By Paul Blustein
Washington Post
March 30, 1998
Protecting global economic order can be a chaotic business. It certainly was for Hubert Neiss, a top official of the International Monetary Fund, when he was dispatched to South Korea last November to strike a deal aimed at restoring investor confidence in the battered Korean economy.
Neiss, a 62-year-old Austrian with a flattop haircut, discovered the day after he arrived that South Korea was only about a week away from running out of the U.S. dollars needed to pay its debts. Ordered by his alarmed superiors to complete a massive rescue package faster than the IMF had ever done before, Neiss went without sleep for three straight days and nights to negotiate a record $57 billion bailout. Such is life these days for the international economy's shock troops -- the 1,000 economists from six continents, boasting PhDs from prestigious universities, who from IMF headquarters in downtown Washington exercise extraordinary influence over the affairs of countries thousands of miles away.
The institution they serve is a source of great mystery to the public and even to officials of countries to whom it is accountable. The IMF's basic function is simple enough: It dispenses loans to financially strapped governments that follow its prescriptions for economic restructuring. But many of the fund's activities are shrouded in secrecy, and even when it releases statements or documents to the public, it tends to hide behind a smoke screen of technical jargon.
The IMF's penchant for obfuscation is such that, several years ago, a fund report described Vietnam's invasion of Cambodia as a "misallocation of resources due to to involvement in a regional conflict," a former IMF official recalled. Another report, on South Africa before the end of apartheid, referred to the country's discrimination against blacks as "structural rigidities in the labor market."
But behind the IMF's forbidding facade are human beings -- and the Asian financial crisis imparts fresh urgency to questions about who these supranational technocrats are, how they operate and whether they know what they are doing. Rarely, if ever, in its 53-year-history has the IMF been forced to scramble so furiously as during its efforts to keep Asia's once-thriving economies from collapsing. Nasty developments have repeatedly taken IMF officials by surprise. And although the fund can claim success in having stemmed the financial turmoil in South Korea and Thailand, a deep crisis persists in Indonesia, the third big bailout recipient.
The mess in Indonesia is one factor fueling a mounting clamor of criticism against the IMF, which comes as Congress weighs a Clinton administration request for $18 billion to help replenish the fund's coffers.
Long Days, Sleepless Nights
A look at the inner workings of this powerful institution shows how its key officials have been struggling at crucial points in the Asian crisis to contain the instability menacing the world economy.
The "war stories" that IMF officials tell are both impressive and disquieting: becoming nearly faint with exhaustion from working long days while spending nights on the phone with colleagues a dozen time zones away; laboring under tight deadlines to distinguish healthy banks from insolvent ones in countries with impenetrable accounting practices; and resorting to messy compromises as markets plunge and defaults loom.
John Boorman, director of the IMF's policy development and review department, recalls how the fund was "getting facts on the run" as the bailout for South Korea was being negotiated in early December. "Decisions were being made on the basis of the facts on hand at the moment, rather than with the fullest information that one would like to have in those kind of circumstances," Boorman said. "The strain was enormous." At times during the crisis, IMF staffers have been thrown for a loop.
On Jan. 15 at a Jakarta restaurant, four IMF economists who had worked the entire previous night uncorked a bottle of wine at lunchtime. They were celebrating the announcement by Indonesian President Suharto that he was agreeing to a surprisingly extensive list of economic reforms, including the dismantling of monopolies and subsidies benefiting his children and cronies. "We were all very pleased," recalled Bijan Aghevli, deputy director of the IMF's Asia department.
But the team's sense of exhilaration began to vanish when Aghevli called on his cellular phone to find out how the Indonesian rupiah was faring in the currency market. The fund staffers were expecting the rupiah to get a sorely needed boost from the announcement; instead, it was falling sharply.
"I couldn't believe it," Aghevli said. In the weeks since, the rupiah has remained severely depressed. The fund blames the Suharto regime for having undermined the rescue's credibility by failing to show financial markets a convincing commitment to implementing reforms; Suharto complains that IMF remedies don't work. The IMF stands charged with running roughshod over a number of problems in its zeal to prevent Asian economies from going bust. It is sowing the seeds of future crises, critics fret, because big banks will conclude they can throw money recklessly around the world without fear of losing it in a default. Another common complaint is that the fund has imposed excessively austere policies on the already hard-pressed Asians.
But the IMF and its defenders counter that the fund's efforts have significantly reduced the ill effects of the crisis. Simply allowing an Asian "tiger" to collapse would pose unacceptable risks to the rest of the world, they argue, especially considering how rapidly financial contagion spreads. What is more, the IMF has had to contend with the reality that countries tend to reject its help until time has nearly run out.
Anoop Singh, a top official in the Asia department, recalls being summoned last July to the office of Stanley Fischer, the IMF's deputy managing director, for an urgent meeting on Thailand. At the time currency traders were dumping the Thai baht and fund officials suspected the government's reserves of dollars had eroded far more deeply than the Thai authorities were admitting. That suspicion later proved correct.
