IMF Pressures South Korea, Philippines

The role of the International Monetary Fund (IMF) in Asia is becoming increasingly controversial, with the leaking of two IMF documents prescribing harsh measures for the South Korean and Philippine economies.

The IMF documents, obtained by the Congress Task Force of the Philippine Solidarity Network, illustrate the virtual control over economic policy-making that the Fund exercises in many debt-strapped Third World countries.

What is more, the reports show the Fund pushing even U.S. allies into politically dangerous corners.

Of the two reports, the one on South Korea is probably the more explosive, tying the granting of an IMF loan to the devaluation of the South Korean won. (One dollar equals 705 won.)

Devaluing the Won

The IMF prescription would bring the second major devaluation of the won in less than three years. In 1980, the Chun Doo-Hwan regime devalued the won by 30% in exchange for an IMF balance-of-payments credit of $749 million.

The 1980 devaluation was not sufficient, the document states, because the won has recently appreciated in value - a development that threatens the "competitivenesso" of Korean exports. This "competitiveness would have to be strengthened by a more flexible use of the exchange rate," asserts the IMF internal report.

Officials of the Chun regime, however, have been putting up some resistance to the IMF demand. "They felt that 'it was still too early to say whether a change in policies was needed," the report states. "For the time being, they were confident that present policies. . . would be sufficient to achieve their macroeconomic objectives."

But the IMF is keeping up the pressure. "Given the depressed profit situation, exporters need better incentives to undertake the `investments necessary to improve productivity," the report states. "An adequately flexible exchange rate policy" is therefore required.

The South Korean regime may not be able to resist the IMF. The economy badly needs an IMF loan to help bridge the current account deficit, expected to hit $4 billion this year. Defying the IMF would not only endanger future loans from the IMF and its partner institution, the World Bank; such a move would also harm the country's credit standing among international private banks, which have loaned over $31 billion to the country.

The government of Chun Doo-Hwan, however, finds itself in a bind, since acceding to the IMF could fuel domestic discontent. Devaluation would increase the cost of living for South Koreans; all items - including basic consumer goods such as food - would now be more expensive. With protests already on the rise against the martial law government and U.S. influence in the country, Chun and his aides may realize that they are sitting on a powder keg.

Tightening the screws on Marcos

While IMF and Korean authorities are on a collision course over exchange-rate policy, the latter is the one and only area where the Fund is pleased with Philippine economic performance.

In line with a standby program involving a balance-of-payments loan of $533 million in 1980, the peso was depreciated by close to 10% in the course of 1981. As of March, 1982, the exchange rate stood at 8.33 pesos to $1, compared to the rate of 7.4 to $1 in early 1980.

Peso devaluation was not, however, accomplished without major conflict. The governor of the Central Bank, Gregorio Licaros, who opposed the IMF prescription, had to be removed from office by President Marcos under severe pressure from the Fund and the World Bank. His successor, a technocrat close to the Bank, has been more pliable.

But notwithstanding its satisfaction with the regime's policy of continuing depreciation, the Fund staff is recommending a veto on the Philippines' request for another standby credit.

The IMF objects to the rising budget deficit and increased credit use by the public sector. In these two areas, the Fund accuses the regime of violating the objectives of the _1980-82 standby program.

Projected to come to only $506 million under the program, the deficit in 1981 actually skyrocketed to $1.4 billion. At the same time, the ratio of tax revenue to GNP declined between 1980 and 1981. To lessen the deficit, the Fund recommends boosting taxes: "There is need to improve the structure and administration of taxation so as to increase tax elasticity. Thus, the objective of increasing government savings should be met in part through increased revenue mobilization."

The other key development incurring the IMF's disapproval is the regime's inability to live up to the Fund's requirement of keeping a tight rein on credit, especially in the public sector. The public sector accounted for 52% of the expansion in total liquidity in 1981, the Fund noted with alarm, in contrast to an average of 14% in 1979 and 1980.

Especially troubling to the Fund was the Philippine Central Bank's rescuing bankrupt companies belonging to friends of Marcos, who were caught in a liquidity crunch by a financial panic in 1981. Contrary to the IMF's directive to limit Central Bank financing to $180 million in 1981, the latter actually came to $400 million. According to the Fund, Marcos' attempt to save his friends and business associates now threatens to subvert the goals of the stabilization program.

Not only is the Fund refusing to cough up more money, it also advises the government to scale down its borrowing from abroad. The Philippines is now $15.4 billion in debt, and service costs, says the Fund, will rise from $1.6 billion in 1981 to $2.3 billion in 1982 and $2.7 billion in 1983.

But the Fund confronts a dilemma. If it prevents the regime from borrowing more from abroad, the government will lose access to funds needed to pay off its already existing debts. Moreover, with the drastic reduction in the regime's public investment program that is likely to take place, the recession now plaguing the Philippines - where GNP grew by a minuscule 2.5% in 1981 - is likely to intensify.

Most important, the political fallout on the dictatorship would be quite serious. Taking advantage of widespread popular discontent with the dictatorship's economic policies, the left-led National Democratic Front has now positioned itself as the main force of resistance to the regime. Among the points of the NDF program, the Fund knows very well, is the "overthrow of World Bank and IMF control of the Philippine economy."

- Report by Walden Bello, director of the Congress Task Force, a Washington, D.C. human rights group, and by John Kelly, editor of CounterSpy Magazine.