'Dollar diplomacy' rises again as foreign-policy tool

It's May 20, 1998, in Jakarta. The Indonesian economy is in shambles. Rioting has claimed hundreds of lives. And as 30,000 protesters occupy a plaza outside parliament, the vice president calls on President Suharto to step down.

But ultimately, it was a "foreign power" wielding financial "weapons" that ousted him, the former Indonesian president said in a recent account.

Back in the "foreign power" in question - the United States - officials scoff at Mr. Suharto's claim, and the former strongman offers no evidence. But his charge is the latest sign that Washington is pursuing dollar diplomacy more widely and aggressively than at any time in decades.

Since turmoil in world capital markets erupted 18 months ago, the US Treasury has ranged from Seoul, South Korea, to So Paulo, Brazil, trying to safeguard the world economy's flow of capital.

But as the globe's lifeguard of liquidity, the US Treasury is not always appreciated. Its involvement in the affairs of nations with troubled economies may backfire - possibly leading some of them to renounce the laissez faire ethos and impose controls on international capital.

Consider Indonesia. Last year the US thwarted a Suharto plan to restore economic stability by introducing a "currency board." This would have backed the Indonesian rupiah with a fixed amount of US dollars, allowing the currency to freely trade at a fixed rate against the dollar.

The US said Suharto lacked the credibility to maintain a rigorous currency board, saying it would have helped his family spirit away some of their riches.

The Suharto regime "found itself incapable of making the hard economic and political decisions that were required," says Alan Larson, assistant secretary of State for economic and business affairs. "It faced a difficult test and failed it."

Critics disagree. Within the US, "there was a feeling Suharto was just another Ferdinand Marcos [former president of the Philippines] and we had to get rid of him," says Merton Miller, a University of Chicago professor and winner of a Nobel Prize in economics. Treasury's objection to a currency board was "not that it wouldn't work but that it would, and if it worked, they were stuck with Suharto."

"The Clinton administration was determined to mortally wound or topple President Suharto, and it was betting on monetary chaos to do the job," says Steve Hanke, professor of applied economics at Johns Hopkins University here and a Suharto adviser. (A similar claim by Suharto was reported recently in the Indonesian newspaper Harian Terbit.)

US officials deny the assertions. "There are only so many ways you can say it is simply not true," Mr. Larson says. Moreover, Washington has merely met requests for help: Indonesia and every other troubled country during the past 18 months has called for US technical and financial aid, officials note.

Whether real or imagined, US involvement can create hostility to open international markets. Warning of foreign abuse, Malaysia last September imposed capital controls.

Indeed, most analysts agree that the US has used the financial chaos in some countries - especially South Korea - to help pry open their capital markets. "During a crisis, countries do things you weren't able to negotiate for two decades because the countries didn't really need financial support," says Morris Goldstein at the Institute for International Economics here.

EVEN a less-invasive financial diplomacy can spur hostility. Bailouts approved by the US and executed by the International Monetary Fund have faltered in part because Treasury and IMF officials overestimated how well financially stricken countries would adapt to strings attached to the aid.

In Brazil and Russia, the Treasury misjudged political opposition to budgetary sacrifices required for IMF aid. In South Korea and Thailand, the Treasury did not expect such high costs to the grass roots from austerity required by the IMF, critics say. Indeed, last month the IMF acknowledged "overselling" fiscal belt-tightening as a condition for aid to Asian countries.

Treasury says it tries to attune itself to a country's nuances by filtering its proposals through government intelligence and foreign-policy experts. "Secretary [Robert Rubin] makes most of the judgments" in financial diplomacy, says a senior Treasury official on condition of anonymity. "But many judgments have broad foreign-policy implications, so it is very important for us" to conceive initiatives "based on [information] the foreign policy community can provide."

But even the most balanced, informed financial diplomacy sometimes requires extreme measures to restore order. "When you get into a global financial crisis, those concerns [of market failure] get pushed right to the center and tend to dominate other things," says Mr. Goldstein, formerly with the IMF.

DOLLAR diplomacy has been a hallmark of the Clinton administration since the early 1990s, when it began aggressively helping US business profit from the post-cold-war dismantlement of free-market obstacles.

But today, rather than just seize on the bottom-line advantages of "globalization," the administration is scrambling to safeguard world economic stability. Short term, the administration seeks to curb market tumult; midterm, to revive growth in ravaged economies; and long-term to curb a backlash against free trade and open capital markets, says Larson.

Recently, Treasury has tried with mixed success to realign finances in more advanced economies. For more than two years, the Clinton administration has called on Japan to stimulate its economy and shake up its debt-ridden banking system.

Treasury has also wielded unusual leverage in Europe, persuading other members in the Group of Seven industrialized economies to cut interest rates in an effort to head off a liquidity crunch and a global slowdown.

But Treasury's policymaking heft has been clearest in relations with Russia, where last August it led efforts to restore financial stability and defend what were deemed vital US strategic interests. Even so, a US-backed aid package for Russia failed to prevent a ruble devaluation and debt default.

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