We should take care not to make the intellect our god; it has, of course, powerful muscles, but no personality." - Albert Einstein

In the Jakarta Post, Jan 21, former coordinating ministry of economic and finance, Mr. Rizal Ramli wrote, "Economic crises have led to violence not only in Argentina and Indonesia, but also in many other Latin American and African countries subject to IMF adjustment programs. The IMF, which "professes" a strict separation between politics and economics, is totally unconcerned with the social, political and humanitarian consequences of its policies and recommendations. Source.

Of course there is nothing new in this observation as political economists have preached about it long time ago. I myself also have mentioned the similar argument here, "The IMF in particular thinks entirely from economic framework and forget the very basic nature of the real world that politics affects economics as much as sugar changes the taste of coffee". Source.

What's wrong with the IMF? And what about the World Bank? Let's see how a reader commented on the WB (translated), "Give a damn to the WB! And the people who support it". For more click here. Simple, but clear: the WB is a bad guy. But are they really bad guys?

For those of you who are not familiar with the two global organizations perhaps wonder what have they done to deserve it? Is that really true? And if it is true, how bad they are?

Well, we need more information about the two agents before doing any judgment. The IMF was founded in 1946, right after the World War II was over. You might want to check an extensive explanation of the purposes of the IMF. Here I present some of them, "to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment".

It is clear that the main objectives of the Fund are exchange stability and monetary cooperation. The subsequent goals are just logical consequences of the two main goals since the dynamics of exchange rates and monetary policy affect economic growth. The goals, theoretically, are wonderful, nothing more we could expect from it.

Now we may need to know a little bit more information about the World Bank. The World Bank, founded also in 1946, initially helped rebuild Europe after the war. But now, it works in more than 100 developing economies with the primary focus of helping the poorest people and the poorest countries. For all its clients the Bank emphasizes the need for: Investing in people, particularly through basic health and education, Focusing on social development, inclusion, governance, and institution-building as key elements of poverty reduction. Around 40 percent of staff is now based in country offices. Source.

Unlike any other global organizations such as the United Nations and its affiliated organizations, the IMF and the World Bank are usually the first to be blamed for any terrible things occur in the under-developed and developing countries. The basic underlying factors inherent in the accusation are the strong association of the Fund and the WB with the West as well as the bad situations experienced by the third world countries resulting from the poor recommendations of the WB and the IMF.

What are those recommendations? The very famous one is the market liberalization: to open the domestic money and financial markets to the international community. Therefore, people from around the world can lend or borrow money to and from Indonesia. They can trade currencies. In addition, foreigners also can invest through financial market in Indonesia such as trading stocks, bonds and etc. The idea is certainly excellent. There is nothing wrong with it. The system has worked well in the Western economies. But why it becomes a problem to us?

For an obvious reason, it could be a big problem. In the West, a heavy overcoat serves a person really well during the winter season. However, a man with a heavy overcoat in a tropical country will feel a burning fire in his body. It's no longer helpful, but disaster.

The market liberalization does not live in a vacuum world. It has to land in a certain environment. And the most important features of environment required for it to really work well are law infrastructure and enforcement. A liberalization of markets and economy is not independent from a way of thinking of a society, either. Liberalization to most extend means freedom, but freedom demands responsibility and justice. It has to be protected by strong judicial or legal system. We can't have freedom unless we have justice. And adversely, we can't have justice unless we have freedom.

The lacks of law enforcement, justice and responsibility in Indonesia have destroyed the liberalization idea. We can still need a light jacket in a tropical country, but not a heavy overcoat. Our environment does not support it. Remember how people have benefited a huge amount of money from the stock and money markets illegally without subject to any legal prosecutions? Remember how individuals capitalized an incredibly large amount of money from the many holes in our legal system? Some of them, through cooperation with local people, are foreigners from the rich countries who know our weaknesses really well. The IMF's recommendations are blind to such obvious conditions.

Mr. Ramli then continued in his article,

In early October 1997 I wrote that the IMF would not resolve the impending financial crisis, but would instead plunge Indonesia into a deeper economic crisis. But Neiss' response (Mr. Hubert Neiss is the IMF's Asia director, ET) to my words of caution was instructive. "That is not true", he said. "You are over-reacting. Every morning I go jogging around the Grand Hyatt, and the Indonesian people that I see are always smiling".

It was then that I realized that not only did the IMF have no understanding of the Indonesian political situation, but that they basically did not think that it was important.

Again, Mr. Ramli's observation is nothing new as it is a logical consequence of what he mentioned before that the IMF "professes" a strict separation between politics and economics. And consequently, Neiss's response is natural.

