CRS Report for Congress
Received through the CRS Web
Asian Financial Crisis: An Analysis of U.S.
Foreign Policy Interests and Options
Updated April 23, 1998
Richard P. Cronin
Specialist in Asian Affairs
Foreign Affairs and National Defense Division
Congressional Research Service ˜ The Library of Congress
The sharp fall in the currencies and stock markets of a number of East Asian economies since
July 1997 has the potential to damage a range of U.S. regional and other foreign policy
interests, in addition to the expected detrimental effects on U.S. economic growth and the trade
deficit. The principal focus of this report is on the foreign policy ramifications of the Asian
financial crisis and U.S. options for addressing them. Other CRS products address the
economic situation in the affected countries and impact on the U.S. economy, specific issues
concerning the IMF programs, and the proposed IMF quota increase and New Arrangements
to Borrow (NAB.) This report tracks and analyzes the efforts of the most seriously affected
Asian countries to deal with their economic and financial problems, and their interaction with
the International Monetary Fund (IMF), the United States, and other major sources of
financial support and policy advice. It also addresses the implications of the crisis for such
U.S. interests as regional stability and the prevention of conflict, trade liberalization, and U.S.
regional and global leadership, and discusses the principal factors that could influence the
duration and severity of the crisis. A final section considers options for Congress in the
context of various criticisms of the IMF’s stabilization programs and the operations of the
Fund itself. The report also includes a discussion of the pending FY1998 supplemental
appropriations request for the IMF’s New Arrangements to Borrow (NAB) and quota
increase, as addressed in H.R. 3114 (authorization), H.R. 3579 (Senate-passed
appropriations), and H.R. 3580 (House-reported appropriations.) The report will be updated
in response to major developments or the accumulation of lesser developments that materially
affect the analysis.
Asian Financial Crisis: Analysis of U.S. Foreign Policy
Interests and Options
The sharp fall in the currencies and stock markets of a number of East Asian
economies since July 1997 has the potential to damage U.S. regional and other
foreign policy interests, in addition to the expected detrimental effects on the U.S.
economy, including slower growth, falling exports, and a rising trade deficit. As of
mid-April 1998, the currencies of the most affected Asian countries appeared to have
stabilized at about 60%-70% of their mid-1997 values against the U.S. dollar, with
the exception of the Indonesian rupiah, which continues to hover at about 25%-35%
of its pre-crisis value. Although some observers also see the crisis bringing potential
benefits in the form of economic reforms and pressures for more democratization,
even the most optimistic analysts agree that the process will a long term one, at best.
One of the most important non-economic impacts on U.S. interests could be a
rise of political instability in countries whose leaders have largely based their
legitimacy on promoting rapid economic growth and an expanding economic “pie.”
If growth continues to decelerate, existing social class, regional, ethnic, and religious
fissures may widen in a number of countries. These developments may be
exacerbated by austerity and economic reforms required by the International
Monetary Fund (IMF) in return for financial rescue packages, leading to a nationalist
backlash against economic globalization as well as a rise in anti-American feeling.
Alternatively, some analysts express hope that the crisis may provide an opportunity
for “creative destruction,” i.e., the adoption of much needed structural reforms,
including greater accountability and transparency in banking systems, and more open
markets. Most, however, agree that economic distress in a number of countries will
cause at least temporary setbacks for regional trade liberalization.
While the crisis does not appear to pose direct risks to U.S. regional security
interests, a prolonged economic decline could fuel nationalism, undermine regional
cooperation, and foster confrontation over long-standing territorial and other
disputes. More than half of Persian Gulf oil shipments pass through key Southeast
Asian straits and the disputed Spratly Islands, and the region is also a major oil and
gas exporter in its own right. South Korea’s economic problems could significantly
complicate U.S. efforts to resolve Korean Peninsula issues. Some also see the crisis
working in the longer term to enhance China’s status and influence.
Congress has addressed the issue primarily through hearings and a pending
FY1998 supplemental appropriations request for new IMF borrowing authority and
a quota increase, totaling $17.9 billion. Members tend to be divided between those
who emphasize the importance of containing the crisis and using the IMF’s leverage
to promote economic reforms and market opening, and those seek to make the
availability of U.S. funds contingent on the adoption of specific reforms, on the part
of both the borrowing countries and the IMF itself. As of early April 1998, the most
restrictive of two supplemental appropriations bills — that reported to the House —
contains limitations on the release of funds for the IMF that the Administration views
as unworkable. The IMF funding measure may also become burdened by an antiabortion amendment that the Administration says will lead to a veto.
Background to the Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consequences of the Freer Flow of Capital . . . . . . . . . . . . . . . . . . . . . . . .
Crisis Partially Made in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of Competition from China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Scale and Scope of the Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Continuing Uncertainty and Instability in Indonesia . . . . . . . . . . . . . . 6
South Korean Currency Collapse and Subsequent Stabilization . . . . . . 9
Japan On the Edge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Implications for U.S. Regional and Foreign Policy Interests . . . . . . . . . . . . . . .
U.S. Interests in Regional Stability and Democratization . . . . . . . . . . . . .
Malaysia’s Social Compact Potentially at Risk . . . . . . . . . . . . . . . . .
Potential Accelerated Succession Crisis in Indonesia . . . . . . . . . . . .
Politically Volatile Setback to Thailand’s Aspirations . . . . . . . . . . . .
Ongoing Uncertainty in the Philippines . . . . . . . . . . . . . . . . . . . . . . .
Potential for Advancing Democratization . . . . . . . . . . . . . . . . . . . . .
Implications for Regional Trade Liberalization . . . . . . . . . . . . . . . . . . . . .
Implications for Regional Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Implications for U.S. Influence vis-a-vis Japan . . . . . . . . . . . . . . . . . . . . .
Factors Influencing the Duration and Severity of the Crisis . . . . . . . . . . . . . . . 24
The Responsiveness of Affected Asian Governments to the Need for Structural
Reform and Greater Financial System Transparency . . . . . . . . . . . . 24
Japan’s Success in Addressing its Economic Problems . . . . . . . . . . . . . . . 25
Whether the Crisis Spreads to China . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
The Effectiveness of U.S. Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Implications and Options for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
FY1998 Supplemental Appropriations Request . . . . . . . . . . . . . . . . . . . . 29
Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Other Executive Branch and Congressional Options . . . . . . . . . . . . . . . . . 34
Executive and Congressional “Gaiatsu” Directed At Influencing Japan’s
Economic Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Support for New Asia-Pacific Economic Cooperation Mechanisms and/or
Significant Changes in the IMF . . . . . . . . . . . . . . . . . . . . . . . . . 35
Bilateral Economic Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Asian Financial Crisis: An Analysis of U.S.
Foreign Policy Interests and Options
Background to the Crisis
The Asian financial crisis began last July when foreign bankers, investors,
currency speculators, and market analysts lost confidence in Thailand’s ability to cope
with a deteriorating balance of
payments situation and a growing
international debt that had reached
50 % of Gross Domestic Product
(GDP.) After depleting its hard
currency reserves to counter
speculative attacks on the baht,
which had been pegged to the U.S.
dollar, the Thai government had
little choice but to let the currency
find its own level. The resultant
plunge in the baht set off a wave of
currency devaluations that soon
swept through Indonesia, Malaysia,
and the Philippines, and to a lesser
On August 20, 1997, Thailand
entered into an agreement with the
International Monetary Fund (IMF)
for an emergency stand-by credit of about $3.9 billion under the Fund’s Emergency
Financing Mechanism in exchange for the adoption of stringent fiscal austerity and a
range of structural reforms, starting with the financial sector. Additional loans from
the World Bank and the Asian Development Bank, and credits from Japan,Australia,
China, Hong Kong, Singapore, and other Asian trading partners boosted the total
package to as much as $17.2 billion. The United States initially treated the Thai
problem as primarily a regional concern and decided not to participate directly.1
Paul Blustein, Thailand Seeks IMF Bailout to Shore Up Its Financial System.
Washington Post, July 19, 1997: A11; Michael Vatikiotis, Pacific Divide. Far Eastern
Economic Review, Nov. 6, 1997: 14-16; CRS Report 97-1021, The 1997-1998 Asian
The sharp fall of South Korea's currency in October 1997 set off a second wave
of devaluations in East Asia, including the free fall of the Indonesian rupiah, which
initially had remained relatively stable. South Korea and Indonesia joined Thailand
in seeking assistance from the IMF and back-up financing from major economic
partners, including Japan, the United States, and Singapore.
In the face of mounting bankruptcies on the part of companies and financial
institutions in Southeast Asia and South Korea, and alarming disclosures about the
extent of private sector short-term foreign borrowing, foreign investors dumped
regional stocks and foreign lenders stopped rolling over their short-term loans.
Companies and individuals throughout East Asia rushed to exchange their local
currency for dollars to cover foreign debts and protect their savings. The unchecked
decline of Asian currencies and asset values compounded the crisis by effectively
multiplying the burden of foreign debt service obligations.
By mid-December, the chain reaction of collapsing currency and stock prices in
Asia appeared to be on the brink of spreading to the broader international financial
system. In late December and early January, however, the risk of contagion appeared
to abate — for the time being at least — as the result of an accelerated transfer of $10
billion to South Korea from the IMF, the United States, Japan, and other sources, and
a tentative agreement by major western and Japanese banks to roll-over some of the
short-term loans to South Korean companies that were at risk of default.
Economists and financial analysts differ somewhat over the exact causes of the
collapse of currency and stock values and the likely severity and length of the setback
for East Asia’s much vaunted economic dynamism. While each economy’s situation
is distinct, most explanations for the crisis center around a combination of factors, the
most important being (1) an over-reliance on short term foreign borrowing by
business enterprises and banks; (2) over-investment in real estate; (3) inadequate
supervision of financial institutions; (4) politically influenced allocations of credit to
unsound companies; and (4) declining terms of trade for countries whose currencies
have been pegged closely to the U.S. dollar, which has been strengthening against the
Japanese yen during the past year.2
Unlike past crises affecting Mexico and Latin American countries, the Asian
crisis was not the result of runaway government spending or unmanageable public
debt, but primarily one involving the private sector. Government complicity lay
largely in policies that encouraged the allocation of bank credit to politically favored
companies and other variations of state-centered “crony capitalism,” and the failure
to adequately regulate the financial sector.
Financial Crisis, by Dick K. Nanto. Updated March 6, 1998:7.
For more details, see CRS Report No. 97-1021 E., The 1997-98 Asian Financial Crisis
[by Dick K. Nanto]. Updated March 6, 1998. p. 16-31.
Consequences of the Freer Flow of Capital
Many of the excesses on the part of Asian banks, finance companies,
corporations, and governments would not have been possible except for the
comparatively recent globalization of capital markets. By one estimate, 90% of
international transactions were accounted for by trade before 1970, and only 10% by
capital flows. Today, despite a vast increase in global trade, that ratio has been
reversed, with 90% of transactions accounted for by financial flows not directly
related to trade in goods and services.3 Most of these flows have taken the form of
highly volatile portfolio (stocks and bonds) investment and short-term loans.
Credit is a vital lubricant of every modern economy and companies everywhere
gain leverage by using borrowed funds to finance investments in productive assets.
In East Asia in recent years, however, businesses, banks, and finance companies
unwisely piled up short-term foreign debt on the unfounded assumption of neverending growth and over-confidence in the ability of their central banks to maintain
stable exchange rates. This phenomenon was facilitated during the 1990s by the
liberalization of previous controls on foreign exchange transactions and private
international borrowing in most Asian countries, and by the existence of a significant
differential between the relatively low interest rates charged by U.S., European, and
Japanese lenders, and the comparatively high domestic interest rates for local currency
borrowing. The interest rate gap encouraged Asian banks and finance companies to
borrow low cost foreign currency and re-lend the funds in local currency at
comparatively high rates of interest, thereby profiting from the spread, but exposing
themselves to exchange rate risk.
In general, financial sector liberalization in Asia was not accompanied by the
creation or strengthening of domestic institutions to monitor and regulate banking
systems. More often than not, the vast inflows of investor funds and bank loans from
Japan, Europe and the United States totaling hundreds of billions of U.S. dollars were
plowed into speculative property development and excess manufacturing capacity.
