July 30, 2003
The International Monetary Fund failed to gauge the seriousness of three of the worst capital account crises to erupt in recent years, and made errors in handling the resulting economic spirals in Indonesia, South Korea and Brazil, according to an independent report from the fund. The report is aimed at helping the IMF improve its crisis management.
The survey, issued late Monday by the IMF's independent evaluation office, found that the fund's major shareholders, which include the United States, played too large a role in dictating IMF policies. Shareholders, the report said, failed to initially authorize enough cash to offset the 1997-1998 Korean crisis, and they pushed Indonesia to overhaul the judiciary - a move that diverted the focus from the banking industry.
In 1998, the Indonesian economy shrank 13 percent after investors pulled out of its capital markets. The same year, Korea's economy shrank 6.7 percent, compared with a positive forecast by the IMF, the report said. In 1999, Brazil's economy grew 0.8 percent, although the fund had forecast a contraction.
"There does seem to be a general problem that fund programs are too optimistic on growth" projections, Montek Singh Ahluwalia, director of the independent evaluation office, said at a news conference in Washington. "In the case of Brazil, we were more cautious" because of mistakes made in Asia, he said.
The IMF in the late 1990's underestimated the vulnerabilities of the banking industry in Indonesia and Korea, the report said. The IMF was also overly concerned about the risks of letting the Brazilian currency float for fear it "would have unsettled international markets already nervous after the Russian default" in 1998, the report said.
Critics, such as former World Bank chief economist Joseph Stiglitz, have said IMF programs helped to deepen recent economic crises in countries such as Korea and Argentina. Ahluwalia said that although some of the bank's policies were unwarranted - such as encouraging fiscal tightening in Korea - the measures were so small that they played no role in deepening crises. The report recommended that the IMF review its approach to handling capital account crises, the massive reversal of capital flows to a country. It urged the fund to limit political interference from shareholders and make more of its information publicly available.
Evaluation Report on
IMF and Recent Capital Account Crises:
Indonesia, Korea, Brazil
More Information on the Independent Evaluation Office
More General Analysis on Internal Critics of the World Bank and the IMF
More Information on Internal Critics of the World Bank and the IMF
More Information on the International Monetary Fund
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