[asia-apec 829] FW: IMF's new "Keynesianism" according to Far Eastern Economic Review

[Arno Mong Daastøl]

The message in Norwegian attached to this article from the FEER reads
something like: The converted IMF is now struggling to convince its Asian
clints of the good sides to budget deficits. .... And then my friend Kristen
asks: Might it have something to do with the US trade deficits?

Greetings!
Arno
arno at daastol.com
http://daastol.com

-----Original Message-----
From:	Kristen Nordhaug [mailto:kristen.nordhaug at sum.uio.no]
Sent:	23. oktober 1998 16:17
To:	Arno Mong Daastol; Rune Skarstein
Subject:	IMF

The times they are a-changing! IMF er blitt keynesianere som sliter med å
overbevise asiatiske klienter om underskuddbudsjetteringens velsignelser!
Vel, det ikke riktig sånn ... Referansen er Far Eastern Economic Review med
en noe futuristisk datering. Det er interessant at man nå ikke bare maser på
Japan, men også på andre asiater om å føre en mer ekspansiv politikk (eller
snarere en mindre kontraktiv politikk for de sistes vedkommende).  Montro om
det har noe å gjøre med USAs enorme handelsunderskudd!
Hilsen Kristen
<<<<<<<<<
Far Eastern Economic Review
Rev Up Spending
IMF's about-turn on fiscal stimulus won't work
By Salil Tripathi in Singapore

October 29, 1998
It is a policy reversal that the International Monetary Fund has begun
topush aggressively. Throwing off its customary austerity, the IMF
wantsThailand, South Korea and Indonesia to rev up their fiscal engines
andspend their way out of the economic blues. And if they rack up
budgetdeficits in the process, that's okay, too.
The IMF set budget deficits in September at 3% of GDP for Thailand, 4%for
South Korea and 8.5% for Indonesia, revised since the Fundannounced its
policy about-turn in July. But economists say the size ofthese deficits
won't be sufficient for badly needed bank capitalization andsocial
safety-nets. What's more, governments are loath to fall too far intothe red,
anyway.
As many experts see it, this impetus isn't strong enough. "At such a time
Asia needs a massive fiscal stimulus, and that's not coming through,"notes
Manu Bhaskaran, chief strategist at SG Securities in Singapore. P.K.Basu,
chief economist at Credit Suisse First Boston in Singapore, concurs.Using
Thailand as an example, he notes that the country's budget deficit ofabout
200 billion baht ($5 billion) forecast for 1998 is "too little," given
thatits current-account surplus is expected to be 418 billion baht. He
points out that Thailand's GDP is targeted to shrink 8.3%. Because deficit
financing is measured as a percentage of GDP, in absolute terms, Thailand's
publics pending would be less in 1998 than it was in 1997. "If that isn't
tight money policy, what is?" muses Basu.
Indeed, some economists believe the fiscal stimulus won't work unless
governments use their rising foreign-exchange reserves to increasedomestic
spending. Exporters sell the hard-currency earnings they bring into the
country to the central bank via commercial banks. To pay for thehard
currency, the central bank either prints new money on the strength of the
increase in its reserves, or reduces the capital-adequacy ratios of the
commercial bank concerned. This creates new liquidity in the system-a
monetary expansion that the IMF would readily approve. The main worry is
that the commercial banks might use the new liquidity to boost their
reserves rather than lend it out, thus weakening the fiscal-stimulus
initiative. "There is an air of irrational exuberance in the IMF's
thinking,"says a regional economist with a European brokerage in Singapore.
The severity of Asia's economic illness prompted the IMF's monetaryrethink.
Circumstances have changed since the IMF first urged tightmonetary policies
on Asia's sick. The early days required austerity to helpeconomies to
stabilize. "That period is behind us. Now is the time toexpand," says IMF
Asia-Pacific Director Hubert Neiss, reiterating anargument that the IMF has
been making for the past three months. Indeed,the region is beginning to
perk up: Currencies are no longer bouncing like yo-yos; interest
rates-although still high-have fallen; and foreign reserves have grown since
the lows of 1997.
Neiss believes a fiscal stimulus-handled properly-will help liquidity toflow
back into Asia. He says confidence in the region would return byearly 1999,
thus attracting private money, if global conditions arefavourable. This in
turn will help governments to pay for bankrecapitalization, easing the
burden of corporate debt.
But the IMF's target economies aren't completely convinced. "In other
countries, we have to urge governments not to run budget deficits; in Asia,
we have to encourage them to expand fiscally. But Asians don't like running
large deficits," said Stanley Fischer, the IMF's Washington-based deputy
managing director.
Indeed, Indonesia and South Korea have dragged their feet in stimulating
demand because they are accustomed to running budget surpluses; in the past,
multilateral agencies, including the IMF, have praised them for this.  And
Thailand has resisted a larger budget deficit, says an IMF official in
Bangkok, despite "a blank cheque" that the fund is willing to write
forsocial spending. In fact, Asian governments had wanted to steer clear of
budget deficits altogether, hoping that export earnings would bounce back
and foreign capital would return. Neither has happened, admits Miranda
Goeltom, adirector at Bank Indonesia, the country's central bank. Exports
haven't risen in dollar terms in Thailand, South Korea and Indonesia, for
example, as global overcapacity has depressed prices in the key
Asianmanufacturing industries such as electronic goods. Nor is it likely
that the volume of exports will pick up; the pace of world economic growth
is forecast to slow to 2% in 1998 from 4.1% in 1997. Foreign capital,
too,remains skittish. David Hale, chief global economist at the Zurich group
inChicago, doesn't think it will return anytime soon to Asia-or to any
emerging market, for that matter.
But the IMF's fiscal-stimulus plan perhaps offers too little, too late. If
governments will spend less in absolute terms in 1998 than they did in
previous years, the outlay for bank recapitalization or social safety-nets
simply won't be enough. According to estimates by the Asian Development Bank
early this year, social-safety schemes would cost 7% of GDP in Indonesia,
and about 5% of GDP in Thailand.
Calculating the cost of bank recapitalization is trickier, but Asian bankers
say it could range from 25% to 50% of GDP in each of the three countries.
Depending upon exchange rates used, that could amount to between $75 billion
and $150 billion. But current-account surpluses for the trio are expected to
collectively total just $57 billion, says SG Securities in Singapore.
There are few financing options available, however. The World Bank andthe
ADB can provide only a fraction of the needed funds. Tapping Asia'sprivate
savings would be difficult. Few Asian countries have activemarkets for
bonds, or other fiscal instruments, in which to pour savings.Depending upon
the limited fiscal stimulus would be like depending upon afreak shower to
reinvigorate a parched landscape.