When profit expectations were undermined by adverse developments such as a glut
of office space and hotel rooms, growing competition from lower cost production in
China, or the collapse of computer chip prices, business bankruptcies soared and
foreign lenders and investors withdrew their funds.4
The foreign debt problem was aggravated in several countries by a mountain of
non-performing domestic debt. In magnitude, the non-performing Asian domestic
debt has been estimated by David Hale, Chief Global Economist at Zurich Kemper
Investments, in Chicago, at 20% to 25% of outstanding bank loans in Thailand, 10%
to 20% in South Korea, and 5% to 10 % in other regional countries, not counting
James A. Kelly, East Asia’s Rolling Crises: Worries for the Year of the Tiger. Center
for Strategic and International Studies (CSIS) Pacific Forum, PacNet #1, Jan. 2, 1998.
In testimony before the House Banking and Financial Services Committee on
November 13, Federal Reserve Chairman Alan Greenspan noted with understatement that “In
retrospect, it is clear that more investment monies flowed into these economies than could be
profitably employed at modest risk.” Testimony before the House Banking and Financial
Services Committee, Nov. 13, 1997.
Japan. Chinese banks also suffer from bad-loan problems in the range of 20% or
more of total lending, mostly owed by money-losing state-owned enterprises (SOEs),
but China’s currency is not readily convertible, and most of its foreign debt is longterm. Despite recent adverse trends, China still has a substantial current account
surplus and sizeable hard currency reserves.5
Crisis Partially Made in Japan
Taking a long view, some analysts see the current crisis as the outcome of a
failure by Japan to effectively address the root cause of its own economic and
financial problems. In a sense, it is argued, an economic “bubble” that built up in
Japan in the late 1980s and burst in the early 1990s, reemerged in the rest of Asia as
a result of the failure of the Japanese Ministry of Finance (MOF) and the Bank of
Japan (BOJ) to take the necessary steps to liquidate hundreds of billions of dollars
worth of non-performing loans. Rather than forcing Japanese banks to sell assets to
cover their losses or take the politically unpalatable step of using public funds for a
financial system bailout, as the United States did to deal with its savings and loan
crisis of the 1980s, the MOF in effect made it possible for banks to disguise the
decline of their assets and to continue to make profitable but risky loans to the fast
growing Asian economies. By one account, Japanese lending to Asia alone rose from
$40 billion in 1994 to $265 billion in 1997, much of it for speculative property
investment and other doubtful purposes.6
Similarly, some analysts also judge that the Japanese finance ministry has
aggravated the problem with an expansionary monetary policy that generally has kept
the yen undervalued and exports and resultant trade surpluses at a high level. In
particular, it is argued, the decline in the official discount rate from 6% in 1991, to
0.5% at present, made it compellingly attractive to Japanese banks in effect to recycle
the country’s export-generated surplus dollars to the fast growing Asian economies.7
Other analysts find the Japanese connection circumstantial at best, and note that
European and American banks were also large lenders to Asia.8
The problems of Southeast Asian countries also were exacerbated by economic
growth differentials between the United States and Japan, which had contributed to
a year-long appreciation of the dollar against the yen. Since Southeast Asian
currencies were “pegged” within a narrow band to a basket of currencies dominated
by the dollar, their exports became comparatively more expensive. By the summer
of 1997, foreign investors began to have doubts about the ability of Thailand and
other Southeast Asian countries to repay their loans and maintain the existing value
of their currencies. These concerns sparked a flight from the Thai baht and other
Estimate by Brookings Institution Fellow, Nicholas R. Lardy.
Ron Chernow, Grim Reckoning in Japan — and Beyond. Op Ed, New York Times,
Nov. 17, 1997: A29.
Martin Feldstein, Japan’s Folly Drags Asia Down. 6 Wallstreet (online service) , Nov.
Douglas Ostrom, Japan and the Asian Economic Crisis: Part of the Solution or Part of
the Problem. Japan Economic Institute, JEI Report, No. 8A, Feb. 27, 1998: 3-6.
Southeast Asian currencies, and a reluctance on the part of foreign banks to roll over
loans or advance new credit to governments and private industries in economies that
were increasingly strapped for foreign exchange.
Impact of Competition from China
Competition from China also played a significant role in the weakening export
growth of the newly industrializing Southeast Asian countries. By about 1992 China
had become the hottest target for Japanese and other foreign investors due to its
comparatively high skilled, low cost labor force, and its extensive investments in
economic infrastructure. China’s rising attractiveness to foreign manufacturing
investment pitted it in direct competition with other Asian producers for the same
export markets. A devaluation of China’s currency, the renminbi, in 1994 directly
undercut the exports of the newly industrialized countries of Southeast Asia,
especially Thailand, Malaysia and Indonesia, putting steadily increasing pressure on
their balance of payments and foreign exchange reserves.
Scale and Scope of the Crisis
The sharp decline in currency and stock prices has affected almost every Asian
country, but thus far has fallen hardest on South Korea and Southeast Asia’s newly
industrializing economies (NIEs) — Thailand, Indonesia, Malaysia and the
Philippines. South Korea’s brush with financial collapse in mid-December sent a new
round of shock waves and currency devaluations through Southeast Asia. By the end
of 1997, the currencies of South Korea, Thailand, and Indonesia had lost half of their
value against the dollar as measured against June 30, 1997 exchange rates, while the
currencies of the Philippines and Malaysia had dropped by about 35%. Most
currencies rebounded somewhat in the first three months of 1998, stabilizing at about
60%-70% of their pre-crisis values, except for the Indonesian rupiah. The Indonesian
currency has continued to hover erratically at about 25%-35% of its former value
amidst growing political turmoil and resistance by the Suharto government to the
IMF's reform program.
Asian Currency Changes Against the U.S. Dollar
Percent Change, June 27,1997 -April 13, 1998
Source: Pacfic Exchange Rate Service
Currencies in Asian
reserves of hard currency
and/or better regulated
suffered significantly less,
but their economies are
nonetheless under stress
from declining rates of
growth, rising bankruptcies,
and depressed real estate
and equity markets. Hong
successfully defended its
dollar against speculative attack, but the necessary rise of interest rates has caused
a sharp fall in property and stock prices. Taiwan, which has strong exports and large
reserves of hard currency, has seen its currency drop by about 15%-16%, while
Singapore, with strong regulation of banks and property investment, has suffered a
10% currency decline as of mid-April 1998.
Continuing Uncertainty and Instability in Indonesia. Since early 1998
Indonesia has emerged as the principal locus of international concern. As of early
April, the Suharto government had concluded its third successive agreement with the
IMF and had only begun to address the two most critical challenges — stabilizing the
banking system by closing unsound banks and strengthening sound ones, and
promoting an orderly rescheduling or write-off of some $74 billion in private debt.
The confidence of both foreign and domestic lenders and investors has been
severely shaken by a rearguard action by President Suharto to fend off many of the
conditions that the IMF attached to its $43 billion rescue package, especially
macroeconomic policy targets that were to be achieved largely by suspending or
terminating major state-dominated infrastructure projects, and other conditionality
aimed at curtailing domestic trade and import monopolies and cartels identified with
the President's family members and friends, and eliminating costly subsidies of basic
In effect, the Suharto government has confronted the Fund and its main
supporters, the United States, the European Union and Japan, with a difficult choice
between simply providing liquidity to Indonesia, with the risk that the funds would fail
to suffice for want of necessary reforms, or holding out for strict adherence to the
agreed-upon reforms at the risk of an escalating political and domestic economic crisis
that could spread to the rest of Southeast Asia. As of mid-April 1998, the IMF had
largely stood its ground, but with certain concessions aimed at alleviating the effects
of severe problems of unemployment, soaring inflation, and serious food shortages.
Long time Indonesia hands see the Indonesian president's recalcitrance as not just
a matter of personal stubbornness or excessive nationalism, though both of these are
factors. It has also been seen as stemming from unrealistic expectations that the
original agreement with the IMF would lead to the immediate restoration of foreign
confidence, as well as a realistic appraisal that the reforms demanded by the Fund and
major economic partners attacked the very basis of the regime's political support.
Once the President realized that simply agreeing to the IMF’s program would not
restore confidence in the rupiah, the agreement with the IMF seemed like a bad
The battle with the IMF was joined with President Suharto's 1997-1998 draft
budget, which he unveiled in early January 1998. The plan substantially exceeded the
IMF's current account and budget surplus targets, even with unrealistic economic
assumptions that it used, and failed to reduce fuel and certain food subsidies
This is the gist of arguments made by a number of Indonesian experts at two round
table discussions at the annual meeting of the Association for Asian Studies (AAS) in
Washington on March 27 and 28, 1998.
(excluding diesel oil and rice, which had already been exempted.) Instead of
austerity, the budget provided for a 32% increase in spending, including funding for
12 major infrastructure projects that the government had earlier agreed to cancel or
President Suharto appeared to give way in mid-January after a showdown in
Jakarta with the IMF's Deputy Managing Director, Stanley Fischer, Deputy Treasury
Secretary Lawrence H. Summers, and other IMF and U.S. officials, and phone calls
from President Clinton and other world leaders. Suharto and IMF Managing Director
Michel Camdessus signed a revised letter of intent on January 15, 1998. The
Indonesian president reluctantly amended the draft budget to bring it in line with the
revised IMF program, and agreed once again to cut off funding for 12 infrastructure
projects associated with his family and friends.
The revised Indonesian program contained a number of concessions to criticisms
that the IMF's original program was too severe. It allowed the government to run a
one-percent central budget deficit instead of the one-percent surplus required in the
original letter of intent. It also put more emphasis on accelerating structural reforms
and strengthening the banking system, and allowed a more gradual phasing out of
fuel and electricity subsidies, with the exception of kerosene and diesel fuel subsidies,
which were already exempted.
The revised program allowed not only the
maintenance of essential social safety net programs, already permitted in the first
program, but also the expansion of community-based rural work programs in areas
of severe drought, and other measures to promote a cost-effective expansion of rural
infrastructure and employment, and expanded education and medical care.10
Despite the IMF's concessions, Suharto again threw down the gauntlet by
proposing a highly controversial currency board system and firing his well-regarded,
American-educated, central bank governor, who reportedly opposed the plan. The
currency board plan would have tried to peg the rupiah at 5,500 to the dollar — to
be maintained by central bank currency exchange transactions and a rigid requirement
that the money supply expand and contract in proportion to hard currency reserves.
The reported brainchild of Johns Hopkins economist Steve Hanke, a consultant to the
Indonesian president, the proposal drew immediate criticism from nearly all quarters
as wholly unworkable given the current parlous state of Indonesia's hard currency
reserves, and potentially disastrous to the economy.11
Suharto also disturbed foreign and many domestic analysts by selecting Research
and Technology Minister, B. J. Habibie, a long-time confidant who is sometimes
described as the president's "seventh child,"as his vice-presidential running mate.
Habibie has been the moving force behind many of the government’s more visionary
industrial projects, such as the expensive effort to develop a national aircraft industry,
International Monetary Fund, Statement by the Managing Director on the IMF
Program with Indonesia. News Brief No. 98/2, Jan. 15, 1995
David E. Sanger, Risking I.M.F. Aid, Suharto Dismisses Central Banker. New York
Times, Feb. 18, 1998: A1, D5.
and he reportedly holds highly unorthodox economic views that tend to reinforce the
president’s own drift towards economic nationalism.12
The test of wills between the IMF and Suharto intensified in early March during
the 11-day session of the a special expanded parliamentary body that meets every five
years to elect a president. Although there was not the slightest doubt that the largely
hand-picked People's Consultative Assembly would reelect him, the President seemed
determined to bolster his image and restore his prestige by appearing to stand up to
foreign pressure. Judging that the Indonesian government was moving too slowly to
implement reforms, the IMF decided on March 6 to delay until at least April the
disbursement of a pending $ 3 billion, second tranche of its credit program, originally
scheduled for March 15. Reportedly, the IMF had decided to await the President's
reelection and designation of a new cabinet before reengaging with him on the issues
The People's Consultative Assembly duly reelected President Suharto to his
seventh term on March 11, amidst non-violent anti-government demonstrations at the
main universities in Jakarta, Bandung, and Yogyakarta, and spreading food riots. The
President reportedly demonstrated his customary purposeful and confident demeanor
during his acceptance speech, but struck a somber note, telling Indonesians that they
would never again enjoy the rapid growth that had taken place during the past 25
As if to underscore his disdain for both domestic and foreign critics, Suharto
named an ethnic Chinese golfing partner and head of the timber cartel, Mohammad
"Bob" Hasan, as trade minister, and made his daughter "Tutut" (Siti Hardiyanti
Rukmana) as social affairs minister. The appointment of a close confidant Faud
Bawazier as finance minister, replacing a well-regarded technocrat, reinforced the
impression that the president was gearing up for further confrontation wills with the
IMF and foreign creditors.15
In early April the Indonesian government and the IMF came to terms on a
revised program. Reportedly, the plan allows Indonesia to run a higher budget deficit
than previously planned, in order to cover the cost of socially stabilizing food and fuel
subsidies, but it also requires extraordinarily high interest rates in order to bolster the
value of the rupiah. According to press accounts, the Indonesian government has
agreed to move more quickly to restructure the banking system, including the closure
of some banks controlled by his family and close associates, and to enter into talks
with foreign banks regarding the rescheduling of the private sector debt. Unlike past
John McBeth, Soaring Ambition. Far Eastern Economic Review, Jan. 29, 1998: 14-
Sander Thoenes, Rupiah Falls As IMF Delays $3 bn Credits for Indonesia. Financial
Times, March 6, 1998: 22.
