Doug Bandow, a nationally syndicated columnist, is a senior fellow at the Cato Institute and the author and editor of several books, including Tripwire: Korea and U.S. Foreign Policy in a Changed World.
It was too good to last. For several weeks Washington stayed aloof from the economic problems recently besetting Southeast Asia. Officials who normally intervene at the drop of a stock market were surprisingly restrained, seemingly allowing countries like Indonesia and Thailand to bear the consequences of their own economic mistakes.
But then Washington announced its backing for a $33 billion bailout of Indonesia led by the International Monetary Fund (IMF). The United States will indirectly provide much of those funds through its support for the IMF and allied institutions. The administration also unilaterally committed $3 billion in backup credit through the Exchange Stabilization Fund. Explained Treasury Secretary Robert Rubin: “Financial stability around the world is critical to the national security and economic interests of the United States.”
Well, yes, but the financial stability of every nation around the globe? The United States bailed out Mexico three years ago; the reason, explained the administration, was that Mexico was unique. Its economy was intimately tied to that of America—the two nations had only recently inked the NAFTA trade accord—and refugees might flood across the border if prosperity was not restored. America’s southern neighbor could not be allowed to fail.
The argument was never convincing—the slump in an economy a tenth the size of America’s in no way threatened U.S. prosperity—but at least the contention had some surface plausibility. And there was only one Mexico. No other developing state could make a similar claim to U.S. aid.
Then along came Indonesia. Jakarta has been liberalizing, but its economy remains bedeviled by inefficient monopolies, insolvent banks, harmful trade barriers, wasteful food subsidies, and political favoritism. Being a relative, or married to a relative, of President Suharto is the surest way to wealth. “The Suharto crowd,” notes Holman Jenkins of the Wall Street Journal, “has laid its hand on every good thing the country has to offer, making themselves impossibly rich and, also, just impossible.” Indeed, Indonesia is a prime example of what National Review’s Richard Brookhiser was referring to when he observed that “Asian capitalism, to the degree that it is different from plain old capitalism, is weaker, bleeding money to the politically connected, cushioning the powerful from their business blunders.”
Thus, the Suharto government has no one to blame but itself for its problems. The collapse of Indonesia’s currency and stock market forced the regime to inaugurate serious economic reform. The resulting “structural reforms are more important than the size of the [aid] package,” observed Indonesian business analyst Pablo Zuanic.
Notably, the changes were necessitated by Indonesia’s problems, not purchased by the promise of Western loans. Jakarta acted because it had to act.
Unfortunately, the bailout package will reduce the Suharto government’s incentive to reform by relieving the pain of financial failure. Warns economist Mari Pangestu, “There are still some untouchables among banks and their customers, and you can’t do anything with the untouchables.” The regime certainly won’t do anything about them—particularly the boondoggle aerospace and auto programs—unless forced to do so. When the government shut down 16 insolvent banks, Bambang Trihatmodjo, a son of President Suharto, warned threateningly: “I see it as an effort to sully our family name in order to indirectly topple my father, so that father won’t be chosen as president again” later this year.
Yet today Indonesia is likely to do only the minimum necessary to receive aid. For a time it maneuvered to avoid any conditionality, attempting to arrange loans from Malaysia and Singapore rather than the IMF. Although that strategy failed, were Jakarta simply left to its own devices, it would have to adopt all of the reforms necessary to recondition its economy and reassure foreign investors, who tend to be more careful with their own cash than are international aid bureaucrats with tax monies from industrialized states.
Now that Washington has intervened to prop up a country with only a small economic connection to America (Indonesia, the Philippines, and Thailand collectively account for less than three percent of U.S. exports), what nation cannot expect help? One administration official told the New York Times: “We can’t step into every economic mess.” But what standard says yes to Indonesia and no to other nations suffering severe financial distress? On a single day last fall the Wall Street Journal ran articles with the following headlines: “South Korea Economy Feels the Pressure,” “Russia’s Finances Worsen, Imperiling Large IMF Loan,” “Mexico Expects to Withstand Turmoil,” and “After a Bad Week, Brazilians Wonder What Comes Next.” Shortly thereafter Seoul requested an even bigger bailout than that received by Indonesia. Estimates of bad bank loans in Southeast Asia range upwards of $73 billion, or 15 percent of outstanding credit. Economists forecast lower growth throughout Latin America. How stable will the U.S. economy be if Washington continually underwrites economic failure around the globe?
Moreover, the administration’s proclivity to bail out the profligate creates a danger of what economists call “moral hazard.” The expectation of a subsidy encourages people to behave irresponsibly, as did many owners of federally insured savings and loans. International aid has similar effects. Warns economist Allan Meltzer, “banks and financial institutions can now act safe in the knowledge that the IMF will provide a safety net to protect them from some, or even most, of their losses.”
Of course, if U.S. taxpayers are lucky, Indonesia and South Korea won’t need their money, and if they do, like Mexico they will repay their loans. But even such a best case won’t be costless, since credit isn’t free. When Washington channels billions of dollars to a foreign kleptocracy like that in Indonesia, it diverts resources from other uses, such as investment by entrepreneurs in America. We will never know how much we have lost in order to promote “stability” in other nations.
The only other argument for American bailout is to maintain Washington’s international clout. Weirdly, some Southeast Asians acted like a woman scorned after the United States failed to jump in at the first sign of economic trouble. “Americans musn’t forget that the Asia-Pacific region is their largest trading partner,” argued Karim Raslan, a Malaysian political analyst. “You do not neglect a part of the world which is your largest trading partner.”
Of course, the fact that American investment and trade has flooded the region suggests that the United States is not being neglectful. But if the United States has to bail out every improvident nation to demonstrate “leadership,” then that leadership isn’t worth very much. After all, if spending 50 years defending most of the globe, funding every international aid organization, and promoting free international trade doesn’t demonstrate American concern, nothing will. In fact, the Southeast Asians were just jealous that—at least until the Indonesian aid package—they hadn’t benefited from the same subsidies as had Mexico.
And a loss of influence could be beneficial. Some Southeast Asians have been muttering that Washington’s supposed lack of interest will spill over into the security field. Says Juwono Sudharsono, deputy governor of Indonesia’s National Defence Institute: “There’s a sense that it’s going to be a much more Asia-centric picture in the security field.” Which, given the collapse of hegemonic communism and the rise of allied powers like South Korea and Japan, makes sense. Washington no longer need defend everyone from everyone.
Unfortunately, Uncle Sam is addicted to wasting taxpayers’ money. Economy-minded legislators should block further bailouts of individual nations. Lawmakers also need to terminate the executive’s ability to misuse the Exchange Stabilization Fund, originally created in 1934 to support the value of the dollar, in cases like this. Otherwise Washington will find more irresponsible foreign debtors to bail out.