It would be difficult to produce more convincing evidence of the world-wide nature of Asia's economic troubles than the encounter yesterday in Brussels between the International Monetary Fund's managing director and the European Union's Ecofin Council. The ministers heard Mr Michel Camdessus argue strongly against a proposal that Indonesia should introduce a currency board as a means of managing the rupiah's collapse on world markets. They agreed that the Asian economic crisis throws up the need for reform of international financial institutions and heard disquieting evidence of how the Asian events could affect the rest of the world economy, Europe included.
Mr Camdessus's case that Indonesia lacks the economic and political strength to run such a policy received widespread support from EU ministers. They took full account of his threat to withdraw the 43 billion-dollar IMF rescue package extended to President Suharto's government if he goes ahead with the proposals. It involves introducing a fixed exchange rate for the rupiah against the dollar and providing full dollar backing for every banknote in local currency. There is a widespread fear that it would provoke sky-rocketing interest rates, that the Suharto regime would not be able to sustain the powerful economic medicine required and that it could collapse under the strain. This is despite the successful use of such a technique in a number of other states in recent years, such as Argentina, Estonia and Bulgaria.
Indonesia has been suffering from chronic capital flight as well as a collapse of its currency, which has left many companies effectively bankrupt. The social and ethnic effects are becoming more and more devastating, as millions of people have been thrown out of work. There are reports of ethnic clashes involving especially the Chinese minority, which has so often been used as a scapegoat in the past. It is precisely to deal with these social protests that the government is giving such serious consideration to the currency board proposal, in order to finance imports and subsidies of rice, sugar, milk and domestic fuel, severe shortages of which have been provoking the riots. Significantly, the EU ministers yesterday discussed ways and means of providing such aid without resorting to a currency board.
One way or the other, therefore, the Indonesian crisis has reached a more serious juncture. This dispute is about how best to manage it. Mr Camdessus's meeting with the Ecofin ministers was arranged to discuss reforms of the international monetary system. It is universally acknowledged that the Asian economic collapse has underlined the urgency of this task. Among the measures under discussion are the creation of an international lending bank of last resort, far greater transparency in fiscal and monetary dealings so far as the IMF is concerned and the development of a capacity to foresee such crises and to intervene earlier in them and regulate them more effectively. The need to change existing methods of international economic crisis management has provoked a vigorous debate involving the IMF and its member states. Aside from the policy questions involved, there is clearly a need for much more openness about how the IMF goes about its business. Indonesia and the other Asian economies are guinea pigs in this discussion.