Seth Mydans, Tighten Belts, Suharto Tells His People, It's All Over. New York Times,
March 12, 1998: A8.
Indonesia's New Cabinet May Deepen IMF Rift. Wall Street Journal, March 9, 1998:
agreements, the new accord provides for the release of IMF stabilization funds in
small monthly increments, based on the fulfilment of commitments by the Indonesian
South Korean Currency Collapse and Subsequent Stabilization. South
Korea, the most industrialized among the affected countries, has been battered by
numerous bankruptcies among major banks and industrial conglomerates (chaebol)
and a devastating drop in its currency and stock market. In late December the Korea
Development Bank abruptly withdrew a $10 billion bond offering after rating services
lowered its sovereign debt to “junk bond” status,17 and concerns mounted in
international financial markets that default by South Korean companies on more than
$100 billion in short-term loans would destabilize the global financial system. Initial
installments from a multi-year, $57 billion IMF rescue package, the largest ever
organized for any country, appeared inadequate to cover South Korea’s needs.
The situation appeared to abate at the end of December as a result of a hastily
organized “Christmas present” of $10 billion in accelerated funding from the Japan
and the United States, and an agreement by major U.S., European, and Japanese
banks — reportedly orchestrated by the Clinton Administration — to roll over about
$15 billion in loans that were coming due within the next month.18 Foreign and
domestic confidence also gained a boost from the victory of opposition leader Kim
Dae Jung in mid-December elections, and his vigorous efforts to persuade the South
Korean population of the need to carry out sweeping reforms, however painful these
might be to both the chaebol and unionized workers.
As of early April 1998, South Korea still appeared on a recovery path, but
analysts have pointed to continued medium and long term challenges. At the end of
January 1998 foreign lenders agreed to reschedule $24 billion in pending short-term
loan repayments, giving the South Korean government some breathing space and
reducing the risk of default, but still leaving companies with seemingly unmanageable
short-term debt levels.19 Essentially, the rescheduling only covered about one-sixth
of South Korea foreign debt, leaving open the question of whether the country and
its companies can attract new foreign capital. Also, while the trade balance improved
dramatically during the last quarter, the gain was based on a slump in imports,
including items critical to export manufactures. Moreover, with 45% of its past
exports to similarly distressed Asian countries, the overall prospects for an exportbased recovery remained questionable. Although South Korea posted its largest ever
monthly trade surplus in March 1998 — $3.7 billion — the good news for the
country’s hard currency reserves was based on export growth of only 7% and a
David E. Sanger, After Compromises, Indonesians Reach 3rd Pact With I.M.F. New
York Times, April 8, 1998: A1, A8.
Steve Mufson, South Korea Takes Three More Punches. Washington Post, Dec. 23,
1997: C1, C2.
Paul Blustein, $10 Billion in Loans Rushed to S. Korea. Washington Post, Dec. 25,
1997: A1, A32.
Charles S. Lee, Aftershocks Rumble. Far Eastern Economic Review, Feb. 26, 1998:
decline in imports of 35.8%. Some question whether this pattern will be sustainable,
since South Korea must import many of the raw materials and components that go
into its exports.20 Private investment and economic research institutions have
predicted an absolute decline in economic output for 1998, a punishing departure
from recent growth rates averaging 8% per annum.
While his show of leadership and self-confidence impressed has both his
compatriots and foreign observers, South Korea's new president, Kim Dae Jung, still
faces a host of difficulties. On the plus side, President Kim successfully negotiated
a historic "grand national compromise" with labor unions that gave companies more
flexibility in dismissing workers in return for expanded union organizational and
political rights.21 On the negative side, the chaebol continue to resist government
efforts to reform and restructure their operations, including consolidations aimed at
promoting more specialization and greater transparency in their financial operations,
and still benefit from preferential bank lending.22
These problems notwithstanding, many South Koreans took heart from a highly
successful sale of $4 billion in government bonds in early April. Even though the
South Korean bonds are still judged as less than investment quality, actual orders
totaled $12 billion — three times what was offered. Analysts viewed the response to
the offering constituted a vote of confidence by investors in South Korea's reform
Japan On the Edge. Japan’s problem is not primarily with its currency —
which many judge has been deliberately undervalued as a result of Japanese monetary
policy since 1995 — but a massive overhang of non-performing debt in its banking
system that has kept the economy in the doldrums for most of the decade. Apart
from a short-lived growth surge in 1996, Japan has averaged less than one-percent
real GDP growth since 1991. An unofficial reestimate of the problem loan situation
by the MOF and the BOJ on December 5, 1998, indicated that the combined total of
shaky and bad loans could amount to as much as $790 billion at prevailing exchange
rates — nearly three times the long-standing official figure.24 The ministry
subsequently released an official figure, calculated on a different basis, of $575 billion.
Even these figures are doubted by private analysts due to the lax standards for
Japan Digest, April 2, 1998: 2-3.
Charles S. Lee, Kim Turns Up the Heat. Far Eastern Economic Review, Feb. 19,
Ryusuke Hashimoto, South Korean Chaebol Saying "No Deal." Nikkei Weekly, Feb.
16, 1998: 18; Stephanie Strom, Foreigners Buy Korea Stock but Not Companies. New York
Times, April 17, 1998: C1.
Kenneth N. Gilpin, Investors Snap Up Korea Bonds in a Big Vote of Confidence. New
York Times, April 9, 1998: D1, D6.
Jon Choy, Japanese Banks to Restructure, Japan Economic Institute (JEI) Report,
No. 46B, Dec. 12, 1997: 4-8.
reporting and the various ways that problem loans can be disguised by weak banks.25
The total bad loan problem is significantly larger than the U.S. savings and loan
problem both in absolute terms and as a share of GNP.
Japanese banks are the largest holders of Asian debt, both performing and nonperforming. Although some of this exposure reportedly has been reduced in the
months before the crash, Japanese banks held $83.9 billion in debt from Thailand,
Indonesia, and South Korea, the three most ailing economies, as of the end of 1996.
In all, Japanese banks had loaned $265 billion to Asia, or 40% of their total foreign
lending, as of 1996.26
Despite extraordinarily low interest rates of less than one-percent, the precarious
situation of the banking system has inhibited the ability of Japanese banks to make
new domestic loans, creating a condition popularly called kashishiburi (roughly
translates as “credit crunch.”) The squeeze has especially affected small businesses
and helped push male unemployment to the highest level (3.7%) since records were
Out of concern that a liquidity crisis would drive otherwise sound businesses to
bankruptcy, the Japanese Ministry of Finance (MOF) in late December 1997
postponed temporarily the imposition of new capital requirements that were intended
to bring Japanese banks into line with international capital adequacy standards as
established by the Bank for International Settlements. The postponement of the new
standards only applies to domestic banks, which can continue to maintain a 4%
capital/assets ratio. Banks that are active internationally still have to meet the new
8% requirement. While this move may alleviate a growing credit crunch, it further
undermines the faith of international investors in the ability of the MOF and the
political leadership to make the hard decisions that are required to deal with the
banking system mess.
During February and March 1998 the Japanese government took a number of
steps to recapitalize the banking system and protect depositors’ assets, but the
initiatives have received mixed reviews from foreign and domestic analysts and
commentators. A bill proposed initially by a ruling Liberal Democratic Party (LDP)
panel in mid-December 1997, and passed by the Diet with unusual speed on February
16, 1998, earmarks some $250 billion to recapitalize weak banks and protect
depositors’ funds. Nonetheless, many have expressed concern that Japan has not yet
dealt with the underlying causes of its banking sector problems, and that instead of
relying on the market to work through the problem, the government has greatly
Reportedly, the Ministry of Finance found it necessary to release more realistic figures
to persuade the Diet (parliament) to go along with an unpopular plan to use public funds to
bolster the banking system. Sandra Sugawara, Japan’s Lawmakers Get Stabilization, Tax Cut
Proposals. Washington Post, Jan. 13, 1998: D1, D2.
Eric Altback, The Asian Monetary Fund Proposal: A Case Study in Japanese Regional
Leadership. JEI Report, No. 47A, Dec. 19, 1997. P. 5; Appendix Table 3.
Japan Digest, March 2, 1998: 5.
increased its already strong role and shut out both would-be foreign and domestic
Implications for U.S. Regional and Foreign Policy
The Asian financial and economic crisis has implications for a range of U.S.
regional, foreign policy and international economic interests, and potentially for U.S.
regional security interests. Some argue that these are actually more significant than
the still modest domestic economic impact of the crisis.29 In a larger sense, the U.S.
response to the situation is likely to have a direct bearing on perceptions of American
leadership and U.S. standing in Asia.
U.S. Interests in Regional Stability and Democratization
The Asian economic crisis has significant potential for negative impact on
political stability in East Asia. Most Asia governments, regardless of their political
systems, have come to depend on delivering rapid economic growth as the main
underpinning of their legitimacy. For Southeast Asian governments, rapid growth
has helped find jobs for a fast growing urban population and satisfied the material
aspirations of the burgeoning and politically important middle classes, thus
maintaining an uneasy social and political stability. By one accounting, Indonesia
needs 6 % annual growth to absorb 2.7 million new entrants into the labor force every
year, whereas the economy is likely to undergo an absolute decline in 1998, with a
sharp rise in unemployment and attendant social strains.30 Predictably, food riots and
anti-Chinese demonstrations, as well as university-based anti-government protests
have steadily grown during the first three months of 1998.
For emerging democracies such as South Korea and Thailand, growth averaging
8 % per annum in recent years has generally dampened serious regional and other
socioeconomic fissures, kept a lid on labor unrest, and expanded the ranks of the
middle classes. A sharp fall from past growth rates may heighten regional and social
class tensions, and undercut democratic institutions.
Political instability need not be an inevitable consequence of the financial
meltdown, but scenarios for unrest are not difficult to imagine. In several Southeast
Asian countries, instability could take the form of retribution against Chinese ethnic
Douglas Ostrom, Tokyo Unveils Two-Part Bank Rescue Plan. JEI Report No. 1B,
Jan. 9, 1998: 1-4; _________, New Bank Program Progresses Amid Rising Criticism, ibid.,
No. 10 B, March 13, 1998: 1-3.
Teresa Wysomierski, Recalculate the IMF’s Value. Journal of Commerce, April 1,
1998: 7A. For further information on the possible impact on the U.S. economy see CRS
Report 98-284 E, U.S.-East Asian Economic Ties: Impact of the Asian Financial Crisis.
March 20, 1998 [by William H. Cooper.]
G. Bruce Knecht, Asia Shudders at “Normal” Growth. Wall Street Journal, Dec. 5,
minorities, which make up a small part of the total population, but control the vast
bulk of the wealth and commercial enterprises. Violence between the majority
population and the Chinese minority wracked Indonesia in 1965, at the cost of
hundreds of thousands of lives — mainly ethnic Chinese. Malaysia experienced
serious ethnic rioting in 1969 following a contested national election outcome, which
spilled over into Singapore, with its predominantly ethnic Chinese population, as
well. Several other potential sources of social unrest lie just beneath the surface in
the region, including the growth of Islamic fundamentalism in Malaysia and Indonesia
and widespread unemployment among high school and university graduates in the
Philippines. In addition, a number of Southeast Asian countries have experienced
uncontrolled urbanization and a growing urban-rural income gap that has provided the
potential for social conflict.31
Distress in Indonesia or in certain economically depressed parts of other
countries could also threaten regional stability and cause intraregional tensions.
Malaysia, for instance, is host to hundreds of thousands of illegal Indonesian workers.
