Analyse the role played by the IMF, World Bank, or WTO in regard to one or more of the countries, especially in reference to public policy.

By Rehbina Sukmasari – Canberra

Image Many people understand globalisation as a complicated creature due to various dimensions attached to its meaning. Despite of its complex features, globalisation basically emphasises one main concept, which is borderless transnational relationship. This global interconnectedness triggers the emergence of international institutions such as the International Monetary Fund (IMF). In theory, the IMF merely deals with economic issues. However, people cannot deny that this intergovernmental organisation influences not only the economy, but also other aspects of the recipient countries. State cannot longer depend only on its domestic actors and ignore the presence of the IMF in decision-making process. In this paper, I will argue that in reference to public policy, the IMF plays a significant role in Indonesia and Vietnam, although the role played depends on the power given by state. For the purpose of this paper, the comparison between the two countries is important because they represent two different political systems that reflect different power delegation from the state to the IMF. First, this paper will discuss the dominant role of the IMF. Second, the role of the IMF in Indonesia and Vietnam will be analysed to show state’s power to limit the role of the IMF in different political systems.

The IMF is a worldwide-known institution. This organisation was designed at Bretton Woods, in the northeastern United Sates (IMF, n.d.). The IMF was originally created as an exchange rate controller among member countries and a loan provider for members at times of crisis (Peet 2003, p. 56). The IMF mainly focuses on the macro-economic and structural policies of governments (Peet 2003, p. 59). Since IMF concentrates on monetary policy, this institution will likely to influence public policy of the borrowing countries through ways that could support the success of monetary policy implementation. Before giving aid to its members, the IMF usually had created clear targets in terms of money supply and deficit limits (Larmour 2002, p. 249).

In analysing the role of the IMF in reference to public policy, the understanding of public policy and its aspects is important. According to Bridgman and Davis, public policy is a government’s course of action which is designed in order to meet certain results (2000, cited in Colebatch 2002, p. 49). Public policymaking process involves several consecutive stages, which are problem analysis, policy agenda setting, assessment of policy alternative, decision making, implementation, evaluation and modification of the policy if necessary (Colebatch 2002, pp. 49-51). Only policy community members can contribute in that process. Nevile defines policy community as a constant network, which is aimed to achieve consensus and negotiate outcome, with the characteristic of interdependent relationship, limited membership and regular interaction amongst its member (2002, p. 7). The IMF can involve in any stage of the process as long as this institution joins in policy community. Members in policy community have different power to play their roles in policymaking process. Power is defined as the ability to make other groups or people do what they do not want to do or change something that the other has done (the Concise Oxford Dictionary of Politics, 2009a). In the policymaking process, relative power emerges when certain members are more dominant than others in influencing policy outcomes. This relative power depends on power resources that the members have on their side.

The IMF has more power in policy community due to its function as loan provider. The IMF exercises its dominant power through structural adjustment programs and aid conditionality for the members. These programs and conditionality are the policy agenda for the recipient countries to follow. This shows the IMF’s power to set up the policy agenda for the recipient countries. However, some people may disagree with the statement that the IMF exogenously imposes its dominant power to create public policy through the structural adjustment programs and aid conditionality. Nooruddin and Simmons argue that the political leaders in the borrowing countries still have bargaining power to negotiate which programs are suitable to be implemented (2006, p. 1005). Unfortunately, for its members at crisis, the IMF is the ‘lender of the last resort’ (McTaggart, et al. 2007, p. 623). These countries have no choice except accepting the IMF’s programs if they want to survive. Therefore, the IMF can control the members’ policymaking to ensure that the policy created is in line with the IMF’s agenda and interests.

Indonesia and Vietnam experience the power of the IMF imposed through its structural adjustment programs. In order to get more loans, in 2003, the Indonesian government signed a Letter of Intent about the Extended Arrangement showing the commitment to follow the IMF’s policy agenda (IMF, 2003). The Indonesian government approved to follow what the IMF had arranged for Indonesia. As the consequence, all the policies made by the government must refer to the IMF’s agenda. Similar with Indonesia, Vietnam also signed a Letter of Intent in 2002 with the IMF concerning Poverty Reduction and Growth Facility (IMF, 2002). The Government of Vietnam agreed to run the policies arranged by the IMF for the purpose of reducing poverty in Vietnam. The case in Indonesia and Vietnam shows that the IMF indirectly decides the most suitable public policies that help the countries to achieve the IMF’s monetary targets. This also shows the important role of the IMF in the countries on controlling public policy.

