The financial crisis has had a global impact, but emerging Asia has withstood the crisis remarkably well. Apart from notable exceptions like Pakistan, Sri Lanka and Mongolia, Asian countries have not felt the need to seek financial assistance from the IMF.
This stands in sharp contrast to the Asian crisis, well over a decade ago, when many countries, including Indonesia, sought the help of the IMF. For Indonesia, this reflects substantial improvements in economic performance over the past decade.
But the IMF, which has gone through some major soul-searching, has also been changing to improve its ability to assist its members.
The history of IMF involvement in the Asian crisis is a troubled one. Mistakes were made and the IMF has learned from that experience. As the global economy evolves, so must the IMF.
In many respects one can speak of a new IMF, which has redefined the way it deals with its member countries.
Now that Asia is leading the global recovery, its relation with the IMF needs to be redefined as well. It has a shared interest in well-functioning international institutions which can help build a stronger financial system. It is time to turn the page.
Asia’s role in the world economy has been growing rapidly, particularly over the past decade.
To be sure, Asia was not immune to the crisis, but economic stability was restored faster than elsewhere and economic recovery was quicker as well. Several Asian countries, among them Indonesia, recorded positive growth even at the peak of the crisis, and faster growth is expected this year.
The two-speed recovery, where economic growth is faltering in advanced countries, poses challenges. Asia has a common interest in coordinating its policies with advanced countries so as to avoid new vulnerabilities.
Asia’s rapid turnaround to recovery can be explained by strong corporate and public finances at the onset of the crisis, which provided policy space to take timely responses to support growth. These factors played an important role in Indonesia’s resilience to the crisis as well. Indonesia entered the global crisis in a strong position. Consequently, even though Indonesia’s financial markets were hit hard during the crisis, recovery was speedy as fiscal space, built up in the years before the crisis, could be used to support the economy. Exchange rate flexibility served as an important shock absorber.
Indonesia’s ability to cope with the crisis has drawn international recognition and stands in sharp contrast to its experience during the Asian crisis.
Indonesia’s economic model sets itself apart from peer countries in the region, as it is based on prudent macroeconomic policies, exchange rate flexibility, emphasis on decentralization and grass root development, and a pluralistic and open society.
The dividends from Indonesia’s reforms are clear and if sustained, form a sound basis for becoming one of the world’s leading economies.
While most Asian countries tackled the crisis without resorting to the IMF, in other regions the IMF plays a central supportive role, particularly in Eastern Europe and Latin America.
In doing so, it is more responsive to the needs and the political realities of its members. Based on past experience, and drawing lessons from its involvement in earlier crises, the IMF has refocused its advice to its core area of expertise, which is restoring stability.
Other policy issues which are not critical for the economy are left to the member. The IMF thus refrains from micromanagement, which critics felt had been dominating past program designs.
The IMF has become more flexible in its lending policies. Conditionality has been simplified and streamlined, aimed at removing the stigma of borrowing at the IMF. Social spending is preserved to protect the poor.
This policy has paid off since many countries have found their way to the IMF. A quarter of all members have agreed an IMF program, including 25 emerging economies and advanced countries like Iceland, and possibly soon Greece. This IMF financial safety net has raised confidence.
A major innovation has been the establishment of the Flexible Credit Line, a non-conditional credit line for well-performing countries with a good policy track record. This instrument lessens the need to build up ever-larger reserves as a way of self-insurance.
In a watershed with former practice there are no conditions to meet once a country has been approved.
Mexico, Poland and Colombia use this credit line, which has allowed them access to international financial markets at lower interest rates.
These more flexible lending policies reflect a new image of the IMF, no longer dominated by the Washington consensus or the neo-liberal credo. A more relaxed attitude toward capital controls is another expression of this new found pragmatism.
Now that the IMF has been given a second lifetime, it needs to strengthen its position as guardian of an open international financial system.
Better policy coordination, particularly among advanced countries, is needed. The IMF established an early
warning system and assists the G20 to have peer reviews among its members. This will increase the traction of IMF advice, particularly among advanced countries, which had been lacking in the past.
A central role for the IMF beyond the crisis requires that its governance structures better reflect today’s new global realities.
The perception that advanced countries are running business in the Fund, but do not adhere to its advice, has undermined the IMF’s authority.
Governance reforms are under discussion, which aim at increasing the share of dynamic emerging markets. These reforms also involve a more transparent appointment process of the managing director and increased staff diversity.
Indonesia is now underrepresented in IMF staff. Having more Asian experts at the IMF would help to better ground the institution’s advice in the realities of its members.
Finally, better global policy coordination is strengthened by well-functioning regional cooperation. In Asia regional cooperation has intensified through the enlarged Chiang Mai Initiative and free trade arrangements between ASEAN and China.
Such cooperation is beneficial to global economic welfare and in no way should be seen as a threat to the IMF. The experience elsewhere, particularly in European Union countries, shows that IMF assistance and advice is a useful complement to regional cooperation.
In conclusion, the ‘new’ IMF is an institution that communicates better with its members, balances the interests of its advanced, emerging, and developing members in an evenhanded manner, and aligns its policies better to the needs of the moment.
The new IMF deserves to regain the trust of those members who in the past have seen the IMF as
the evil-doer. With improved governance the IMF again can be seen as an institution which is owned
Not by a small number of rich countries, not dominated by a special credo, but as a diversified institution with a listening ear for all its members.
Indonesia, as member of the Group of 20 leading economies in the world, can play a major role in the policy setting of the IMF. It has a shared interest to do so as it is increasingly integrating in the global economy and thus is impacted by policy mistakes elsewhere.
Indonesia’s remarkable success in dealing with the crisis and its sound economic growth model provide a good basis for a forward-looking, constructive relationship with the IMF.
Indonesia and the IMF may share a somewhat troubled past, but the time has come to turn the page.
Age Bakker, from the Netherlands, is executive director of the IMF for a group of 13 countries, mainly in Eastern Europe. This article is a summary of lectures delivered at regional offices of Bank Indonesia in Denpasar, Jakarta and Yogyakarta, as well as at University of Indonesia. These are his personal views.