Among these are some who claim to be political refugees, such as those from a longsimmering separatist movement among ethnic Acehnese from the island of Sumatra,
across the Straits of Malacca from the Malay peninsula. On March 26, 1998, several
hundred mainly Acehnese Indonesians rioted when Malaysian authorities carried a
mass deportation of illegal immigrants, reportedly leaving eight immigrants and a
policeman dead as a result of the confrontation.32 On April 10, eight Acehnese
immigrants entered the U.S. Embassy compound in Kuala Lumpur, Indonesia, seeking
political asylum. With the ongoing slowdown of the Malaysian economy, and the
government’s plan to expel 200,000 illegal Indonesian immigrants by August 15,33
more such clashes can be expected. Many of those expelled will manage to return
again, much in the same way as illegal immigrants who are sent back across the U.S.Mexican border, and both Malaysia and Singapore fear a tidal wave of job-seeking
boat people from Indonesia if conditions there should continue to worsen.
Malaysia’s Social Compact Potentially at Risk. Malaysia’s stability could
also be endangered because of the impact of an economic slowdown on the delicate
social balance between the indigenous Malay majority and ethnic Chinese Malaysians
who account for about 30% of the population. Severe ethnic riots in 1969 nearly tore
the country apart. Since the early 1970s, the Malaysian government has promoted
ethnic peace by carrying out an affirmative action program for the traditionally less
educated, more rural, ethnic Malay majority. The Chinese largely have accepted
Mahathir’s “New Economic Program” and their own political marginalization
because rapid economic growth has taken much of the sting out of programs that
favor the Malays. A sharp economic slowdown could intensify the competition for
jobs and government contracts, leading to rising ethnic tension. In the end, these
See analysis along these lines in a survey article, The Next Battle, Far Eastern
Economic Review (FEER), Nov. 20, 1997: 18-28.
Malaysia Riots Kill 8 Immigrants and an Officer. New York Times, March 27, 1998:
Washington Post, April 11, 1998: A10; ibid., April 12, 1998: A20.
developments could upset the country’s fragile social compact and undermine the
umbrella party status of the ruling United Malays National Organization (UMNO.)
For the time being, Malaysia’s social and political stability seems likely to remain
intact. Although the government revised its 1998 growth forecasts downward to 2%3 % in late March, one-third or less of recent levels,34 analysts rate the country’s
economic fundamentals as sound. These include a fiscal surplus, low (but rising)
inflation and low external debt, and a high savings rate. Moreover, while Prime
Minister Mahathir bin Mohamad has railed at foreign speculators for causing the
precipitous decline in Malaysia’s currency, his Deputy Prime Minister and Minister
of Finance, Anwar Ibrahim, presumably with the Prime Minister’s support, has quietly
engineered pragmatic economic policy adjustments, including an 18% cut in
government spending for FY1998, that have reassured the local business community
and international lenders.35 Some analysts worry, however, that the government is
focusing too much on shoring up politically favored businesses and giving the
appearance of normalcy, while failing to adequately to liberalize the financial sector
and strengthen the banking system.36
Potential Accelerated Succession Crisis in Indonesia. In Indonesia, the
world's fourth most populous country, the crisis has raised new questions about the
competence and stability of the government headed during the past 32 years by
President Suharto. The reelection of President Suharto on March 11 has not dispelled
the possibility of a change of leadership before the end of his seventh five-year term,
given the scale and scope of Indonesia’s problems, Suharto’s age and reported health
problems, and rising discontent with his rule. The collapse of the rupiah has led to
unusually direct criticism of the government by opposition leaders and technocrats,
and food shortages have sparked riots in three towns in the eastern part of Java, the
country’s most densely populated and most politically important island, as well as
similar outbursts in several other islands, and non-violent but unusually vocal
demonstrations by students at major universities throughout the country.
Until the economic crash, the military-backed Suharto regime generally had
received good marks from economists and development experts for maintaining
strong growth and spreading its benefits to a wide spectrum of the population. In
recent years, however, its image has frayed considerably due to high level corruption,
including financial scandals involving the president’s family, the repression of a
populist opposition party led by the daughter of Indonesia’s first post-independence
leader, and its heavy-handed suppression of the long-festering rebellion in East Timor,
a former Portuguese colony forcefully occupied by Indonesia in 1975. Many
experienced Southeast Asian scholars feel that corruption has gotten worse in recent
Sheila McNulty, Malaysia Cuts Economic Growth Forecasts. Financial Times, March
25, 1998: 8.
Chen May Yee, Malaysia Unveils More of Austerity Plan. Wall Street Journal, Dec.
9, 1997: A19.
Financial Times, March 25, 1998, op. cit.
years, and have described the state of affairs as resembling the government of
President Ferdinand Marcos, in the Philippines, in its last years.37
While many analysts have questioned President Suharto’s willingness to carry
out reforms that threaten the structure of his patronage-based government, the
political maneuvering that preceded his reelection demonstrated that at present those
who may be dissatisfied with his leadership have no viable alternative. This equation
could change, however, were the military to decide that he had become a net liability
to national cohesiveness or the institutional interests of the Army itself. The
likelihood of such a change would be greatest if the urban middle classes — who
heretofore have sided with the forces of law and order — were to identify with more
radical students and unemployed urban workers and directly protest against rising
prices and falling incomes. This scenario could become more credible if moderate
Islamic parties and leaders were able to give more structure to the opposition to
Suharto, thereby reducing middle class fears of political chaos or rampant populism.
Even without a major political upheaval, Indonesia’s small Chinese minority —
perhaps 3 % of the population — could become the scapegoat target of a violent
backlash, since most of the countries failing banks and conglomerates are Chineseowned. In early January 1998, one prominent international financial analyst, David
Hale, of Zurich Kemper Investments, in Chicago, warned of the possibility of an
“ethnic pogrom” against the Chinese minority in Indonesia if the financial crisis leads
to a political breakdown.38 Reportedly, Chinese money is already flooding into
Singapore’s real estate market out of concern that the country may experience a
replay of the 1965 period.39 This flight of Chinese capital has created an angry
reaction among the ethnic Indonesian majority, who have questioned the patriotism
of the Chinese minority. Thus far, however, there appears to be no concerted
movement against the ethnic Chinese on the part either of the regime, the military, or
the political opposition.
Finally, many observers doubt that rural villages can absorb the millions of urban
workers now without jobs, and argue that structural changes in the Indonesian
economy suggest that the growing ranks of the unemployed will become a permanent
and volatile part of the scene in Jakarta and other large cities and towns. Some
analysts recently returned from Indonesia forecast growing social and political
tensions both in rural areas, which have lost a steady flow of remittances from recent
urban migrants, and in the urban areas themselves, where the jobless are fighting for
A number of prominent U.S. and foreign scholars expressed this view at two panel
discussions at the March 26-29, 1998, annual meeting of the Association for Asian Studies
(AAS), in Washington, DC..
Paul Blustein and Sandra Sugawara, Rescue Plan for Indonesia in Jeopardy.
Washington Post, Jan. 7, 1998: A15.
Paul Blustein, U.S., IMF Assurances Not Quelling Doubts on Indonesia. Washington
Post, Jan. 14, 1998: A14.
This was the assessment of a number of scholars who participated in two discussion
Politically Volatile Setback to Thailand’s Aspirations. Successive rounds of
currency devaluations have rocked Thailand, the country in which the crisis
originated, and brought it to a political crossroads. A constitutional monarchy and
an on off-again-on-again parliamentary democracy, Thailand regained a democratic
government in mid-1992, after angry middle class citizens took to the streets and
forced the reversal of a 1991 military coup. The current crisis has suddenly
impoverished many among the emergent middle and professional classes in Thailand,
and sent urban workers back to their homes in the countryside, with few prospects for
On the positive side, the financial collapse led to the resignation of the widely
disparaged government of Prime Minister Chavalit Yongchaiyudh, which the
Economist described as having “been seen as unusually corrupt and incompetent, even
by the standards set by some of its predecessors."41 The crisis also tipped the political
balance in favor of a new constitution, the sixteenth since the establishment of a
constitutional monarchy in 1932, whose provisions aim at reducing political
corruption, increasing accountability and transparency, and establishing minimum
educational credentials for elective office. Notably, the Army kept to the background
but lent its weight to adoption of the new constitution, as did the King, who still
wields great influence. The new Prime Minister, Chuan Leekpai, leader of the
formerly opposition Democratic Party and a previous prime minister (1992-1995), has
been praised for bringing back into the administration the technocrats who had guided
Thailand’s economic takeoff during the late 1980s.
Many observers expect that the financial collapse which has devastated
Thailand’s economy will exacerbate existing fissures in the society. Potential sources
of trouble include a severe urban-rural income gap, a restive urban labor force, a
suddenly impoverished middle class, and a potential political backlash by ethnic Thais
against the minority of assimilated ethnic Chinese, who largely control the economy.
More positively, some analysts judge that the effect of crisis will fall less heavily on
the still largely subsistence rural economy, and that agricultural exports, boosted by
the currency devaluation, will partly offset the decline of other sectors.42
Overall, Thailand has received praise for making a good start on shoring up it
financial system, but doubts remain about its ability to export its way back to
economic vitality. Chuan received a boost from a state visit to Washington in early
March, during which he received a warm welcome from President Clinton and other
U.S. officials, and had an opportunity to explain his policies to the business
community. More concretely, the Clinton Administration helped ease Thailand’s fiscal
problems by agreeing to the cancellation its $250 million contractual obligation to
purchase of eight F/A-18 fighter aircraft, which will now be bought by the U.S.
panels at the AAS annual meeting in late March, 1998.
Thailand: Reaching for the Moon. The Economist, Sept. 20, 1997: 45-46.
Michael Vatikiotis and Khon Kaen, The Good Earth. FEER, Oct. 23, 1997: 20-21.
Marine Corps, and offering up to $1 billion in Export-Import Bank trade credits and
$400 million in OPIC investment insurance.43
The IMF tacitly endorsed Thailand’s efforts in delivering the third of four
quarterly installments of its $17.2 billion rescue package in late February. As in the
case of Indonesia, the Fund reportedly agreed in the latest letter of intent to relax its
previous fiscal austerity requirement in recognition of the potentially destabilizing
effects of the economic slowdown. In return to a broader commitment to
privatization the Fund agreed to allow Thailand to run a 2% budget deficit, instead
of the 1% surplus contained in the original agreement.44
Ongoing Uncertainty in the Philippines. The stability of the Philippines may
also be in doubt because of the intersection of the financial crisis with an already
uncertain political situation. President Fidel Ramos, who generally has earned good
marks for putting the Philippines on a growth path after long being regarded as the
“sick man of Asia,” cannot succeed himself under the Philippines constitution. While
Ramos’ reforms have boosted growth, they have also further widened an already large
income gap between the rich and the middle classes, on the one hand, and the large
mass of Filipinos living in deep poverty, on the other. Comparatively speaking, the
Philippines has suffered less than its neighbors, partly because it had less far to fall,
but the impact on those below the poverty line has been severe.
Because the odds-on favorite for the presidency in May 11 elections, VicePresident Joseph Estrada, espouses a populist agenda that sounds hostile to
globalization, some analysts have questioned “whether democratic politics and
globalization can coexist in a developing country like the Philippines.”45 Others have
taken encouragement from the emergence of two challengers in the field of 76
candidates, a wealthy businessman and former governor of Cebu, Emilio Osmena, and
the Mayor of Manila, Alfredo Lim, but also concern about a possible polarization of
politics along regional and linguistic lines.46
Potential for Advancing Democratization. The impact of the crisis on political
stability may not be wholly negative. Some analysts project that the crisis will have
a healthy effect on the prospects for democracy and better governance. They cite the
effective mobilization of angry middle classes in Thailand in support of a new
constitution, the partial reining in of President Suharto’s children in Indonesia, and the
election of long-time democracy advocate Kim Dae Jung in South Korea as signs of
a healthy reaction against the “Asian values” arguments for authoritarianism.
According to this line of argument, recent failures of economic management by
Paul Blustein, Thai Leader Given Warm Welcome, $1.7 billion in Aid. Washington
Post, March 14, 1998: A19.
Paul M. Sherer, Thais Signal Commitment to IMF: Slowing Economy is Recognized.
Wall Street Journal, Feb. 25, 1998: A19.
Nayan Chanda, Blown Away: 1997; the Year in Review. Far Eastern Economic
Review, Dec. 25, 1997 & Jan. 1, 1998: 24.