In reality, the function as loan provider does not automatically guarantee that the IMF can play its role as this organisation wishes. The role of the IMF on public policy is also determined by the power given by state. In theory, the multilateral economic institution such as the IMF has absolute power of finance, as Polidano and Hulme said as ‘financial muscle’ (1999, p. 128). Because of its financial power, the IMF is able to impose certain conditionality on state before this institution lends the aid to members which are in crisis (Larmour 2002, p. 249). Some people may think that the IMF can highly control public policymaking in one country due to its financial power. Dolowitz and Marsh see the conditionality as a direct imposition of a policy from the international institution to state (1996, 2000, cited in Larmour 2002, p. 249). Unfortunately, the IMF could exercise its muscle if only the member governments allow them to exercise in their territory. The important thing to remember is that state holds the highest power in a territory (Newton & Van Deth 2010, p. 20). The role of the IMF in a country is limited by the sovereignty of the state. Sovereignty, which is mutually recognised as a norm in global society, reflects ‘ultimate political authority’ held by state (The Concise Oxford Dictionary of Politics, 2009b). In reference to public policy, the IMF has no power to run its role in a territory before state delegates power to this institution to get involved in decision-making process. The IMF cannot contribute to the policymaking unless state invites this institution to join in policy community. In line with the principle of sovereignty, state has the full capacity to decide whether the IMF would be included in a policy community or not. Power given by state is like permission from a sick patient for a cardiologist to do a heart surgery. Although the cardiologist has a full capacity to do the surgery, the cardiologist cannot do this medical action unless the patient permits the cardiologist to do so. Although fully equipped with adequate knowledge and financial capacity, the IMF still cannot exercise its role on public policy making process in any state unless the state invites the IMF to join in policy community as a symbol of power delegation from state to the IMF.

If the role played by the IMF as an international institution were highly determined by the power given by state, then the political system would be important. The political system reflects the way state governs its business in its territory based on its laws and constitutions. Therefore, the political system in one country determines how state delegates its power to foreign actor such as the IMF. This means that the IMF may play different role in Indonesia and Vietnam in reference to public policy on the grounds that these countries have different political systems.

The IMF has played different roles in Indonesia following several changes in Indonesian political system. Over years, Indonesia has moved from authoritarian system into multi-party democracy system. The IMF played a very important and dominant power in 1997 when Indonesia was still in authoritarian system, under the Suharto regime. Due to severe financial crisis in mid 1997, Suharto, the Indonesian president at that time, decided to ask for the IMF’s assistance to bring back international confidence in Indonesia (Chander 2005, p. 1223). As a consequence, the Indonesian government must obey the IMF’s conditionality. Public sector reform was one of the IMF’s conditionalities that must be done by the Indonesian government. In contrast, the IMF no longer plays a dominant role in Indonesia’s public policy since 2006, when Indonesia has moved into a democratic multi-party system. The government limited the IMF’s influence in Indonesia when Susilo Bambang Yudhono (widely known as SBY), the Indonesian president at that time until present, did an early repayment for all outstanding obligations to the IMF in October 2006 (IMF, 2007). The Indonesian government regains its full state ownership. This means that the government has freedom to manage its public policy based on its own needs and interests.

The comparison of the IMF’s role between 1997 and 2006 shows that the IMF played different roles in different political system in Indonesia. When Indonesia applied authoritarian system in 1997, the government through president shared state ownership and power with international actor by signing contract with the IMF. Although some people say that this was due to financial crisis, Chander, however, argues that the government’s motivation of involving the IMF to solve financial crisis is not merely to bring benefit for people (Chander 2005, p. 1224). This implicitly indicates that the Indonesian government could have other motive(s) when signing contract with the IMF in 1997. In authoritarian system, the government often tries to retain power at any price (Newton and Van Deth 2010, p. 281). When signing contract, Suharto may think that the IMF, with its financial resources and good international reputation, could help him hold the power and regain international trust. If the IMF believes Suharto, then other countries may also trust the government and reinvest their capital in Indonesia. This may be the reason why the government involves the IMF at that time. In contrast, SBY limits the IMF’s dominant intervention in Indonesia by paying all the liabilities. This is not only because of the improved economic capability, but also the matter of sovereignty. SBY does not see the IMF as the only tool to retain power because domestic actors also take crucial control in government. Democracy requires the government to work in line with the interest of majority of elected representatives, so that the government can maintain their power in government (Newton and Van Deth 2010, p. 276). Martinez-Diaz also recognises that the decrease in the IMF’s role in Indonesia was due to the democratic consolidation and wider political arena with new domestic policy actors (2006, p. 407 & 408). In January 2005, the Indonesian government, under SBY, for the first time set up its own agenda for donor-recipient meeting (Martinez-Diaz 2006, p. 408). This never happened in the Suharto era.  The democratic multi-party system has created different political culture, compared to in the authoritarian system. These changes show that different political systems give different level of power for the IMF to play its role in reference to Indonesian public policy.

