Anwar and the IMF

When I returned from an overseas conference two days ago, I realised that a Sept 5 Berita Harian report on my comment on International Monetary Fund executive director Horst Kohler's statement - and reproduced in The Star (Sept 6) - had provoked a reaction from Parti Keadilan Rakyat (Keadilan) information chief Rustam A Sani.

Rustam's statement demands a response.

While the general thrust of the Berita Harian story reflected the gist of my remarks, its presentation and certain aspects of the report were off tangent. My five-minute comment over the phone was mainly about the IMF and its handling of the 1997-98 financial crisis. The role of former deputy premier and finance minister Anwar Ibrahim vis-a-vis the crisis was not my primary concern.

It was the Berita Harian reporter who asked me what I thought of Anwar's approach. I replied that he was more inclined towards following the standard IMF prescription in dealing with crises of the kind that confronted the region - that is, increasing interest rates at an escalating pace.

Of course, my remark did not constitute 'a proper economic analysis' which no one should expect from a brief telephone conversation. But the point is I had highlighted Anwar's 'policy error' to the reporter which unfortunately the newspaper did not carry.

Since raising interest rates sky high was what Anwar did in fact, there is no way one can describe it as 'political propaganda' on my part. Besides, Anwar himself made it explicitly clear in the midst of the crisis that he would heed the IMF's advice.

However, it was heeding the IMF's advice on interest rates - as renowned economists Joseph Stiglitz and Jeffrey Sachs have shown in a number of their writings - that was largely responsible for the devastation of the Indonesian, Thai and South Korean economies during the crisis.

In Indonesia, "20 percent of the population was unemployed, and a hundred million people - half the population - were living on less than one (US) dollar a day."

In Thailand, suddenly more than a million people were thrown out of jobs.

In South Korea, in Stiglitz's words, "Urban poverty almost tripled, with almost a quarter of the population falling into poverty".

Political commentator William Pfaff was right in characterising the IMF's actions as, "An episode in a reckless attempt to remake the world economy, with destructive cultural and social consequences that could prove as momentous as those of 19th century colonialism."

There are many reasons why Malaysia was spared the fate of its neighbours but one of the most decisive measures that helped stabilise interest rates and check the financial hemorrhage was the imposition of currency controls in order to insulate the economy from gypsy capital.

It is this: protecting the Malaysian economy and indeed, Malaysian society, from the deleterious effects of the financial crisis which deserves accolades. Compared to other countries in the region, the economic and social consequences of the crisis - and these consequences could have been horrendous in a delicately balanced multiethnic society like ours - were minimal.

This is the critical factor in the 1997-98 crisis that Rustam fails to appreciate. The issue is not whether other countries including those that swallowed IMF pills have also recovered from the crisis.

And if they have recovered, it should be emphasised, their capacity for autonomous economic and political decision-making which was already severely hampered by their client or crony relationship with Washington, is now even more limited than before.

South Korean and Thai intellectuals lament that since the financial crisis, Washington appears to be in a stronger position to arm-twist their ruling elites to toe its foreign policy dictates. Is it any wonder then that in spite of popular opposition to the war on Iraq, the South Korean leadership chose to back the Washington cabal?

Or, should we be surprised that in spite of his rhetoric, the Thai prime minister in the end sent troops to bolster the US-led occupying force in Iraq?

Having said that, it is equally important to point out to both Rustam and another Barisan Alternatif leader who commented on my Berita Harian remarks, Kamaruddin Jaffar, that South Korea did not - contrary to what they assert - follow IMF prescriptions in toto.

It did not close down banks, and "the Korean government, like Malaysia's took a more active role in restructuring corporations. Moreover, Korea kept its exchange rate low, rather than letting it rebound.

"This was ostensibly to enable it to re-establish its reserves, since by buying dollars for its reserves it depressed the value of the won. Actually, Korea kept the exchange rate low in order to sustain exports and limit imports.

"Moreover, Korea did not follow the IMF's advice concerning physical restructuring. The IMF acted as if it knew more about the global chip industry than these firms who had made it their business, and argued that Korea should quickly get rid of the excess capacity.

"Korea, smartly, ignored this advice. As the demand for chips recovered, the economy recovered. Had the IMF's advice been followed, the recovery would have been far more muted."

There is one other point that Rustam makes which should also be scrutinised. He gives the impression that the IMF was interested in promoting greater transparency and eliminating cronyism and nepotism which is why "in countries that accepted IMF assistance many banks and big companies were forced to shut down operations."

Transparency was used as a ruse - as various studies on the IMF have argued - to coerce governments especially in East Asia to reduce their role in managing the economy and to allow greater latitude to the so-called 'market' to establish American-style capitalism in every nook and cranny of the planet.

If the IMF was really concerned about cronyism and nepotism how is it that for at least a decade it had lauded the performance of a number of the 'cronyistic and nepotistic' economies in the region as the East Asian miracle?

Besides, let us not forget that the IMF has hardly the credentials to preach 'transparency'. Some of the major decisions it had made in the re-structuring of economies from Bolivia and Tanzania to Syria and Egypt were shrouded in total secrecy - to the detriment of the people in these countries.

Indeed, as the American scholar Chalmers Johnson puts it: "The IMF is essentially a covert arm of the US Treasury, yet beyond congressional oversight because it is formally an international organisation."

In Robert Kuttner's words, "[It is] the most powerful unaccountable institution in the world."

In conclusion, allow me to quote from the Nobel Laureate in Economics, Joseph Stiglitz who states in his 'Globalization and its Discontents', "In retrospect, it was clear that Malaysia's capital controls allowed it to recover more quickly, with a shallower downturn, (15) and with a far smaller legacy of national debt burdening future growth.

"The controls allowed it to have lower interest rates than it could otherwise have had; the lower interest rates meant that fewer firms were put into bankruptcy, and so the magnitude of publicly funded corporate and financial bailout was smaller.

"The lower interest rates meant too that recovery could occur with less reliance on fiscal policy, and consequently less government borrowing. Today, Malaysia stands in a far better position than those countries that took IMF advice.

"There was little evidence that the capital controls discouraged foreign investors. Foreign investment actually increased. (16) Because investors are concerned about economic stability, and because Malaysia had done a far better job in maintaining that stability than many of its neighbours, it was able to attract investment." (125)