Rigoberto Tiglao, Late Surge. Far Eastern Economic Review, March 5, 1998: 23.
governments that exhibit varying degrees of authoritarianism will be a boon for
democratic values and greater accountability.47
Two realities raise questions about the validity of this view. First, some previous
limited steps towards more democracy in several Asian countries have, in the opinion
of many analysts, led to setbacks for good economic management, as political leaders,
seeking to boost their popularity, have promoted unwise economic policies. Most
notably, it is argued that Thailand’s economic management suffered from an excess
of populism and corruption after the parliamentary elections of 1992 — i.e., beginning
with the first administration of current Prime Minister Chuan Leekpai, but especially
his two successors, Banharn Silapa-archa, once described as “the quintessential rural
machine-patronage politician,”48 and the discredited Chavalit Yongchaiyudh. Partly
in response to the conventional wisdom that national politics has been corrupted by
the influx of rustic machine politicians since the 1992 democratic opening, the new
Thai constitution includes minimum educational qualifications for legislators.
Democracy has been riding high since the election of President Kim Young Sam
in South Korea, the once persecuted opponent of dictatorial military rule, but the
country’s initial democratic opening did not produce an effective government.
President Kim Young Sam, the country’s first popularly elected President and a
would-be reformer, failed badly. He was widely criticized for political ineptitude and
economic mismanagement, and for following a vacillating policy towards the North.
Moreover, because of the impending December 1997 presidential election, the South
Korean national assembly had balked at passing important financial reform measures
and thereby deepened the crisis.
The second reality is that the short term consequences of the crisis could include
considerable social and political conflict, especially in the more authoritarian regimes
such as Indonesia that lack the institutions for a smooth political transition.
Commenting on the replacement of the discredited Chavalit government with the
coalition headed by Chuan Leekpai, a senior Thai political leader noted that the
ability of Thailand to achieve a smooth power transfer in response to an economic
crisis was the result of political openness, but that the same result “ probably could
not be expected in other countries of the region.”49 Even in this instance, some
analysts believe that the Chuan government may be the last chance for elected
Implications for Regional Trade Liberalization
The Asian financial crisis raises serious questions about the prospects for
opening up regional markets to U.S. exports, a major and long-standing U.S. foreign
For an argument along these lines, see Keith B. Richburg, Across Asia, Stirrrings of
Democracy. Washington Post, Dec. 16, 1997: A1, A18. See Also Thomas L. Friedman,
Thailand’s New Song. New York Times Op Ed, Dec. 15, 1997: A29.
Daniel E. King, Thailand in 1995: Open Society, Dynamic Economy, Troubled
Politics. Asian Survey, Vo. 36, No. 2 (February 1996): 136.
Michael Vatikiotis, High Hopes. FEER, Nov. 20, 1997: 24, 28.
policy. On the positive side, at the November 1997 APEC meeting in Vancouver, the
leaders agreed to put nine industrial sectors covering global trade totaling $1.5 trillion
on a fast track to tariff reductions in pursuit of the established goal of regional free
trade by 2010 for the industrialized countries and 2020 for the developing countries.50
While the Asian financial crisis inevitably dominated the agenda and discussions, many
observers took comfort in the fact that the affected countries did not seek to
backtrack from their previous commitments.
The conditionality imposed by the IMF for its emergency credits includes
requirements that recipient governments end the kinds of collusive practices that have
brought about the current crisis, and which have the effect of giving special
advantages to favored domestic producers and monopolies, and open up their
economies to foreign trade and investment. These are over and above more basic
requirements to put their banking and financial systems in better order, achieve budget
surpluses, and — somewhat contradictorily — reduce their trade deficits. For
instance, the IMF’s program for South Korea requires that Seoul agree to a WTO
compatible timetable to remove export subsidies and restrictive import licensing,
remove arbitrary regulatory barriers to imports, and raise the ceiling on foreign
ownership of Korean stock shares.51 The IMF program requires Indonesia to reduce
tariff and non-tariff barriers, and eliminate certain import and marketing monopolies,
among other trade-related structural changes.52
In the longer term, these developments may pay large dividends in the reduction
of trade and investment barriers. In the shorter term, however, the affected Asian
countries face hard choices. On the one hand, they need to satisfy the market opening
objectives of the IMF, foreign lenders, and investors, who view liberalization as a spur
to greater economic efficiency. To do otherwise, would jeopardize the very basis for
their previous rapid economic growth. On the other hand, they feel a strong desire
to pursue policies that they calculate will minimize business failures and preserve
employment in sensitive industries and economic sectors, including counterrecessionary government spending and measures — both formal and informal — to
Implications for Regional Security
Even the worst case possibilities for domestic instability in Asian countries do
not necessarily pose direct threats to U.S. security interests, but the indirect threats
could be significant should affected countries undergo destabilizing internal political
turmoil. In his January 27, 1998, State of the Union address, President Clinton
asserted a strong linkage between stability in Asia and U.S. security interests.
According to a National Defense University publication, more than half of the world's
USIS Washington File, Transcript: 12/10 Amb. Wolf Worldnet on Vancouver APEC
Results. Dec. 11, 1997.
IMF Approves SDR 15.5 Billion Stand-By Credit for Korea. IMF Press Release No.
97/55, Dec. 4, 1997.
IMF Approves Stand-By Credit for Indonesia. IMF Press Release No. 97/50, Nov. 5,
shipping passes through the straits of Malacca, Sunda, or Lombok, and past the
Spratly Islands, including well over half of the world's supertankers.53
A political breakdown or armed power struggle in Indonesia could engulf
Singapore and other regional states in a wave of refugees, embolden regional
separatists, or reawaken irredentist claims on Malaysia’s states on Borneo, Sabah and
Sarawak. A internal Indonesian conflict theoretically could interrupt the free passage
of commercial vessels and U.S. Navy ships through the important Sunda and Lombok
straits, and jeopardize the safety of thousands of expatriate Americans and billions of
U.S. investment. An interruption of oil production in Indonesia could possibly disturb
oil markets. Ironically, though, the current depressed price of oil in global markets
is itself a threat to the economies of the Southeast Asian oil exporters.
For now, most regional conflict scenarios arising out of the financial crisis still
appear far-fetched. In mid-February, in the Malaysian capital of Kuala Lumpur, Prime
Minister Mahathir Mohamad and Singapore’s Prime Minister Goh Chok Tong
pledged to strengthen ties and resolve outstanding disputes during a reportedly warm
meeting -- the third such session in a month’s time.54 In general, the ASEAN
countries have largely shelved their territorial disputes with each other, and these
likely would be reawakened only in a worst case situation in which assertive
nationalism replaced thirty years of ASEAN cooperation. Some analysts worry more
that China might seek to exploit the distraction of the Southeast Asian countries and
the postponement of their military modernization programs to seize territory in the
contested Spratly Islands. Thus far, China seems to have used the crisis to make a
show of support and regional leadership, not aggrandizement.
If the crisis were to lead to internal ethnic conflicts in one or more Southeast
Asian states, however, these could have wider consequences. For instance, an
outbreak of ethnic conflict in Malaysia, might cause Singapore to intervene militarily
to protect the Chinese minority, which is heavily represented in Johore State, just
across the strait. Apart from other significant implications for U.S. security interests,
a conflict between Malaysia and Singapore could create an untenable situation for the
U.S. naval and air force personnel at the facilities that they currently use on a
semipermanent basis, including the former British naval base at Sembawang, on the
Strait of Johore.
Perhaps more likely is the possibility that American security interests on the
Korean Peninsula, where the United States has deployed 37,000 troops, could be
jeopardized by South Korea’s financial problems. Early in the crisis, some U.S.
officials and private analysts expressed concern that North Korea might seek to take
military advantage of South Korea’s problems. This possibility seems to have faded,
if for no other reasons than North Korea's continuing food shortages and economic
prostration, the Pyongyang regime’s presumed awareness of the near certainty that
serious aggression would lead to a devastating American military response. Tensions
John H. Noer, Southeast Asian Chokepoints: Keeping Sea Lines of Communication
Open. Strategic Forum, No. 98, December 1996, Institute of National Strategic Studies.
Table 1, p. 3. These data are for 1993.
Oon Yeoh, Malaysia to Keep Water Tap Open. Nikkei Weekly, Feb. 23, 1998: 23.
have also lessened since the installation of the Kim Dae Jung administration in Seoul,
which has made considerable progress in creating a dialogue with Pyongyang.
A less direct, but more likely, threat to American security interests is the
possibility that South Korea may be unwilling or unable to play its expected role
under a U.S.-North Korea nuclear accord of October 1994, thus jeopardizing U.S.
nonproliferation objectives. Under the U.S.-DPRK Agreed Framework, the Clinton
Administration agreed to organize the supply of two 1,000 megawatt light water
nuclear reactors (LWRs) in return for North Korea’s commitment to freeze its
existing nuclear program and eventually open up all of its facilities to international
inspection. South Korea has informally committed itself to assume about 60 % of the
$5-6 billion estimated construction cost, and a South Korean company is the prime
contractor. The overall project is being carried out by the multilateral Korean
Peninsula Energy Development Organization (KEDO), but the U.S. is the ultimate
guarantor of the project, subject to congressional approval.
Despite various provocations towards the South by Pyongyang, the North
Korean regime has met the minimum conditions laid down for moving ahead with the
first phase of the project, and KEDO is ready to begin construction. No serious work
can begin, however, until South Korea provides about $150-200 million for initial
construction activities.55 Even before the economic crisis ensued, it was unclear how
the South Korean government would mobilize the requisite political capital to
persuade the National Assembly to approve funding for a project that remains highly
controversial. Now, although President Kim Dae Jung has expressed his support for
the project, his political opposition controls the national assembly. Because of South
Korea’s financial situation, it is unclear where the funds will come from, even if the
political will is present. If the project stalls, however, North Korea might react by
refusing to abide by its nuclear freeze, or committing new provocations against the
South or American interests.
The financial problems of U.S. friends and allies in Asia also seem likely to
adversely affect security cooperation and result in some cancellations of arms
purchases from U.S. defense contractors, thus impeding regional military
modernization programs. Reportedly, South Korean defense officials have indicated
their desire to negotiate some relief from the nearly $400 million annual dollar cost
of Seoul's host nation support of U.S. forces.56 Several countries reportedly already
have canceled or postponed major purchases of U.S. weapons systems.57 As noted
above, Thailand has officially been relieved of its obligation to purchase eight F/A-18
North Korea must also enter into a nuclear cooperation agreement with the United
States, which will require it to clear up uncertainties about its suspected diversion of nuclear
material, before any sensitive components or materials are delivered. For further background,
see CRS Report No. 97-356 F, The U.S.-North Korea Nuclear Accord of October 1994:
Background, Status, and Requirements of U.S. Nonproliferation Law [by Richard P. Cronin
and Zachary S. Davis.]
South Korea: U.S. Official Cohen to Bring 'Mixed Bag' of Gifts, Demands. Seoul, The
Korea Times (Internet version) in English, 0719 GM, Jan. 19, 1998.
Charles Aldinger, U.S. Defense Secretary Sets 11-Day Asian Visit. Reuters, Jan. 6,
aircraft. Some see the arms cutbacks as benefitting China's presumed ambitions for
regional hegemony,58 while others may view the cancellations as a welcome reduction
in what they see as a budding Southeast Asian arms race.
Last but not least, U.S. alliance relationships could also be affected adversely if
the United States fails to show leadership, or if its leadership appears to Asian allies
to be narrowly geared to protect the financial interests of U.S. banks and investors.
In this respect, Asian allies and other affected regional countries will most certainly
be concerned if Congress does not support funding for the IMF or restricts the ability
of the Clinton Administration to provide bilateral loans from the Exchange
Stabilization Fund. Such concerns could create doubts regarding the credibility of
U.S. security commitments. Providing reassurances on issue seemed to be a major
purpose of Secretary of Defense Cohen’s swing through the region in January.
Implications for U.S. Influence vis-a-vis Japan
For a time after the initial collapse of the Southeast Asian currencies, it appeared
that Japan would move aggressively to fill a void that had been created by a generally
passive response to the crisis by the Clinton Administration. Unlike the case of
Mexico’s debt crisis, the United States Government initially declined to take the lead
in organizing a rescue of Thailand, and only committed funds to assist South Korea
and Indonesia when the crisis spread and deepened.
In contrast with the relatively small commitment of U.S. funds, Japan deployed
substantial resources in support of the beleaguered economies. Tokyo’s commitments
and contributions have included $ 4 billion for Thailand, $ 5 billion for Indonesia, a
$10 billion commitment to the IMF-led $57 billion package for South Korea,
contingent on the deployment first of loans from the IMF and other international
financial institutions, and a $1.3 billion “bridge” loan to Seoul pending the receipt of
the IMF funds.59
Japan also initiated a short-lived bid to play the role of a regional financial leader.