Unlike the Indonesian authoritarian system, Vietnam with its one-party authoritarian system allows the IMF to play a role in limited way. The IMF could not impose its power and play a leading role in Vietnam because the Vietnam’s Communist Party takes dominant control over policies. In contrast with Indonesia, interestingly, Vietnam was open for foreign financial support only after the government introduced a comprehensive set of reforms and amended its foreign policy (Shivakumar 1996, p. 3257). In 1986, the Communist Party introduced a renovation strategy known as doi moi to encourage economic growth in Vietnam (Shivakumar 1996, p. 3257). The public administration reform was the main agenda for doi moi.  Although the programs under doi moi were hardly to be said very successful, doi moi had showed that Vietnam tends to protect its domestic public policies from international influence and keep the Communist Party to be the sole powerful decision maker. Vietnam does not want to share its sovereignty with international donors. The Communist Party also frankly said that they do not want the market guide them in their policymaking (Shivakumar 1996, p. 3263). The concept of profit, sounded by international institution, is not in line with their ideals of social egalitarianism (Cima 1989, p. 789). However, Vietnam cannot avoid the reality that the government needs international actors to help them overcome economic problems.  Vietnam is not immune to globalisation. The IMF finally assisted Vietnam in 1990 (Shivakumar 1996, p. 3257). The Vietnam’s openness to the IMF’s aid does not mean that the IMF takes dominant power to play in Vietnam’s policymaking. The ownership of Vietnam was dominantly still under the government’s control. According to the IMF Country Report, the Government of Vietnam published its own state-owned enterprise (SOE) reform framework and issued an action plan to ‘jump-start’ the SOE reform in the second half of 2001 (2002, p. 11). This led to a delay of the SOE reform in Vietnam because the policy framework moved from the original three-year reform framework and must be adjusted. This means that Vietnam still holds the dominant power on its policymaking due to its sovereignty, although the IMF has financial muscle to bargain.

The analysis of the IMF’s role in Indonesia and Vietnam leads people to an understanding that the IMF plays different role in the two countries in reference to public policy, depending on the authority given by the state. After receiving loan from the IMF, Suharto gave freedom to the IMF to exercise its power in Indonesia. Suharto invited the IMF as international actor to help him retain power at crisis. The Indonesian government, with the authoritarian system, was seemed to have less power than the IMF on the policymaking. Some people may think that Indonesia will be dictated by the IMF forever. When Indonesia enters the democratic multi-party system, that opinion is proven to be wrong. Under SBY, the Indonesian government limits the IMF power on the policymaking in Indonesia. The democratic multi-party system forces SBY to lead and run the country in accordance with coalition interests, not the IMF’s interests. The case in Vietnam also shows the same experience. With its one-party authoritarian system, Vietnam does not give the IMF a space to exercise dominant power on public policy. The Vietnam’s Communist Party saw the IMF as a potential rival that will harm the Party’s position as the highest decision maker in Vietnam. Although in the same authoritarian system, the IMF plays different role as happened in Indonesia and Vietnam. This shows that state controls the role of the IMF in reference to public policy in one territory.

In conclusion, the IMF plays an important role on public policymaking in the recipient countries, but still state with its sovereignty has the highest power that limits the IMF’s role. The financial power of the IMF has been experienced by its member countries at crisis. Through its structural adjustment programs and aid conditionality, the IMF imposes its power on policymaking in the borrowing countries. However, the IMF cannot play its role in a territory without authority from state. The political system in one country makes a difference on how state delegates its power to the IMF. The cases in Indonesia and Vietnam offer solid evidence showing that state decides the limit of the IMF’s power to influence public policy. Whether in the democratic multi-party or the one-party authoritarian system, state has the highest power to decide to what extent the IMF could exercise its power on the country’s public policy. The cases in Indonesia and Vietnam are not meant to prove that all recipient countries in the world have the same power to control the IMF’s influence. This is only a picture to show that the role of the IMF in reference to the borrowing countries’ public policy is not always limitless.

