The Money Men by Chris Bowen (superbooks4u .txt) 📕

The Asian crisis had a bigger impact on Indonesia than the GFC had on the US. The contraction was bigger. And the prescription that the IMF and the US forced on Indonesia was the exact opposite of what the US did when they faced a crisis. They enforced cuts on Indonesia. When it came to the US they stimulated demand.24

In Australia, key observers were watching the IMF’s behaviour with increasing alarm. Most significant of all were the attitudes of the RBA governor, Ian Macfarlane, and its deputy governor (and Indonesianist), Stephen Grenville. As Grenville recalls: ‘In January 1998 we concluded that the IMF basically didn’t know what it was going to do in Indonesia.’25 The RBA decided to make its views clear. As Kelly puts it, ‘in one of the most critical stands in its history, the RBA decided to declare war on the IMF’.26

Without the support of its government, however, the RBA would be limited in its ability to do anything about the worrying situation. And it was no fait accompli that the important trio of Howard, Costello and Downer would agree with the RBA’s concerns. The federal Treasury was a lot more relaxed about the IMF’s approach, in keeping with the view that the US Treasury was espousing. In fact, the Clinton administration strongly supported the IMF’s actions. Several key figures in the Australian Government came to the conclusion that while the IMF was simply making a mistake, the United States was keenly aware that the IMF’s actions could bring about the fall of autocratic Indonesian president Suharto, a scenario about which it was very happy.

Having been alerted to the RBA’s concerns, Costello convened a meeting at which he would hear from the RBA and the Treasury together. On this occasion, he found the RBA view much more convincing. To their credit, Howard and Downer also saw the logic in the RBA’s perspective. An important meeting of the National Security Committee of the Cabinet was then called at which Macfarlane and Grenville were able to outline their concerns directly. Costello was not voluble in this key meeting, but such was the cogency of the RBA’s view that he did not need to be. Costello came to the conclusion that the IMF was mishandling the situation in Indonesia, and indicated that he was prepared to assert to both the IMF and the Clinton administration that mistakes were being made. In this, he was both correct and courageous, particularly for a treasurer of reasonably short tenure.

Costello’s stance was not the reason, however, that Australia got through the crisis unscathed. Nor was the fact, as Costello has claimed, that Australia was returning to surplus. The key difference between Australia and other Asian countries, even those with higher capital reserves, was that Australia had a floating exchange rate. Thailand, South Korea and Indonesia all had to float their exchange rates in distressed, less-than-ideal circumstances. Australia’s exchange rate fell below US50 cents, acting as a buffer—just as it was supposed to do. As Macfarlane has said: ‘It was the float that got us through. If we had a fixed exchange rate then we would have had a crisis like Asia. There’s no doubt about that.’27

Costello and Downer both put the views of the Australian Government to the IMF and the Clinton administration. This led to some acrimonious meetings, particularly with US Treasury secretary Larry Summers, who accused Australia of ‘fuelling Indonesia’s resistance to taking the hard medicine’.28 Costello told me in 2015: ‘My meetings with Larry Summers were the most unpleasant of my life. Ted Evans told me … that he’d never seen anything like it.’29

Eventually, the IMF realised that its program simply was not working, which led to a revised, more realistic package being negotiated between it and Indonesia. This was not enough to stop the Suharto government from falling, but it did lead to a better economic outcome. Five years later, the IMF issued a mea culpa of sorts when it admitted that ‘In retrospect, the extensive structural conditionality in the January 1998 program became a distraction from taking much needed action on bank and corporate debt restructuring, which was missing from the January program.’30

It is questionable as to whether Australia’s stance had an impact on global deliberations during the Asian financial crisis. Paul Blunstein’s definitive history of the Asian crisis, The Chastening, makes no mention of Costello or Australia. But when Turkey and Argentina later experienced economic difficulties, the IMF was much more constructive in the way it dealt with these countries. Costello is at least entitled to feel satisfaction that his complaints, rejected at the time, undoubtedly led to a better approach by the IMF to later crises.

Likewise, Australia’s participation in the IMF bailout of Thailand, and in those of South Korea and Indonesia, was the right thing to do. It did Australia credit to have participated so fully in the management of the crisis (in fact, Australia and Japan are the only two countries that took part in all three bailouts). When the G20 was formed, due to a recognition that international forums had not adequately dealt with the issues and challenges thrown up by the Asian crisis, it was partly Australia’s advocacy and activism at the time that saw it included. (Contrary to popular belief, the G20 does not represent the world’s twenty largest economies. Rather, there is a degree of arbitrariness as to which nations are included.)

The Great Tax Adventure: the GST

During Costello’s tenure as treasurer, Australia instituted a broad-based consumption tax, something that both Howard and Keating had attempted but in which they had been stymied by their respective nervous prime ministers. The dynamics of this new attempt to introduce a GST were fundamentally different from the first two attempts in 1979 and 1985. On this occasion, a treasurer with policy ambitions did not have to convince or pressure a reluctant prime minister. Importantly, this time, the prime minister