In September 1997, at an IMF meeting in Hong Kong, Japan’s Finance Minister
proposed a $100 billion Asian Monetary Fund to stabilize Asian currencies. The plan
was widely thought to be the brainchild of a senior official of the Ministry of
Finance,who is well-known for touting the virtues of Japan’s bureaucratic-led
economic model and criticizing the western, market-centered economic orthodoxy
promoted by the IMF and the World Bank.
The Japanese never spelled out the exact contents of the plan, but the goal
appeared to be to provide an alternative to the IMF’s intrusive fiscal austerity and
structural reform conditionality. Despite backing by Malaysia, however, the idea
failed to gain support at a meeting of APEC deputy finance ministers in Manila in late
November 1997, although the officials agreed to a U.S.-backed compromise involving
This view was expressed by one participant in a January 13, 1998, CRS workshop on
Southeast Asian security issues.
Japan Digest, Dec. 4, 1997: 3; Jathon Sapsford, Japan Makes Big Bridge Loan to
South Korea. Wall Street Journal, Dec. 19, 1997: A13.
the establishment of a supplementary “second-line” Asian fund, based on voluntary
commitments from Asia-Pacific economies, for deployment should the IMF’s
resources prove inadequate. Both the United States and the IMF itself had lobbied
hard against the AMF proposal, on grounds that a lack of conditionality would
remove the necessary incentives for reform and create a “moral hazard” problem -i.e., the continued provision of risky loans under the assumption that defaults would
be made good by taxpayer funds from unaffected countries. 60
Japan’s opportunity to expand its regional influence was further undercut by the
decision of the Clinton Administration in the fall of 1997 to take a more direct role
in addressing the crisis. After standing in the wings while Thailand’s first devaluation
played out, the Clinton Administration in late October committed $3 billion in
“second-line” support for a $37 billion rescue plan for Indonesia, and played a leading
role at a meeting in Manila of Asia-Pacific finance ministers. In December, and once
it was satisfied that South Korea would adopt the necessary financial and structural
reforms, the Administration committed $5 billion to support South Korea, and agreed
to accelerate the delivery of funds. In late December the U.S. Treasury Department
also played a key role in getting U.S., European, and Japanese banks to agree to roll
over some $24 billion in short-term loans to South Korea and, in March, the United
State rectified its earlier stand-off attitude towards Thailand by extending trade credits
and investment insurance.
In sum, after assuring itself that the affected countries were willing to adopt the
IMF’s required reforms, and after verifying the need for more funds than those
available to the IMF from its own resources, the United States emerged as still the
most influential power and the only one with the ability to assert clear leadership. As
one analyst noted, “For all the complaints about Washington’s bullying Asia, the U.S.
is Asia’s largest export market and the key to maintaining regional peace.” Rather
than taking the lead from the United States, Japan’s bid to promote an Asian
Monetary Fund simply served as a catalyst to get the United States engaged. When
the United States weighed in, it was the single most important influence on IMF
Japan has been handicapped in its effort to play a regional leadership role by its
own financial system headaches and sluggish economy, and the fact that Tokyo
would not or could not do what the Asians most desired — stimulate its own
economy and open up its markets further to its neighbors’ exports. Prime Minister
Hashimoto of Japan reportedly informed Malaysia’s Prime Minister Mahathir and
other Asian leaders in mid-December that Tokyo lacked the ability to lead the region
out of its problems unilaterally, and that without a central role for the IMF neither the
IMF nor other countries would offer the necessary aid62 At a first-ever summit of 12
regional leaders in Malaysia, Hashimoto explained that Japan could not expand its
Edward A. Gargan, Asian Nations Affirm I.M.F. as Primary Provider of Aid. New
York Times, Nov. 20, 1997: D2.
Bob Davis and G. Pierre Goad, Asia Reaffirms U.S. Primacy on Bailouts. Wall Street
Journal, Nov. 20, 1997: A16, A18.
Japan Digest, Dec. 15, 1997: 1.
imports of Asian goods because of its own economic problems.63 Japanese aid, while
impressive, fails by a large measure to compensate for the increase in the effective
debt burden caused by the fall in the Asian currencies, and its efforts have been widely
viewed as largely aimed at protecting the interests of Japanese banks.
The reassertion of U.S. economic and financial leadership can be a two edged
sword. Asians widely view the United States as a key force in the economic
globalization phenomenon because of its long-standing efforts to lower barriers to
trade, investment, and capital flows. Japan, meanwhile, generally has played a strong
role in generating export-led growth in Asian countries while working within, rather
than challenging, existing trade barriers and requirements for local content in foreign
manufacturing operations. Since many in Asia see the current situation as largely a
consequence of too much liberalization, too fast, the U.S. role in leading the region
out of the crisis is likely to be more critically evaluated than the response of Japan.
Factors Influencing the Duration and Severity of the
The ultimate implications for U.S. regional and foreign policy interests may
depend on the duration and severity of the crisis and the perception of Asian countries
of the U.S. role. Several factors may influence the duration and severity of the crisis.
All but one of them are substantially outside American control, but several are
susceptible to U.S. influence.
The Responsiveness of Affected Asian Governments to the Need for
Structural Reform and Greater Financial System Transparency
It goes almost without saying that a longer term solution to the region’s
problems can only be found if the affected governments carry out reforms that will
eliminate the practices that contributed to the crisis in the first place. This will require
an enormous amount of political will and nerve, since some reforms such as better
accountability and transparency in the financial system inevitably will further dry up
credit and cause additional bankruptcies. More basic structural reforms, such as
reducing the role of bureaucratic and political influence in the allocation of credit,
and reducing formal and informal trade barriers, will inevitably damage powerful
vested interests. To date, South Korea and Thailand have earned good marks from
the IMF and other foreign benefactors, while Indonesia has continued to teeter on the
edge of a total economic breakdown. Malaysia, on its own, has adopted some of the
fiscal measures and reforms that might have been required had Kuala Lumpur found
it necessary to seek IMF assistance.
James Kynge, Economic Clouds Darkened Summit Skies. Financial Times, Dec. 17,
Japan’s Success in Addressing its Economic Problems
Perhaps the single most important substantive determinant will be Japan’s
success in dealing with its bad loan problem and attendant credit crunch, and finding
a way to regain an economic growth path. On an exchange rate basis, Japanese GNP
has constituted about 75% of the East Asia region’s total output in recent years.
Thus a comparatively modest increase in Japan’s growth rate could substantially raise
its imports of Asian goods and thereby help its neighbors to revitalize their shattered
As of the spring of 1998, some Japanese and foreign analysts saw Japan on the
edge of a “malign” deflationary spiral. Reportedly, U.S. economic officials have
become “deeply worried that Japan’s deflationary problems are gaining dangerous
momentum,” with the possibility that the economy will be sent “spiraling rapidly
downward.”64 Skepticism abounds, also, regarding the government’s plan for a “big
bang” financial sector deregulation and other administrative reform and deregulation
The Hashimoto government has taken a number of significant, but thus far
unsuccessful steps to revitalize the Japanese economy and address the country’s
massive banking system problems. These include a partial reversal of what many
have criticized as an overly restrictive fiscal policy and the aforementioned
commitment of $250 billion to shore up the banking system. In early April 1998,
shortly before the G-7 financial ministers meeting, the Prime Minister unveiled a $124
billion economic stimulus package, the fifth, and largest yet, since October 1997.
As the new fiscal year began on April 1 Japan faced a gloomy economic future,
with the highest male unemployment rate since records began to be kept and a
dispirited corporate sector. Efforts by the ruling LDP and the finance ministry to
boost the stock market through the announcement of the latest economic stimulus
plan, and stock purchases using public trust funds, appears to have misfired. Many
analysts criticized the fact that the plan was heavy on "pork barrel" public works
spending, and only provided vague, and temporary, tax cuts totaling $30 billion over
a two year period.
In general, the Hashimoto government's measures have been judged inadequate
by most Japanese and western analysts. The finance ministers of the Group of Seven
(G-7) industrialized democracies, meeting in London in late February 1998, barely
concealed with diplomatic language their impatience with Japan for failing to take
more effective steps to resuscitate its ailing economy. On the eve of the February 21,
1998, meeting U.S. Treasury Secretary Rubin commented to reporters that "As we
all focus on these questions of what to do in Asia, probably nothing is more important
than Japan getting back on a path of strong domestic-led growth.".65 On April 9
Secretary Rubin indicated less than an enthusiastic response to the latest spending and
Sandra Sugawara, Fears of Deflation Rising in Japan. Washington Post, March 14,
1998: D1, D9.
Patrice Hill, Japan's New Plan to Fix Economy Disappoints G-7. Washington Times,
Feb. 21, 1998: A5.
tax proposals, welcoming the move but noting “what is crucial is that Japan move
quickly to put in place a strong program.”66
The most severe reaction has come from the markets. While the government
openly aimed at boosting the market to above the 18,000 level on the benchmark
Nikkei 225 index, the fiscal year ended with the Nikkei index at 16,500. The index
fell to 15,750 the following day, after the release of a dismal quarterly Bank of Japan
report on business confidence. Had the government succeeded in temporarily boosting
stock prices, companies and banks could have ended the fiscal year showing a profit
on their holdings. Instead, the plan’s failure stood out in bold relief, and businesses
and banks began the new fiscal year with further depleted assets. The chairman of
Sony corporation reportedly declared in early April that the economy was “on the
verge of collapse.”67
Whether the Crisis Spreads to China
Thus far China has been insulated from the crisis, even though its 1994
devaluation was one of the contributing causes of the problems of the Southeast Asian
countries. China contributed $1 billion towards the IMF package for Thailand, and
its leaders have declared that China would not carry out a further currency
devaluation. Despite these favorable policy decisions, analysts worry that some 20%
or more of China’s own bank loans are non-performing and that Beijing faces a
gargantuan problem in seeking to stem the losses of its inefficient state owned
To date, China has avoided trying to match the declines in the currencies of its
Asian competitors, but growth has already slowed to 8% from its usual double-digit
figures and unrest reportedly is rising along with unemployment.68 The more the
other Asian currencies plunge, however, the stronger will be the pressures on
Beijing’s economic managers to devalue so as to protect China’s export markets and
the stability of the regime. Reportedly, U.S. officials are particularly concerned that
a sharp slide in the Japanese yen will cause China to devalue.69 China could also be
forced to devalue its currency if Hong Kong cannot continue to maintain its peg
against the U.S. dollar.
Sandra Sugawara, Hashimoto Cuts Taxes $30 billion. Washington Post, April 10,
1998: A1, A18.
Makoto Sato, Fiscal Year-End Spurs Market Intervention. The Nikkei Weekly, March
23, 1998: 1, 12; Japan Digest, April 2, 1998: 1.
Pamela Yatsko and Matt Forney, Demand Crunch: With Growth Sliding to a Danger
Level, China Must Act Fast to Create Jobs and Stave Off Social Unrest. FEER, Jan. 15,
Sandra Sugawara, Fears of Deflation Rising in Japan. Washington Post, March 14,
1998: D1, D9.
The Effectiveness of U.S. Leadership
The effectiveness of U.S. leadership could affect the extent of possible damage
to the U.S. economy and the global trading system, especially in regard to rising
political instability and a growing loss of confidence among the populations of Asian
countries. Not only does the United States have the largest and most robust
economy, and the largest and most open market, but the crisis has also demonstrated
that only the United States has the institutional mechanisms for coordinated crisis
management and the will to lead. It is almost inconceivable that the IMF or any
collection of Asian countries could adopt policies that were not supported by the
Notwithstanding its prominent role, some have characterized U.S. leadership —
at least until recently — as being generally more tactical and technical, and more
focused on the financial aspects of the crisis that are the principal concerns of U.S.
banks and the IMF, than with the larger foreign policy implications. Due to the nature
of the crisis, U.S. intervention has been led by the Treasury Department. Senior State
Department officials and other members of the U.S. foreign policy apparatus have
been largely silent, despite the considerable foreign policy implications of the crisis.