Of course to reduce all problems into two main aspects: politics and economics would be totally wrong. There are other aspects that the IMF also tends to ignore: the social condition and stage development of a country. This observation also has been around for many years and I just rephrased it in the previous article,

The controversial example is the prescription of the IMF to the Indonesian government to lower the subsidy for fuel and gasoline, and thus raise their market prices, in order to increase the government revenues and improve its balance budget. It comes from Economy 101 course and economically is right. But what is economically correct is not necessary acceptable.

What most people want now are stability of prices, jobs, justice for corruptors and a clean government. None of this seems directly implied by the IMF recommendations. No wonder since most of the Fund's economists are raised and trained in the West and have little knowledge of the local conditions. Source

Now we have at least two answers to why the IMF's prescriptions are irrelevant. The IMF fails because its conception of economics is separated from politics. Secondly, because the local understanding of the IMF's staff is poor. In the previous material I also argued that

In addition, the so-called Economic science is basically driven by the results of research on the Western economies.

This is right to the heart of all basic principles behind the IMF's recommendations: economic theory which is essentially developed in the Western countries, especially in the UK and the US. This subject is certainly open for a debate, but since it requires more sophisticated jargons, I decided to postpone talking about this here. 

Perhaps, for more concreteness, take one controversial example where the IMF recommended to the Indonesian government to increase the interest rates in order to overcome the financial crisis in 1997. 

From Economic 101, a higher interest rates would induce consumers to save, attract foreigners to buy rupiah and save them in Indonesia and reduce the speculative activity on rupiah. But this also causes problems to domestic firms since now they are facing higher credit interest rates. The outcomes are predictability. Production decreases and this forces prices and unemployment to increase. The IMF absolutely knew that and they convince it will be a temporary in nature. Once the currency gets stable, the interest rates can be decreased slowly and production, prices and employment can be restored. Do we see that happens in the country?

What's happening is, as what we are witnessing, the higher interest rates is not able to attract foreigners' money. Who wants to risk their money in such fragile circumstances? They did buy rupiah, but then they sold it in the next hour or day. There is no enough capital or money coming in. In fact, capital is flowing out. The higher interest rate is also failed to increase saving rates since consumers need cash to face the higher prices and uncertainty about their jobs. In addition our banking industry itself is no better than a walking zombie, so who wants to put their money in the banks unless it's extremely urgent?

It takes Joseph Stiglitz, the 2001 noble prize winner in Economics, to say an obvious "advanced countries through the multilateral institutions preach to the developing countries about the need for higher interest rates, while the advanced countries themselves do the opposite".

In the US itself, during the last four months, the Federal Reserve already cut the interest rates a number of times bringing the interest rates to the lowest rate in the last 30 years. The purpose is to prevent the further recession of the economy. Then why does the IMF want us to increase the interest rates? This is a question with no real answer for us. But it just shows how confusing is the policy recommendation suggested by the Fund.

The only country in Asia which suffered the crisis but steadfastly say no to the Fund's recommendation is Malaysia. Malaysia implemented in the September 1998 what is called Capital Control measures, dropping its previous IMF-style high interest rate policies. Few months ago, I was involved in a project with Harvard professors on the issue of the Malaysian capital control policy. One of the measures that Malaysia is implementing is pegging the ringgit at 3.80 to the U.S dollar as part of the drastic measures to insulate the economy from speculators. 

Commenting on the policy, the Asian Wall Street Journal said Malaysia's decision to impose capital controls flouted economic orthodoxy and directly contradicted the crisis prescriptions of the IMF, the U.S. Treasury and a host of other experts. None of the troubled Asian countries performs better than Malaysia today.

If the IMF is famous for its false prescriptions in managing monetary and financial turbulences, although as we have seen not all of them are bad, the World Bank is well-known for its failed program called Structural Adjustment Program (SAP) launched in the under-developed and developing countries in the 80s. The SAP actually was more a joint program promoted by the World Bank and the IMF. The main policies issues are: reductions in public expenditures (including social services); elimination and/or targeting of subsidies; tax reform; restriction of credit; privatization of most state enterprises; trade liberalization; devaluation; removal of barriers to foreign investment; and "competitive" wages. It covers the whole area of a nation's economy.

It has been argued that the purpose of the program is to alleviate the under-developed and developing countries debt, poverty and unemployment problems which were culminated to a substantial amount the late 70s. The heavy involvement of the governments in the economy was viewed as inefficient and so privatization was the answer. The governments' control on the market also needs to be eradicated and so deregulation was the answer. A massive series of deregulation in the under-developed and developing countries was introduced in 80s and early 90s. In Indonesia some of them are Deregulation Package of October 88, 91, 93 and many subsequent deregulations.

It turned out, privatization and deregulation were successfully stimulated the economies of developing countries. Indonesia, together with Thailand, Malaysia, Korea and several other countries, was often quoted as a model of The World Bank successful program. The number of people living in poverty was significantly reduced, growth rates were high, and so on (see how poor are we). However, just like the liberalization idea, privatization, deregulation and all other policies are not living in an empty space. They need a right environment. They require strong legal system.