References

Chander, A 2005, ‘Globalization and distrust’, The Yale Law Journal, vol. 114, no. 6, pp. 1194-1236.

Cima, RJ 1989, ‘Vietnam’s economic reform: approaching the 1990s’, Asian Survey, vol. 28, no. 8, pp. 786-799, viewed 10 September 2010,

< http://www.jstor.org/stable/pdfplus/2644626.pdf&gt;.

Colebatch, HK 2002, Policy, 2nd edn, Open University Press, Philadelphia.

IMF 2002, ‘Vietnam: second review under the three-year arrangement under the poverty reduction and growth facility and request for waiver of performance criteria- staff report; staff statement; new brief on the executive board discussion; and statement of the executive director for Vietnam’, IMF Country Report No. 02/151, July, International Monetary Fund, viewed 10 September 2010,

<http://www.imf.org/external/pubs/ft/scr/2002/cr02151.pdf&gt;.

—– 2003, ‘Indonesia: ninth review under the extended arrangement – staff report; and press release on the executive board discussion’, IMF Country Report No. 03/376, November, International Monetary Fund, viewed 10 September 2010,

<http://www.imf.org/external/pubs/ft/scr/2003/cr03376.pdf&gt;.

—– 2007, Statement by IMF Managing Director Rodrigo de Rato at the Conclusion of his Visit to Indonesia, International Monetary Fund, Press Release No. 7/11, 24 January, viewed 10 September 2010,

<http://www.imf.org/external/np/sec/pr/2007/pr0711.htm&gt;.

—– n.d., About the IMF: Cooperation and Reconstruction, International Monetary Fund, viewed 10 September 2010,

<http://www.imf.org/external/about/histcoop.htm&gt;.

Larmour, P 2002, ‘Conditionality, coercion and other forms of ‘power’: international financial institutions in the Pacific’, Public Administration and Development, vol. 22, no. 3, pp. 249-260.

Martinez-Diaz, L 2006, ‘Pathways through financial crisis: Indonesia’, Global Governance, vol. 12, no. 4, pp. 395-412, viewed 10 September 2010,

<http://proquest.umi.com/pqdweb?index=4&did=1174969691&SrchMode=2&sid=4&Fmt=6&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1285635133&clientId=20870&gt;.

McLean, I & McMillan, A (ed.) 2009a, ‘Power’, The Concise Oxford Dictionary of Politics, Oxford Reference Online, viewed 10 September 2010,

<http://www.oxfordreference.com/views/ENTRY.html?subview=Main&entry=t86.e1065&gt;.

­­­—– 2009b, ‘Sovereignty’, The Concise Oxford Dictionary of Politics, Oxford Reference Online, viewed 10 September 2010,

<http://www.oxfordreference.com/views/ENTRY.html?subview=Main&entry=t86.e1286&gt;.

McTaggart, D, Findlay, C & Parkin, M 2007, Economics, Pearson Education Australia, New South Wales.

Nevile, Ann 2002, ‘Analitical framework’, in Ann Nevile (ed.), Policy choices in a globalized world, Nova Science, New York.

Newton, K & Van Deth, W 2010, Foundations of comparative politics: democracies of the modern world, 2nd edn, Cambridge University Press, United Kingdom.

Nooruddin, I & Simmons, JW 2006, ‘The politics of hard choices: IMF programs and government spending’, International Organization, vol. 60, no. 4, pp. 1001-1033, viewed 10 September 2010,

< http://www.jstor.org/stable/pdfplus/3877854.pdf&gt;.

Peet, R 2003, Unholy trinity: the IMF, World Bank and WTO, Zed Books, New York.

Polidano, C & Hulme D 1999, ‘Public management reform in developing countries’, Public Management Review, vol. 1, no. 1, pp. 121-132.

Shivakumar, MS 1996, ‘Political parties, development policies, and pragmatism in a changing world: lessons from Vietnam’, Economic and Political Weekly, vol. 31, no. 50, pp. 3255-3264, viewed 10 September 2010,

<http://www.jstor.org/stable/pdfplus/4404883.pdf&gt;.


About mofilink

Mofilink is a pool of perspectives, ideas and contribution for Indonesia government finances reforms.
Gallery | This entry was posted in Policy Learning and tagged , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s