Some change in this situation was indicated by President Clinton’s numerous personal
phone calls to Indonesian President Suharto, Secretary of Defense William Cohen’s
trip to the region in mid-January 1998, and the state visit of Prime Minister Chuan
Leekpai. In general, however, the Administration had done relatively little until
January 1998 to indicate a broader view of the potential political fallout, a fact that
caused no little comment on the part of former officials and pundits.70
Longer term U.S. interests may also be affected by perceptions of the U.S. role,
not just its effectiveness. While Japan is in some respect the “headquarters” economy
for Asia, the United States is still the center of financial capitalism and the single most
influential member of the IMF. In that sense, whether the United States responds
with strong leadership or a more narrowly defined defense of its economic interests,
may have a significant impact on whether the affected countries treat their current
difficulties as a “hiccup” on the road to mutually beneficial global economic
integration, or as victims of fickle western capitalists and financial speculators.
One possibility is that Asian allies and friends will regard the United States as
having let them down in their hour of need. Most well informed Asians understand
the degree to which their own leaders and institutions contributed to the crisis, but it
is only natural that they look elsewhere for complicity, especially when the IMF, the
World Bank, and western financial analysts had so recently praised the same countries
for their strong economic fundamentals and prudent macroeconomic management.
In this respect, they tend to have unrealistic expectations that the United States, as the
leading capitalist country and the strongest advocate of the financial sector
liberalization will somehow share their pain. To the extent that U.S. policy is seen
as self-centered, the Asian reaction may negatively affect a number of U.S. interests,
including alliance and military access relationships.
See, for instance, Robert B. Zoellick, A Larger Plan for Asia. Washington Post, Jan.
6, 1998: A13.
Implications and Options for Congress
Exactly how the United States should respond to the Asian financial and
economic crisis has become a highly divisive issue for Congress, given that U.S.
leadership inevitably requires the commitment of a significant level of taxpayer funds
in pursuit of policies whose very premises are subject to strongly differing points of
view. Whether it wants to or not, the United States, as the largest economy and
principal architect of the current international financial and trading regime, cannot
avoid the expectation that it will assume the mantle of leadership, even if Japan and
the European Union arguably have a larger economic stake in the outcome of the
current crisis. The extent to which the United States should shoulder the main burden
of leadership, the direction in which it should lead, and the exact policy prescriptions
that it should support, are matters of intense congressional debate.
The debate is all the more heated because the issues involve a complex mixture
of objective factors, competing economic theories, and ideological premises that are
not reducible to provable outcomes. Consequently, policymakers and analysts tend
to promote solutions that are strongly colored by their core philosophical and
ideological beliefs. In addition, because the recent rapid growth of the Asian
economies has been predicated substantially on reliable access to foreign capital, the
affected governments themselves face a kind of Hobson’s choice between economic
policies designed to reassure the financial markets and policies that might produce
better results in the domestic economy and/or create less stress on social stability. In
a real sense, therefore, the arguments over the IMF’s conditionality cannot be
reconciled because the very premises of the Fund’s critics and supporters are
different, and each believes that its approach will more effectively address broadly
The Asian crisis and the IMF’s response also has triggered a variety of questions
about the Fund’s role and its internal operations. A number of congressional
initiatives seek both to prevent the emergence of similar crises in the future and to
change the way that the IMF responds to them, if preventive measures should fail.
Others seek fundamental changes in the IMF’s operations, especially the goal of
greater transparency regarding its activities and agreements with borrower nations.
Many Members are frustrated that past legislative directives requiring that the
Administration use its “voice and vote” in support of greater transparency in the
Funds operations, as well as trade liberalization, and the protection of labor rights,
have not produced the desired results. This has led congressional critics of the IMF
to seek to tie U.S. contributions to the requirement that the that the Administration
pursue, and in some cases achieve, results on such matters as greater transparency of
the IMF’s operations and the Fund’s support for a variety of sometimes conflicting
loan policy objectives.
From the perspective of U.S. foreign policy interests, while many of the changes
sought by Congress might, if actually carried out, bring long term benefits for the
stability of the international financial system, the failure of the United States to
support the quota increase and the NAB would undoubtedly generate a negative
reaction in Asia, among the G-7 partners of the United States, and within the
international banking and investment community. The U.S. business community, and
representatives of states and localities with a major stake in trade with Asia, have also
expressed dismay at the possibility that Congress will refuse to provide funds for the
IMF or will reach an impasse with the Administration over the language in the funding
FY1998 Supplemental Appropriations Request
The current congressional debate is focused on the Administration request for
$17.9 billion in supplemental FY 1998 appropriations for the IMF. This includes a
previous request of $3.4 billion for the U.S. share of the IMF’s proposed New
Arrangements to Borrow (NAB) and $14.5 billion for the proposed quota increase.
Neither of these would support the current IMF loans to Asian countries but
they would affect the ability of the IMF to respond to future emergencies. Neither
can go into effect without the participation of the United States and other major
The NAB request consists of a special levy on 25 major economies, while the
quota increase would apply to all 182 IMF members. Both assessments are
proportionate to the size of the member economies. The NAB funding, which was
requested by the Administration well before the current Asian problems emerged,
would provide back-up medium-term credit lines that the IMF could draw against as
a supplement to its quota-based resources to assist countries facing a financial crisis.
The credit line would be raised to approximately $46.6 billion if fully funded by 25
prospective contributors.71 Most likely, the NAB would be activated in crises caused
by sudden movements of short-term capital that threatened the stability of the
international financial system, i.e, a crisis at least as bad as the one that hit Asia last
year. That crisis did not satisfy the conditions of the IMF’s existing credit line, the
General Arrangements to Borrow (GAB), which requires the Fund to first
demonstrate that its resources are inadequate.
The Senate had included the NAB contribution in its version of H.R. 2159, the
Foreign Operations, Export Financing, and Related Appropriations Bill, 1998, most
believed the funding would be included in the final version of the bill. At the last
minute, however, the conference leadership dropped this provision, along with
funding for UN arrears and the reorganization of the foreign policy agencies, as part
of an effort to resolve an impasse over a House amendment outlawing U.S.
contributions to overseas family planning agencies and NGOs that counseled,
promoted, or carried out abortions — the so-called "Mexico City" language adopted
by the Reagan Administration but overturned by the Clinton Administration. The
Administration had threatened to veto any bill containing the abortion provision.72
For further details, see CRS Issue Brief 97038, The International Monetary Fund’s
“New Arrangements to Borrow.” Updated regularly [by Patricia A. Wertman.]
For background on this impasse, see CRS Report 97-211 F, Appropriations for
FY1998: Foreign Operations, Export Financing, and Related Programs. Updated Dec. 11,
1997 [by Larry Nowels.]
The Clinton Administration also agreed earlier to contribute about $14.5 billion
to a recently negotiated IMF quota increase, and was expected to request the funds
in the FY1999 budget.73 Whether as a tactical move, or out of genuine concern
about the recent drawdown of the IMF’s resources, or both, the Administration
decided to combine the NAB and quota increase in the same FY1998 supplemental
Members of Congress thus far have given mixed signals as to how the funding
request for the IMF ultimately will be dealt with. Those supporting the request
emphasize the need to stabilize the situation and to prevent a continued downward
spiral of currency values, arguing that the further the Asian currencies fall, the greater
the effect on the U.S. trade deficit and on U.S. jobs. Even though the measure does
not involve an increase in budget outlays — being treated technically as an exchange
of dollars for IMF "special drawing rights" — congressional opponents and the public
at large tend to view it as a "bailout" of the international banks and Asian companies
with taxpayer funds, and, at a minimum, to seek strengthened conditions to protect
or promote various U.S. interests. Some Members favor the elimination of the IMF
altogether, arguing that the world of international trade and finance has changed
radically since the Fund was created in the aftermath of World War II, and that its role
is no longer relevant.
Even proponents of the funding request have expressed at least partial
dissatisfaction with the conditionality imposed by the IMF for its assistance in the
Asian crisis, and also from initiatives aimed at promoting fundamental changes in how
the Fund operates, especially concerning its emergency financing mechanisms and
procedures for surveillance and data dissemination. Proponents , however, argue that
the goals of reforming the IMF and reshaping its conditionality should not be allowed
to jeopardize the current request. Opponents, on the other hand, would make the
new funding contingent on the achievement of these changes.
As of the beginning of the spring recess, Members of the House and Senate had
introduced well over a dozen bills and resolutions that would affect U.S. participation
in the IMF and/or seek changes in the Fund’s operation. Those receiving action
include the following:74
H.R. 3114, International Monetary Fund Reform and Reauthorization Act of
Referred to the House Committee on Banking and Financial Services on Jan. 27,
1998, and ordered to be reported (amended) by a margin of 40-9. As reported to the
House (H.Rept. 105-454), March 18, 1998, H.R. 3114 authorizes the full $17.9
For more details on the quota increase, see CRS Report 98-56 E, The International
Monetary Fund’s (IMF) Proposed Quota Increase: Issues for Congress. January 16, 1998 [by
Patricia A. Wertman.]
For more details, see CRS Report 98-123 F, Supplemental Appropriations and
Rescissions for FY 1998. Updated April 14, 1998 [Larry Nowels, coordinator.]
billion request for the IMF subject to conditions regarding improvements in workers’
rights in countries receiving IMF support and other matters that the Administration
either found unobjectionable or has actively supported.
H.R. 3580 (House Version), Making Supplemental Appropriations and
Rescissions for the Fiscal Year Ending September 30, 1998, and For Other
Purposes. Unlike the Senate bill, the House Appropriations Committee has split the
FY 1998 supplemental into two separate bills.
! H.R. 3579, passed by the House on March 31, 1998 (212-208),contains
supplemental appropriations for emergency disaster assistance, overseas
peacekeeping funds for the Department of Defense, and for a number of
government departments and agencies, and for other purposes.
! H.R. 3580, reported March 27, 1998 (H.Rept. 105-470), would appropriate
$3.4 billion for the IMF's proposed New Arrangements to Borrow (NAB) and
$14.5 billion for the IMF quota increase, but with conditions which the
Administration finds objectionable and in some cases “unworkable” due to the
likelihood that other member countries would refuse to support the proposed
Sec. 401 of H.R. 3580 would hold up the release of funds for the NAB until 15
days after the Secretary of the Treasury has notified the appropriate committees of
Congress that the IMF has adopted a policy of conditioning standby agreements in
excess of $500 million on provisions requiring the recipient country to:
“(1) comply with the terms of international trade agreements, of which the
borrowing country is a signatory;
“(2) eliminate the practice or policy of Government-directed lending by private
or public financial institutions, and;”
“(3) guarantee nondiscriminatory treatment in debt resolution proceedings
between domestic and foreign creditors and for debtors and other concerned
The Administration argued in a March 30, 1998, policy statement, that it
"believes that the practical effect of this section alone would delay indefinitely the
implementation of the quota increase," since it would condition the release of funds
on IMF-borrower agreements over which the United States had no control.75 Getting
the IMF to adopt many of these loan provisions would require lengthy negotiations
and the agreement of the major members, and might never be adopted.
Executive Office of the President, Office of Management and Budget, Statement of
Administration Policy: H.R. 3579 — Making Emergency Supplemental Appropriations, FY
1998; H.R. 3580 — Making Supplemental Appropriations and Rescissions, FY 1998, March
30, 1998. p. 3.
Likewise, the Administration has strongly objected to Sec. 408, which forbids
the release of funds to the IMF unless the Secretary of the Treasury certifies that the
Fund has met a number of conditions regarding the transparency of its operations.
The Administration agrees with the objectives but complains that the section not only
would be likely to delay indefinitely the implementation of the quota increase, but also
that it is written so broadly that it could also delay the release of previously
appropriated funds for existing programs, as well as the NAB.76
Apart from the provision of funds and limitations on their release, H.R. 3580
contains numerous reporting requirements and provides for a high level International
Financial Commission Advisory Commission composed of at least four former
Treasury Secretaries and representatives of labor, business and non-governmental
organizations, and a nine member Advisory Committee on IMF Policy. Sec. 407 of
the bill would require the Treasury Secretary to instruct the U.S. Executive Director
of the IMF "to use aggressively the voice and vote of the Executive Director" in
support of 14 different policy objectives and 19 detailed sub-objectives. These
include such goals as exchange rate stability and the avoidance of competitive
devaluations; market oriented reform, trade liberalization, economic growth,
democratic governance, and social stability; privatizing industry in an equitable
manner; economic deregulation, establishing or strengthening key elements of a social
safety net, and opening agricultural markets.
H.R. 3579 (Senate Version), 1998 Emergency Supplemental Appropriations Act.
Passed the House Amended, by 212-208, on March 31, 1998. Passed the Senate,
amended, on March 31, in lieu of S. 1768. Senate conferees appointed, March 31.
