Someone needed to speak truth to Europe
In the eurozone the IMF has let itself to be used by leaders as political cover, writes Takatoshi Ito
One man sat hunched over the papers that the other had flown in from Washington to watch him sign. The photographs made clear who was in charge: not the strongman who had ruled Indonesia for three decades, but the cross-armed technocrat who looked down as President Suharto inked a bailout agreement that he had seemed to reject a week earlier.
The Greeks’ hostility towards the international institutions that are their country’s chief creditors reminds many Asians of how they felt in 1997-98, when the International Monetary Fund demanded austerity and reforms in countries battered by economic crisis. Such demands are bound to cause strain; if you really dislike austerity, do not borrow from the IMF. When Malaysia declined to do so in 1998, its government was free to spend all the money it could raise.
Greece, which is already in hock to the IMF to the tune of €32bn, no longer has that option. Its situation is closer to Indonesia’s in 1998, when the fund began to suspect that Suharto no longer intended to abide by the plan he had agreed the previous year. It was then that the IMF’s managing director travelled to Jakarta to extract a public commitment to a revised deal.
Things did not go well after that. The Indonesian economy deteriorated and IMF disbursements stopped; the rupiah fell to one-sixth of its pre-crisis level. Riots raged, shops burnt and in May 1998 Suharto resigned in disgrace. The economy shrank by 13 per cent that year. It took six years and four presidents before stability was restored — perhaps a foretaste of Greece’s future.
Devaluation is impossible while Greece remains in the euro. The fund lacked the ability even to question the official accounts (manipulation of which is the root cause of the current saga) because the EU’s own statistics agency was supposed to be keeping watch.
When Japan and some Asian countries tried to launch a regional liquidity support mechanism in the 1990s, the proposal met strong opposition from the IMF and the US. Asians cannot be frank with each other, it was argued, and anyway the effort was said to be an unnecessary duplication of the IMF. Now, Europe has established just such a mechanism, and it has indeed failed. Perhaps the Americans and the IMF should have warned them off. Or perhaps the IMF cannot be frank with Europe, either — its management, after all, is dominated by Europeans.
The Asian countries that received IMF help did what they were asked. None of them defaulted on their government bonds, let alone IMF loans. Yet the experience was bruising. These governments pile up foreign reserves, determined to make sure they never again find themselves being told what to do.
The IMF portrays itself as an unsparing truth-teller, a bastion of economic rationality that can be relied upon in a crisis for tough love and good sense as well as emergency loans. In the eurozone it has fallen short, allowing itself to be used as political cover by leaders in national capitals who have for too long proved unable to speak plainly.
In the end, Europe has gained little from this way of doing business. The IMF has forfeited a great deal of credibility, not least with the Asian countries that have been its best students.
The writer, a former deputy vice-minister at the Japanese finance ministry, is a professor at Columbia University
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