Indonesia Decision Only a First Step for Region

This nation’s return to the International Monetary Fund’s fold this week marks a symbolic turning point in the 7-month-old Asian economic debacle. But the overall situation across the region remains fragile.

President Suharto’s grudging decision to carry out reforms that the IMF has ordered--after a breathtaking barrage of international diplomatic arm-twisting--signals the end of the first phase of the Asian crisis, U.S. and foreign analysts agree.

In the wake of Suharto’s experience, Asian governments, which were stunned by the outbreak of the crisis last July, no longer are in denial about the need to restructure their economic policies. And they no longer harbor delusions that they might be able to defy the 181-country IMF without paying a price.

But while Suharto’s spectacular turnaround--orchestrated largely by the high-level U.S. mission that President Clinton dispatched here to help manage the situation--may have banked the fires temporarily in Indonesia, the outlook around the region remains uncertain and troubling.

Some countries, such as South Korea and Thailand, finally have put in place some serious measures to help correct their underlying problems. But there is considerable question whether they will prove able to carry them out, either because of technical constraints or political resistance.

The technical expertise in many of these countries, especially Indonesia, is thin at best. Policymakers are heading into uncharted waters. And many of the reforms they are being asked to make--even the simple disclosure of financial information--will require enormous cultural changes for Asians.

At the same time, the Asian countries will be under continuing pressure from global financial markets to toe the line on their policies or face new assaults on their currencies and stock prices--leading to the same kind of market free-fall that ultimately forced Suharto to bow to IMF demands.

As a result, Jeffrey E. Garten, an international economics expert now dean of the Yale School of Management, predicts that while Suharto’s turnaround may calm the financial markets temporarily, the region is likely to continue encountering “periods of market calm alternating with periods of despair.”

Indeed, economic strategist Alan K. Stoga points out that for all Suharto’s assertions that he will follow the IMF prescriptions this time, the currency markets still are skeptical. Indonesia’s currency, the rupiah, rose briefly after Thursday’s accord, then fell again; Indonesian stocks plunged sharply.

“Whether this fix will be enough to stem the tide is not clear,” Stoga said. There is no question that the diplomatic arm-twisting here this week was needed. U.S. and other Western officials justly feared that if Indonesia’s financial turmoil were allowed to go unchecked it would risk sparking new waves of assaults on other Asian markets.

It also might have encouraged other Asian governments to follow Suharto’s lead in flouting IMF demands for reform. Within weeks, the economic restructuring that Western officials had painstakingly persuaded Asian leaders to put into place might well have unraveled.

What this week’s effort did was dampen both of those risks and put Indonesia back on track--this time with an IMF economic restructuring plan that contains fewer potential loopholes. It also prodded Suharto into staking some of his own future on the success of the reforms.

But there still are serious questions about how well or how quickly the Asian countries will recover. While most have begun putting at least some of the reforms in place, the delay already has cost them dearly in terms of lost wealth in their currency and stock markets.

And the economic pain--the bankruptcies and unemployment that economists say are likely to spread quickly once these policies are fully in place--has barely begun. When it comes, it is almost certain to spark a political backlash that can only make matters worse.

In Indonesia’s case, there also is the very real problem of succession: Who will replace Suharto if he dies or is forced to step down? Although IMF officials skirted such talk in their public statements, the issue hung heavily over all their discussions with the Indonesian leader.

“These countries aren’t growing out of the slump yet--they still are retrenching to adjust to the situation,” Gregory B. Fager, Asian expert at the Institute of International Finance, an organization of global banks, said of the troubled Asian economies.

Moreover, for all the IMF efforts, the Western powers have little real idea how to speed the Asian countries’ recoveries. Critics already have begun attacking the IMF for insisting on reforms that are ill-suited and sometimes backfire.

But at the same time, most analysts agree that the fund has been learning as it goes along--and improving its prescriptions. The policy changes that it recommended for Indonesia, for example, were aimed much more at restoring market confidence than the ones it set down for Thailand. And IMF supporters argue credibly that the situation in any of these countries would be far worse if the fund were not involved. The governments would be left to the region’s financial markets, which would wreak more havoc than the IMF ever has--without providing emergency loans.

Further, Stoga complains that, despite the success of the U.S. mission here this week, the industrial nations still do not have a strategy for handling the Asian crisis. Indeed, most only started to be interested when the Indonesian crisis flared.

“Is it just going to be . . . [that] the gang races around from disaster to disaster, or is the administration eventually going to develop some broad-ranging action plan?” Stoga asked. “Where is the strategy--and where are the resources--for containing this problem?”

U.S. officials have hinted that Treasury Secretary Robert E. Rubin is considering calling a meeting of finance ministers sometime this spring to hammer out new ways of addressing the Asian dilemma, but so far, they concede, he has no major proposals worked out.

Perhaps the major lesson of the Indonesian experience is that policymakers no longer have much leeway to resolve such problems. As soon as markets latch onto one, they buffet the country’s currency and stock markets relentlessly--a situation that was almost unheard of before globalization.

The discipline of the markets can help keep errant governments in line. Not only Indonesia, but South Korea and Thailand undoubtedly have moved more quickly than they might have otherwise because the losses their countries were sustaining in the markets left them with no other choice.

The Asians, who long ago jumped on the globalization bandwagon as a way to rapidly achieve prosperity, are particularly vulnerable to the whims and wills of the markets. By contrast, Fager recalls, in the Latin American debt crisis of the early 1980s, governments could put off their response for months.

Fager suggests that becoming aware of such prospects may force governments of financially troubled countries to move more quickly in future emergencies and prevent them from straying too far when their own programs begin to lag.

“You don’t really have a choice,” he said. “The markets are imposing some fairly swift, fairly large corrections. If these countries thumb their noses at the IMF or ignore the market’s signal, they will suffer. They really are hostages to the markets.”

As a result, while this week’s events in Indonesia may have been a turning-point, they are only a first step.

* MORE COVERAGE: Influential Deputy Treasury Secretary Lawrence Summers heads the U.S. mission to Indonesia. A1

China outlines bold steps to avoid a financial crisis. D3