Should the US Bail Out Indonesia?

By , Staff writer of The Christian Science Monitor

White House decision on Friday to help bail out Indonesia has revived a debate over whether American taxpayers should rescue foreign officials and investors from their own mistakes.

The US offered $3 billion on top of a $23 billion package put together by the International Monetary Fund (IMF) for the Southeast Asian giant. It is aimed at curbing financial market chaos that has spread globally. But the bailout has rekindled fears such aid encourages turmoil elsewhere by officials and investors to assume the Fund's safety net extends worldwide.

Although soothing markets in the short term, the Fund's initiative will probably backfire eventually, say some experts in international finance.

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"Long term, the prospects are bleak," says Allan Meltzer, an economics professor at Carnegie Mellon in Pittsburgh, Pa. "If we keep bailing out misguided investors and lenders we'll build ourselves a large crisis," he says.

The Indonesia aid package worries some members of Congress, too. As with Washington's $12 billion bailout of Mexico in 1995, lawmakers resist using tax dollars to rescue foreign speculators and bureaucrats. Opponents say Washington should stay away from Indonesia and - even at the risk of wider chaos - make those responsible for the mess find a solution themselves.

"Providing a bailout creates a moral hazard," says Ian Vasquez at the Cato Institute. "Governments can expect to be rescued from sloppy policies and investors can expect to have their losses cut," he adds.

The Clinton administration shied away from joining a $17.2 billion bailout for Thailand announced in August by the IMF, Asian Development Bank, Japan, and other Asian nations. Later, Washington was criticized in East Asia for abstaining from the aid, which has failed to stabilize the Thai baht and other Southeast Asian currencies after months of attack from speculators.

Now, the spread of turmoil has apparently prompted the Clinton administration to get off the sidelines. "Financial stability around the world is critical to the national security and economic interests of the United States," Treasury Secretary Robert Rubin said Friday in an endorsement of the Indonesia aid.

Washington's $3 billion will come from the Treasury's Trade Stabilization Fund as "contingency financing." The money will be used only if the IMF's "first line of financing" fails to stabilize markets. At least five other countries have also agreed to contribute to the pool of backup capital.

The White House tapped the Trade Stabilization Fund in 1995 when it failed to win support from Congress for the Mexican rescue package. So far, Congress is looking suspiciously at the Indonesia initiative.

"The reversal of administration strategy in dealing the the Southeast Asia crisis requires explanation to assure the support of the public and Congress," Rep. Jim Saxton (R) of New Jersey said in a statement Friday. Mr. Saxton, chairman of the Joint Economic Committee, called on the White House to disclose the full terms of the aid.

As part of the aid deal, Indonesia has agreed to a sweeping overhaul of it fiscal, monetary, and trade systems, which may undercut President Suharto's elaborate system of patronage.

If history is any guide, a drastic overhaul by Indonesia is unlikely. Recipients of IMF aid rarely meet the commitments they made in order to win aid, say experts. "Governments subscribe to reform only in a half-hearted sense and the influx of billions of dollars tends to delay reform," says Mr. Vasquez. "When capital is not forthcoming, officials concentrate on significant reform," he adds. Instead, officials, lenders, and investors should haggle out a solution to a financial crisis without the cushion of outside capital.

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