IMF TO THE RESCUE

By Richard Lacayo

Over the centuries, Korea has seen its share of expeditionary forces. They used to come in on sailing vessels and troopships. In the past two weeks they arrived by commercial airliners--a bunch of innocuous number crunchers from the International Monetary Fund. This particular force had been invited in by the South Koreans, though not without a good deal of misgiving. Just a few weeks before they arrived, Seoul had been calling the idea of an IMF rescue unthinkable. Now the unthinkable is fully under way, and the fund's inspectors have become supervisors of the world's 11th largest economy.

More than the fate of South Korea has dropped into the laptops of the technocrats from Washington. The Asian crisis brewing since the summer has reached the Code Red stage. With Thailand and Indonesia receiving IMF bailouts, the fund has become the main hope for containing the East Asian upheavals before they spread to Japan, and from there perhaps to the U.S. Thailand, which came running to the IMF this summer, is getting a $17 billion aid package. Indonesia will get about $23 billion. South Korea initially asked for $20 billion, but last week its Finance Minister indicated the package might be as much as $50 billion. Financial experts put the amount closer to $60 billion when assistance from individual nations and banks is added. By comparison, Mexico's bailout three years ago cost $48 billion.

The fears that the crisis could move to Japan are very real. Those Asian nations are major consumers of goods from Japan, which is suffering from its own prolonged recession and instability caused by overextended financial institutions. Japan's vulnerability was brought home last week by the collapse of the 100-year-old Yamaichi Securities, that nation's largest business failure since the end of World War II.

A ripple-effect crisis in Japan could then be felt in the U.S. At the very least, Japan would decrease its imports of American goods, thus widening its already large trade gap with this country. At the worst, Japan would begin selling off some of its $320 billion in U.S. Treasury securities, leading to a run-up in U.S. interest rates and perhaps an end to the bull market.

Asian demand for American goods has started to slacken. And don't expect many Asian leaders to have the political stomach to open their own markets much further in this time of crisis, especially now that the U.S. Congress has rebuffed President Clinton on fast-track trade legislation.

The IMF didn't put itself at the center of this storm. It was placed there first by the countries requesting help, then by the other Pacific Rim nations. For different reasons, both lenders and receivers wanted a middleman to give them cover. For all the embarrassment that attaches to it, a bid to the IMF allows recipient governments to claim that an outside force is compelling them to make unpopular but necessary reforms. Donor countries can also avoid taking the blame for the pain that IMF requirements impose.

Agreement on the IMF's central role was the chief accomplishment of last week's Vancouver summit of the Asia-Pacific Economic Co-Operation forum. The U.S. had been trying to head off some efforts by Asian countries to set up a separate, regional body to handle the bailouts. Such a move, Washington feared, would have undermined the IMF, which over 50 years has built up the expertise--and, even more important, the credibility--to handle these complicated and politically sensitive operations. The salient point, said President Clinton, is that "on a global level, the role of the IMF remains central." The language was flavorless. The message wasn't: Eat your spinach.

For those unacquainted with the thrills of international economics, the IMF is in essence both a bank of last resort and a fiscal reform school for wayward economies. When countries such as Thailand and South Korea admit their sins--too much debt, too much spending and a lack of controls on their banking industries--the fund sends in the economists, armed with several financing schemes. There are short-term loans to stanch the bleeding and stop the flight of capital. The fund also negotiates for longer, 10-year credit agreements, as well as so-called concessional loans, or grants, to the poorest countries.

The organization with all this power was established at the Bretton Woods conference near the end of World War II. The goal was to build a new international economic order and thus avoid a repetition of the prewar period's spreading economic chaos, which had set the stage for Hitler. The organization today operates from a headquarters in Washington only a few blocks from the White House, which alone makes it suspect in the eyes of some countries. Its top executives include managing director Michel Camdessus (a Frenchman) and first deputy managing director Stanley Fischer (an American). They report to a 24-person international executive board. The IMF staff is small--just 1,100 professionals, including 759 economists--only one-fifth the size of its sister agency the World Bank, which was established at the same time and funds development projects in the Third World.

IMF staff members constantly roam the globe, visiting countries and meeting with finance ministers and central-bank governors. "This is not ivory-tower analysis," says Shailendra Anjaria, director of the external-relations department at the IMF. "This is get-your-feet-wet, on-the-scene inspection." Because the IMF releases its funds in periodic amounts, it has a lever to keep countries in line. Says Deputy Treasury Secretary Lawrence Summers: "It's very important that we put out fires without giving people an incentive to leave matches around the next time."

The organization itself has operated with a high level of secrecy, if not mystery, that has inflamed critics. The IMF seldom discloses the details of its agreements with borrower countries. And IMF officials, in their public statements, speak in a language that seems purposefully oblique, out of a professed fear of rattling the financial markets. But lately the agency has tried to become more transparent in its actions. In the recent Thai bailout, under IMF pressure the Thai's took the unusual step of releasing a detailed, multipage summary of the loan agreement.

Even when they work, the remedies the fund imposes as the price for handing out credit or money can be nasty, brutish and not so temporary. The Philippines has been under IMF supervision for three decades. Following IMF admonitions, the country has enjoyed considerable success in the past five years dismantling government monopolies, selling off state enterprises and opening its banking and telecommunications system. In fact, it had hoped to get out from under the IMF's thumb soon before the crises started.

