most key economic indicators from the manufacturing index - GDP growth, consumption, exports and the current account surplus - have shown remarkable improvement, Thailand is still plagued by a crippled banking system and rising public debts. The economy is expected to register a growth rate of about 4.5-5 per cent this year, but it will take a while before the GDP climbs back to the pre-crisis level.
Thailand is about to graduate from the IMF support programme on June
19th this year, having withdrawn about US$14 billion from the IMF's standby credit. It will be now left to confront the future, fraught with uncertainties and a hostile global environment, on its own.
Kohler, who just completed his Latin American trip, would like to get first-hand knowledge from leaders in Bangkok, Beijing, Seoul, Jakarta and New Delhi. He is interested to learn their views about the state of the global economy, the economic recovery in Asia and how the IMF may be reformed so that it becomes the true guardian of global macroeconomic stability and of the international financial system.
Except for the initial period of the IMF support programme, which was quite sadist in its approach, Thailand has indeed taken a moderate path in mending its crisis and undertaking structural reform. By now, Kohler, who has been in office for only four weeks, should have been familiar with all the literature about the Thai or the Asia crisis which saw the IMF at the centre stage assuming its role as the surgeon-general.
The IMF doctor has been criticised here in Thailand as being too harsh on the patient lying in a coma. The high-interest dose aimed to stabilise the baht took a heavy toll on the real economy, destroying the balance sheets of the local companies and banks. The fiscal surplus, designed to reduce the current-account deficit and pay for the restructuring cost of the financial institutions, further punished the private sector-oriented Thai economy through its contractionary force. The result was that Thailand went into a depression in the following year of 1998 with a negative growth rate of more than 10 per cent.
The crisis then also exposed a deep structural flaw in the international financial system. The IMF, the World Bank and the G-7 countries were reluctant to act as lender of last resort when Thailand was suffering from a liquidity crisis. It could be said that a huge part of the Thai crisis was structural, yet the liquidity crisis worsened the woes. Without the global lender of last resort, other neighbouring countries, under the leadership of Japan, stepped in with a bailout for Thailand. The IMF reluctantly joined in the last minute, awaiting the final signal from Washington DC.
The IMF, dominated by the Washington consensus and the Harvard mafia, has been operating without a clear mandate. It stepped in readily to provide a US$50-billion bailout fund to Mexico and an equally huge size to Russia, apparently doing so because of US geopolitical interests. When it came to the Thai crisis, the IMF did not make the slightest move until it was called upon by the US.
The IMF also got involved in the nitty-gritty details of the structural reform of the client countries receiving its aid. It took charge of the banking reform in Thailand when most of its staff did not have the experience, nor the expertise.
Kohler is believed to have formed a tentative agenda in his mind as to how he would like to reform the IMF. He would prefer the IMF to go back to its original mandate by focusing on crisis prevention or monitoring the macroeconomic conditions for the member countries. He would also like the IMF to provide short-term financing to crisis-hit countries, under strict conditions, to alleviate them from the balance of payment crisis.
Coming from the German background of fiscal prudence, he is also believed to disagree with the IMF's role as a deep-pocket lender that could further create moral hazard. Neither does he agree with the IMF's role as a development-aid agency, a role that should go to the World Bank or other regional development agencies.
But he is expected to have a tough time in Washington DC reforming the IMF under the watchful eyes of the US.
The crisis so far has sowed a sense of distrust among the countries in Asia over the IMF and over the make-up of the international financial architecture. The IMF was soft on the hedge funds. It promoted unchecked free flow of capital and liberalisation that contributed to the crisis. Later it was forced to admit that the Malaysia-style of capital controls worked.
That's why in Chiang Mai recently the member countries of Southeast Asia, China, Japan and South Korea have agreed to explore the possibility of enhancing regional financing arrangement to ward off the next round of financial crisis. That foreshadows creation of the Asian Monetary Fund, an organisation that would complement or might rival the IMF in some ways.
Kohler will be keen to learn the views of the Thai and regional leaders on the international financial architecture and whether they would support him in reforming the IMF. If they get along on good terms, maybe there will be no need to create the Asian Monetary Fund, at least in its bureaucratic form.