The Senate passed a single supplemental appropriations bill combining the
funding measures in the House-passed H.R. 3579 and House-reported H.R. 3580 in
one bill, including $17.9 billion for the IMF and legislative language imposing a
number of constraints on the disbursal of funds and policy guidance and requirements
regarding IMF conditionality and the transparency of its operations. The major
provisions of the bill largely parallel those in H.R. 3580, but the Senate bill includes
some key language changes requested by the Administration regarding provisions that
the Administration had deemed unworkable. For instance, whereas Sec. 401 of the
Senate bill provides that funds cannot be disbursed for the quota increase until the
IMF adopts several significant policy changes regarding trade liberalization,
government-directed credit, and debt resolution, the Senate bill only requires a
certification that the major IMF shareholders (essentially the G-7 industrial
democracies) will seek to implement these policies.
! Like the House-reported H.R. 3580, of the Senate passed version of H.R.
3579 (Sec. 5003) would create an International Financial Institution Advisory
Commission to consider and report on the implications of consolidating the
activities of the IMF and the World Bank. The Senate bill goes further,
however, in also including the World Trade Organization (WTO) and in
directing the President to call for a new Bretton Woods conference to consider
a new structure for achieving exchange rate stability, economic growth, and
responding to international financial crises (Sec. 5004.)
! Both H.R. 3580 and the Senate-passed H.R. 3579 contain sections that seek
to insure compliance with the IMF's program for Indonesia. The Senate bill,
however, would also require the U.S. Executive Director to the IMF to
oppose the extension of IMF resources to or for the benefit of the President
of Indonesia and also to oppose further installments of credits to Indonesia on
less stringent terms than those imposed on Thailand and South Korea.
! The Senate-passed H.R. 3579 appears to go further than the House-reported
H.R. 3580 in regard to efforts to prevent IMF support to the semiconductor,
steel, automobile, and textile and apparel industries. These provisions would
clearly relate South Korea, Thailand, and Indonesia, though they are not
specified by name. Whereas the Senate bill (Sec. 5006) directs the Treasury
Secretary to certify that no IMF resources or guarantees have been provided
in support of these industries, the House bill (Sec. 402(a)(2) only requires
reports on the success of measures undertaken by the U.S. Government and
the IMF to insure that any country receiving U.S. Economic Stabilization Fund
(ESF) loans does not provide subsidies or bail outs to individual corporations,
especially in the semiconductor, steel, plywood, and paper industries.
Potentially, the biggest risk to funding from the IMF comes not from the
restrictive provisions, some or all of which could be dropped by the House-Senate
conferees, but by the likely attachment to H.R. 3580 of an unrelated anti-abortion
amendment during floor consideration in the House. Despite some modifications of
the amendment's language since it was split off from the conference report to the
regular FY1998 foreign operations appropriations bill (H.R. 2159), the
Administration has continued to warn that it will veto any measure containing the
S. 1769, reported by the Senate Appropriations Committee on March 17, 1998,
includes the same IMF provisions as the Senate-passed version of H.R, 3580. The
Senate adopted the language of S. 1769 as an amendment to S. 1768, which gained
final passage as H.R. 3580. This could become the main conference vehicle if the
House passes the supplemental appropriations in two separate bills.
H.R. 1757, The Foreign Relations Authorization Act. The conference report
on H.R. 1757, which was filed on March 10, 1998, includes authorization of $3.4
billion for the IMF’s NAB. Because the bill also includes the anti-abortion provision
that the Administration has threatened to veto, its main significance to the IMF
funding request is that it, rather than the pending supplemental appropriations, could
be the vehicle for addressing the abortion issue. Were the President to sign H.R. 1757
in its present form, there would be no need for the attachment of the anti-abortion
amendment to the supplemental appropriations bill.
Other Executive Branch and Congressional Options
Apart from consideration of funding for the IMF, the Executive branch and
Congress have a number of options for lessening the destabilizing effects of the Asian
financial crisis and promoting a rapid economic recovery.
Executive and Congressional “Gaiatsu” Directed At Influencing Japan’s
Economic Policies. For most of the postwar era, Japanese leaders have relied on
gaiatsu — foreign pressure — to help them overcome the opposition of vested
interests to measures designed to harmonize trade and economic relations with the
outside world. During the first three years of the Clinton Administration, U.S.
officials replaced gaiatsu, with its patron-client overtones, with a more
confrontational posture, including demands for the negotiation of “results-oriented”
trade agreements. The Clinton Administration largely abandoned its confrontational
approach after the conclusion of a compromise autos and auto parts agreement in
mid-1995, and the emergence of new concerns about the future of the U.S.-Japan
security relationship. The latter derived primarily from the adverse reaction in Japan
to the September 1995 abduction and rape of a Japanese schoolgirl in Okinawa by
three U.S. servicemen, and efforts by China to intimidate Taiwan by means of
provocative military exercises and missile tests.
Until early 1998, U.S. officials had been highly restrained, at least in public, in
prodding Japan to stimulate its economy and reduce its reliance on exports to bolster
the economy. The reasons for this reticence are unclear, but may be partly related to
the goal of protecting and expanding U.S.-Japan security cooperation, and partly out
of a desire not to create panic in U.S. markets.
Beginning in January 1998, the Administration’s low key approach to dealing
with Japan’s apparent policy gridlock gave way to a more assertive posture. Senior
officials from the Treasury, Defense, and State departments stopped in Tokyo after
a round of visits to Southeast Asian capitals, reportedly with the mission of
strengthening the resolve of the Hashimoto administration to take adopt more
effective measures to clean up the Japanese banking system’s problems and stimulate
the economy. In keeping with the gaiatsu tradition, the U.S. pressure for greater
efforts to revive the Japanese economy reportedly was welcomed by some Japanese
bureaucrats. While Prime Minister Hashimoto and other senior political and
bureaucratic figures bristled at U.S. policy advise, an anonymous senior finance
ministry bureaucrat tellingly indicated that the United States still played its historical
post-World War II role as the unofficial opposition party. “Japan is,” the official
reportedly said, “in a way, waiting for the U.S. to come [and apply] some pressure.”
According to the official, “In order to get the understanding of the Japanese public,
the Japanese government also has to have the U.S. in the scheme.”77
Congress, for its part, has several limited ways to convey a greater sense of
urgency regarding Japan’s failure to adopt policies that adequately address its
economic and financial problems, including hearings focused on Japanese and regional
James L. Tyson, U.S. to Lecture Tokyo on Helping Asia. Christian Science Monitor,
Jan. 14, 1998: 1, 7.
economic issues, and Sense of the Congress resolutions. One such House initiative,
H. Res. 392 (Bereuter/Berman), calls on Japan to take more effective steps to address
its economic and financial problems, and reduce informal barriers to trade and
investment, as a means of alleviating the Asian financial crisis, insuring against a
global recession, and reinforcing regional stability. The resolution was introduced on
March 24, 1998, and referred to the House Committees on International Relations,
Banking and Financial Services, and Ways and Means on the same day. Sec. 410 of
H.R. 3580 also expresses in more brief and less specific language the Sense of the
Congress on the role of Japan in restoring regional and global economic growth.
In choosing to put the spotlight on Japan, Members of Congress, like
Administration officials, have to weigh the potential benefits of American pressure
against the possibility that Japanese leaders will actively resist measures called for by
the United States in order to show that they cannot be intimidated by outsiders. Given
the severity of Japan’s problems and Prime Minister Hashimoto’s revealing
declaration that Japan will not lead the world into a depression, any resentment of
U.S. and other foreign pressure is likely to be tempered by a pragmatic desire to
deflect criticism by successful policy intervention. Thus, to the extent that
Administration officials and Members of Congress emphasize policy approaches that
enjoy support among Japanese economists, business leaders, and the media, U.S.
initiatives could have an impact. The prospect of success would be enhanced further
if other countries within the G-7 industrialized democracies and Japan’s Asian
economic partners similarly call for new approaches to revitalizing the Japanese
Support for New Asia-Pacific Economic Cooperation Mechanisms and/or
Significant Changes in the IMF. The United States could undertake new initiatives
to promote a pan-Pacific approach to the problems of the East Asian economies,
perhaps within the framework of the present 18 member Asia-Pacific Economic
Cooperation organization (APEC.) For instance:
! under the existing framework of 10 APEC working groups, the United States
could support the creation of an additional working group on common
financial sector standards and/or agree to be a “shepherd” taking responsibility
for coordinating the effort that might help Asian countries bring their
regulatory mechanisms up to international standards.
! the United States could also take the lead in following up on an agreement by
the APEC finance ministers in Manila in November 1997, for the establishment
of a supplementary “second-line” Asian fund, based on voluntary
commitments from Asia-Pacific economies, for deployment should the IMF’s
resources prove inadequate.
! alternatively, if Congress is unwilling to support funding for the IMF under
terms acceptable to the Administration or other major countries, the
Administration also has the option of reversing course and encouraging Japan
to reintroduce its proposal of last summer for the creation of an Asian
Monetary Fund. This likely would be viewed as a decision by the United
States to abandon its postwar regional leadership, however, and it is not clear
that the Japanese themselves are currently prepared the assume the
responsibility that this would imply in the context of an implied reduction in the
U.S. regional leadership and burdensharing.
A number of Members of Congress have called on the Administration to examine
alternatives to the current IMF on grounds that conditions have changed radially since
the days of the original Bretton Woods agreement, including the increasing
predominance of private capital flows in creating currency crises and balance of
payments problems. As noted above, Sec. 5003 of the Senate version of H.R. 3579
would create a high level International Financial Advisory Commission to consider
issues concerning “the future role and responsibilities, if any, of the International
Monetary Fund, and the International Bank for Reconstruction and Development [the
World Bank] and the World Trade Organization.” Sec. 403 of the House-reported
H.R. 3580 contains a similar provision. Sec. 5004 of the Senate bill also would
require the President to call for a new Bretton Woods conference on the roles of the
IMF, the World Bank, and the WTO.
Thus far, the Administration’s reaction to these proposed initiatives has been
equivocal. With regard to U.S. foreign policy interests generally, especially in the
Asia-Pacific region, any American initiative likely would meet with the most favorable
response from other major countries if it were backed by unencumbered financial
support for the IMF quota increase and NAB. Conversely, the United States likely
would receive less support if Congress and the Administration failed to come to terms
on the pending supplemental appropriations request.
Bilateral Economic Assistance. Congress and the Administration could also
promote U.S. foreign policy interests, including trade and humanitarian interests,
through bilateral assistance to the affected Asian countries. Indonesia and Thailand
especially are experiencing growing distress both in rural areas and in cities as a result
of soaring prices for rice, edible oils, and other basic foodstuffs, caused both by
currency devaluations and the effects of a prolonged drought. Imports of capital
goods, raw materials, and technology that are critical to export manufacturing have
been sharply depressed in all three IMF program countries due to the lack of letters
of credit and hard currency reserves.
The timely provision to food aid to Indonesia and Thailand, as well as expanded
import credits from the U.S. Export-Import Bank, could reinforce social stability in
both by reducing hunger and distress arising out of economic contraction. This could
help to shore up Thailand’s democratic government and help to prevent widespread
political instability in Indonesia. While many analysts view the Suharto regime as in
the same general position as that of Philippines President Ferdinand Marcos, in the
mid-1980s, there is at present no opposition movement comparable to that led by
Corazon Acquino and no established democratic tradition. If President Suharto were
to be swept from office by a massive social eruption, he would likely be replaced by
a figure from the Army or an Army-backed civilian. Under these circumstances, most
Indonesian specialists judge that the Indonesian people as well as Indonesia’s
neighbors and interested countries such as the United States and Japan, have more to
lose than to gain from the kind of economic desperation that would provoke
On March 24, 1998, the State Department announced the extension of some $70
million in new assistance to Indonesia for humanitarian relief. The package includes
$25 million in PL-480 Title II food aid to be distributed by drought-stricken Eastern
Indonesia; $ 6 million in essential medical supplies; and $25 million in concessional
loans under PL-480 Title I for public sector purchases of wheat, soybeans, and rice.
The U.S. Agency for International Development (USAID) is also considering a
request for loan guarantees totaling $14 million, to be used to support small, laborintensive infrastructure projects in urban areas with large-scale unemployment.
USAID’s existing $45 million development assistance program is already targeted on
economic and financial sector reforms, and efforts to strengthen the social safety net
— all policy goals that have been emphasized in pending supplemental appropriations
legislation for the IMF.