Applying to the fund means lost economic sovereignty, which is no small matter for any country, especially a developing one in which colonialism is still a fresh memory. The fund's recommendations also mean pain for the poor and working class when governments adopt the fund's austere recommendations. Those usually include slashing budget deficits, which often means higher taxes and lower social spending, an end to subsidies on things like food and fuel, and privatization of inefficient state-owned industries, with the inevitable worker layoffs.

Is the IMF up to the immense and complicated task of curing East Asia of what ails it? The fund's advocates say yes and point to its many successes over the years, most recently in Mexico. That country recovered in record time from the humiliating 1994 collapse of the peso by promptly adopting IMF reforms.

East Asia's troubles rest in large part on the region's intricately developed system of crony capitalism, in which personal connections trump the rule of law or markets almost every time. "What now has to be addressed is reform of banking systems, the improvement of supervisory and regulatory functions of governments," says Robert Hormats, vice chairman of Goldman, Sachs International.

Other economic experts doubt that the IMF's normal medicine will work in Asia, and some think it may even do more harm than good. "When the IMF was in Latin America, they faced the typical hyperinflation problem and they knew what they were doing," notes Harvard economics professor Gregory Mankiw. "But in Asia the prescription is far less clear." Kevin Watkins of Oxfam--an Oxford-based, nongovernment development agency--says the IMF may shortcut Asia's recent progress. "What differentiates East Asia has been its ability to create growth with equity," he says. "Now the IMF programs threaten to break that link. You may have growth, but with continued poverty."

The IMF can worsen an already panicky situation, says Jeffrey Sachs, the director of the Harvard Institute for International Development. In Thailand the IMF plan required the government to close 58 financial institutions. When that became known, "the panic intensified," Sachs says. "Rather than restoring confidence, the IMF's intervention merely confirmed to investors that they were right to flee." Meanwhile, financial institutions that will be closed because they cannot satisfy strict standards of reserve capital will have their assets, mainly foolhardy real estate developments, auctioned off. But that massive sell-off could lead to a sharp fall in values that will affect the portfolio of even sound financial institutions that hold the same type of properties.

One result of the IMF measures could be trouble in the streets. In 1989 alone, Venezuela and Jordan were hit by riots after their governments, in an attempt to satisfy IMF requirements, ended food and fuel subsidies that had kept prices artificially low. The reaction in East Asia hasn't yet escalated to rock throwing. But in October, amid the threat of massive demonstrations, the Thai Prime Minister rescinded a fuel-tax increase that the government had adopted just three days earlier to satisfy an IMF-mandated budget surplus. "There is no long-term solution for the common people," laments Somsak Kosaisook, secretary-general of Thailand's public-employees union. "They have to bear all the hardships of higher prices and unemployment."

In the hope of softening the impact on the poor, the IMF is now including social-policy directives as part of its loan package. This summer the fund signed an agreement with Argentina in which Buenos Aires agreed to give priority in budgeting to primary schools and health care and to strengthen the independence of the judiciary. The agency's deal with Thailand includes provisions to help the jobless.

It's not just the poor who flinch when they hear the letters IMF. The arrival of the IMF can also mean pain for economic elites, who are expected to dismantle the business culture that made them rich even while it dragged their nations into crisis. In the Asian Pacific, where much of the current trouble was brought on by buddy-buddy capitalism and closed-door banking practices, the fund wants more stringent borrowing rules, more open bank reporting and freer trade policies.

But if the IMF is a house of pain, that's because it tends to countries that are so deep in crisis that the only options are ones that hurt. By the time a country asks for IMF aid, foreign investors have long since fled, international banks have shut their lending windows, and the world's private capital markets are offering the loan-shark interest rates that go to high-risk borrowers.

That situation largely describes East Asia today. In some important respects the economies are sound: inflation is relatively low; growth and savings rates are high. Korea's economy had until recently been expected to grow 6% this year. But at the same time, wildly imprudent lending policies have led to mountains of bad debt and economic instability. A speculative frenzy in real estate has cluttered the skylines of Jakarta and Bangkok with empty office skyscrapers. Unwise industrial investment has added new auto and microchip plants to a world market already glutted with both.

The fund's bailouts in Asia will be money down the drain unless its prescriptions become permanent reforms. For that the region will need strong political leaders who are willing to battle the alliance of bureaucrats, business and labor interests that benefited from the old system. Asian governments have been resisting the details in IMF rescues. The bailout of Indonesia has been slowed by the reluctance of officials to act against firms connected to the children of President Suharto.

The IMF has tackled the problems of even bigger economies in the past. Back in 1963 a major industrial nation was scaring off foreign investors who were nervous about its worsening balance of payments and were losing confidence in its overall economic policies. The troubled country borrowed $250 million from the fund that year and an additional $350 million the next. The rescue package worked. The currency stabilized, and investor confidence was restored. Which was the stumbling country that then needed the IMF's help? The United States.

--Reported by Bernard Baumohl/ New York, Jay Branegan/Vancouver, Kim Gooi/Hanoi and Bruce van Voorst/Washington, with other bureaus

With reporting by BERNARD BAUMOHL/NEW YORK, JAY BRANEGAN/ VANCOUVER, KIM GOOI/HANOI AND BRUCE VAN VOORST/WASHINGTON, WITH OTHER BUREAUS