The successful results which were actively campaigned by the WB were illusions. In what analysts term a "trickle up" process, there was a massive transfer of resources from the salaried population to owners of capital, and from public control to a few private hands. Privatization of public companies does not result in a transfer of management from the government to private agencies, but rather a transfer of administration from the government to a handful of people in the government and a few people in the private sector. In Indonesia, this case is very obvious. 

A small number of high government officials corroborated with a few businessmen and most of them are none but their friends and families. Privatization and deregulation only contributed to a steep concentration of income and wealth, a trend that ran counter to the imperative of creating a strong domestic market as a factor in ensuring sustained economic growth. Greedy foreigners, joined with corrupt domestic people, stole national resources 'illegally'.

The failure of the SAP is an ongoing gloomy story from many parts of the world mainly from countries in the Latin America, Africa, Southeast and South Asia. The further tightening of credit, suppression of wages, cuts in social spending, and liberalization of trade and financial markets have intensified the decline of local productive capacity, deteriorated the welfare of the vast majority of in many countries that implement the SAP.

The natural question now is, do we still believe in the WB policies? The idea of privatization and deregulation are actually not bad. It is intended to let the market determine the best for the economy. From Economics' perspective, most of the government interventions are distortionary. It creates inefficient allocations and could lead to lower welfare.

In other words, the deregulation, liberalization, privatization and other programs introduced by the WB and the IMF are just landed in the wrong time, introduced in the wrong stage of development and done by the wrong people. Prior to the SAP, Indonesia was already a very corrupt nation. A massive corruption in a government oil company, Pertamina, in 70s is an example. Nepotism were every where. And when the three programs above introduced in the 80s, suddenly the corruption, bribery and all kinds of manipulative practices found their havens. 

Although not all of them are really suitable to the needs of its users (the under-developed and developing countries), the outcomes of the programs should not be as worse as what have seen now if the programs were done by the right people. When a car hit an innocent pedestrian, it's not the car's fault, but the driver who steered it, or the environment and weather were terribly bad.  

This answer and rough analogy certainly will not satisfy those who see the West as the source of all evils. There are a number of people who hold this perception dearly. Every program and policy recommended or supported by the WB and the IMF (also by the WTO- World Trade Organization) were viewed with suspicious and considered as tools or mechanism designed to serve the West's interest. In their view, the global organizations are nothing but vampires that bring misery to the people in the under-developed and developing countries. In their perception, using the analogy above, the accident happened because the car producer produced a car that has a poor brake system.  This perception is only trying to blame others when the greater portion of the mistakes is self-committed ones. 

We should be more focus on our own weaknesses rather criticizing and blaming the WB and the IMF or other global organizations. It is true that in some of their programs they introduce measures that make us confused and look ugly. But we have also a position to say no. Malaysia did it and they are much better than us.

What makes matter worse is that there are a handful of Westerners who are preaching that the Transnational Companies (TNCs) are behind all of these 'evil' activities. Even some of them coin a term conspiracy which refers to a conspiracy between TNCs, the WB, the IMF and the WTO to destroy under-developed and developing economies. And the number of people in those countries who are buying what these handful people are preaching keeps growing. This of course misses the mark that most of the problems in those countries are because of the mismanagement of national resources and the poor morality of their leaders. One example is the IPTN project which is a total strategic error.  I am afraid that people in Indonesia will hate the WB and the IMF more than they hate the heavy corrupt bureaucrats and political leaders. 

Thus, it is not the case whether we should or should not believe in the WB and the IMF, rather we should care more to have a clean government that commits to: (1) clean itself from corruption and nepotism, (2) bring all the heavy corrupt individuals to justice and seize their assets and (3) establish a national plan in recovering our economy. So far, we have seen none of them from our new government. 

There is no energy, no clear agenda and no urgency in our economic recovery plan. When the crisis hit Malaysia, Mahathir directly led the national economic recovery council. The goal was clear, to stabilize the economy. The steps were also clear and bold, even if it requires a rejection in the IMF's recommendation. 

At the end, Mr. Ramli wrote

We must prepare ourselves to declare a "Second Independence Movement";that is, a movement dedicated to realizing Indonesia's potential as a modern, leading nation in Asia. We must now find the courage to declare our economic independence and make the necessary sacrifices to achieve it.

To me, Mr. Ramli is nothing more than a spectator who feels sorry about the defeat of his favorite team. While he was in his position as one of the most important figures in the government, we hardly heard anything from him about this kind of statement. It does not take a such strong experience to give that observation. 

Nevertheless, it is good that he finally realizes the need for that Movement. And to you I say, welcome, because the only agent that can do it is the present young generation. The older people are already too ignorance to understand its urgency and also they are too tired to commit themselves to such a long and hard battle.

US: 02/02/02             Your comment