By Richard Borsuk, G. Pierre Goad and Michael M. Phillips
The Wall Street Journal
January 20, 1999
The International Monetary Fund, in its first comprehensive review of its Asia rescue packages, admits it made some mistakes.
But the IMF didn't give an inch on its favorite and much-criticized crisis weapon: tight money, the fund's insistence that countries jack up interest rates to strengthen their currencies and keep inflation low. "We have no apologies for the advice on monetary policy," said Jack Boorman, director of the agency's policy development and review department.
However, on other controversial components of its rescue programs in Thailand, South Korea and Indonesia the IMF is far less emphatic.
The acknowledgment by the IMF that things didn't go exactly as planned in Asia won't come as a surprise to the region's residents, to be sure. And the IMF offered ready excuses for its errors. Still, the self-criticism, in a staff study released Tuesday in Washington, answers some lingering questions about the Asian crisis and points to the issues that the IMF, other agencies and governments must grapple with to prevent a similar disaster in the future.
'Misgauged the Severity'
The study highlights the failure of the initial IMF programs in each country to accomplish the prime objective of stemming the outflow of private-sector capital. In Thailand, South Korea and Indonesia, capital outflows were much bigger after the rescue programs were introduced than the IMF anticipated. The programs also "badly misgauged the severity" of the economic downturns in the three countries, the study said. The result was a "vicious circle": Capital continued to flee because the initial programs failed. The programs didn't work because they failed to restore confidence.
"Yes, there were optimistic projections, but those projections were based on the programs working as planned," Mr. Boorman told reporters in Hong Kong and Singapore.
There's plenty of blame to go around. The IMF report said that a key reason the economic crisis has been much deeper in Indonesia, compared with Thailand and South Korea, was failures in Jakarta's monetary policies. Korea and Thailand tightened monetary policies more or less in line with IMF recommendations, but in Indonesia there was "a virtually complete loss of monetary control" in the face of the banking collapse and political turmoil, the report said.
Korea and Thailand "have, on the whole, been rather successful in implementing the [IMF] programs as agreed," the report said, adding, "whereas in Indonesia, in part due to the severity of the underlying political crisis, the program has repeatedly veered off course and required substantial modification."
Many critics of the IMF approach in Indonesia argue that the fund erred as soon as it and Jakarta agreed on a rescue program in October 1997, when it asked Indonesian authorities to shut 16 of the country's approximately 220 banks. Rather than boost confidence that Indonesia would act firmly to tackle its banking and economic woes, the closures sparked massive withdrawals from the banking system as panicked depositors worried that their banks, too, would be shut.
The bank runs, the IMF report notes, "led to calls for massive liquidity support" from Indonesia's central bank. Such support, the report adds, was provided "quite indiscriminately," causing money supply to balloon. "No monetary program could have withstood this kind of stress," the fund said.
Mr. Boorman, asked whether the decision to close the 16 banks was a mistake, said the IMF "agonized greatly" over the closures, and the impact of the move was "one of the most difficult questions" for the review committee. He defended the closures on the grounds that in a country with Indonesia's "history -- or lack of history" in dealing with problem banks, "the line had to be drawn somewhere."
Turning to other issues, the IMF report said that in all three countries fiscal policy was, in hindsight, too tight in the first versions of the rescue packages. The staff study argues that the recommended reductions in government spending in the original packages made sense based on the then-optimistic economic assumptions. Critics argued that a cutback in government spending just as consumption and investment were plunging reinforced the economic slowdowns. Fiscal policy has since been loosened considerably with the IMF's blessings. "The easing of fiscal policy could have come more promptly," Mr. Boorman said.
IMF Guide
Some economists and government officials have criticized the scope and complexity of the structural reforms in the rescue packages. While perhaps desirable in theory, the reforms demanded by the IMF have in practice been an unnecessary distraction in the middle of a crisis, critics say. What's more, failure to meet reform deadlines helped undermine confidence. Mr. Boorman said it is too early to conclude that the emphasis on structural reform was a mistake.
The study isn't just a bureaucratic autobiography; it's also a guide for IMF activities. In fact, after Brazilian authorities let the country's currency, the real, move freely against the dollar last week, they met with IMF officials who insisted on high interest rates and huge budget cuts to restore investor confidence.
That policy combination might support the value of the real, stem inflation and encourage investors to keep their money in Brazil, eventually allowing interest rates to fall. But the risk is that, as happened in Asia, it will stunt economic growth by making it extraordinarily difficult for companies and consumers to borrow, and aggravate Brazil's foreign-debt burden.
Even officials at the IMF's sister organization, the World Bank, have been critical of the tight-money approach, saying it's too hard on the local population. In a speech Tuesday, however, bank President James D. Wolfensohn said that in Brazil's case the policy is a reasonable way to stabilize the economy. He doesn't think the IMF "in its wildest expectations is talking about maintaining high interest rates."
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