Yet even after weeks of quiet entreaties, the Thais were resisting inviting the fund to negotiate a rescue package. They were reluctant to submit their economy to IMF mandates. "Mr. Fischer said a team should just go to Thailand," Singh said. "And we said, 'But they have not asked for us!' And he said, 'Just go, and in the time it takes you to get there, I'll convince them.' "
Prescription for Success
Michael Mussa, the IMF's chief economist, pulled a bottle of pills from his pocket. "This is Coumadin," he said. "Essentially, it's rat poison." Mussa was using the pills, which he takes for a heart ailment, to illustrate a point: It's not easy to determine a country's ideal economic reform package. "What this does is interfere with coagulation of the blood," said Mussa. "It kills rats by causing massive internal hemorrhages. For me, taking this medicine in small doses helps guard against blood clots. On the other hand, it increases the risk of hemorrhage. "IMF programs are like medicine in that sense," he continued. "Some of the medicine has harmful side effects, and there are real questions about what the dosage ought to be. The best that can be hoped for is that we're prescribing more or less the right medicine in more or less the right dosage."
Remedies for sick economies are concocted in a beige limestone building 13 stories high and three blocks west of the White House. Although one-quarter of the 2,600 employees are American, the place has a distinctively Continental feel. That's in part because the managing director is traditionally a European -- currently, it's Michel Camdessus, a 64-year-old with a formal mien who previously was governor of the French central bank.
The fund's economists, the dominant force within the staff, consider themselves elite international civil servants. They fly business class, stay in luxurious hotels when on missions to foreign capitals and earn salaries that average $94,000 a year, tax free. (American staffers pay taxes on their earnings, but their salaries are raised accordingly.)
The IMF likes to depict itself as the servant of its 182 member countries. Founded in 1944 to oversee fixed currency rates, it still functions today in much the same way it did then -- as a sort of credit union, with nations depositing money that is lent to members in need. The United States has the biggest say in fund affairs, with an 18 percent voting share on the board, and its top policymakers are consulted closely by fund management. But while the IMF abides by the wishes of its major shareholder nations, it also is one of the most cohesive bureaucracies in Washington.
The institution's discipline is legendary. When a team of economists goes on a mission to a troubled country, they bring along a document -- typically the product of weeks of debate within fund departments -- spelling out what policies the country should adopt. When they start negotiating with the country's officials, they are expected to stick unfailingly to this pre-agreed approach, to convey the impression they are certain of what they are talking about. And even when they find themselves sympathizing with the objections raised by the country's officials -- as they often do -- the whole issue has to be debated again privately with officials back in Washington before the IMF negotiators make any concessions. One such battle occurred during last summer's rescue of Thailand after negotiations got underway. "It was awful," recalled Singh, who was on the Bangkok side of the tussle. "We had never worked this fast in any country. Deposits were flying out the doors of the banks. Over three nights, we were up in Bangkok, arguing with Washington."
Singh and the other fund economists in Bangkok favored allowing the Thai government to guarantee all bank deposits. The IMF Department heads in Washington feared it would set a costly precedent. A compromise was finally struck: The Thais would charge banks a fee to help pay for the guarantee on deposits.
Disputes within the staff are resolved by Camdessus, or -- more commonly -- by Fischer, a former economics professor at the Massachusetts Institute of Technology whose formidable intellect commands great respect among IMF staffers.
But any debate still takes place within an extremely hierarchical system that, some analysts say, makes the fund too rigid. Economists from the World Bank, who often conduct joint missions with the IMF, voice awe at the almost military manner with which IMF staffers back their superiors' judgments once a decision is reached, in contrast with the more freewheeling atmosphere at the bank.
Promotions -- from economist to senior economist; senior economist to deputy division chief; and so on -- occur only after a staffer has spent at least two years at each level. "You have division chiefs who have been there for 20 years, and it's very difficult to join at mid-career," said Laura Papi, who left the IMF in November. "So the organization is very inbred."
The fund's strong bureaucratic culture helps explain the argument advanced by some of its more vehement critics such as Jeffrey Sachs and Steven Radelet of Harvard University. They see an institution stuck in a mind-set that it developed during the Latin American debt crisis of the 1980s, when the chief problems were runaway budget deficits and inflation.
The IMF is too prone to fall back on familiar budget-cutting and other austerity measures, these critics complain. And it hasn't yet honed its expertise for dealing with problems that have cropped up in the 1990s, notably the weaknesses in many countries' banking systems and their vulnerability to sudden withdrawals of "hot" foreign money. "I don't want to say there's this absolute orthodoxy that never changes, but things do change slowly," said Radelet, who faults the fund for being particularly ham-fisted in the way it tried to restore public confidence in the Indonesian banking system by closing 16 insolvent banks. An internal IMF staff report acknowledges that the move backfired by worsening a panic among depositors, who feared that their banks might be closed, too.
Fund officials throw up their hands at much of this criticism. When countries lose the confidence of markets, they argue, the only sensible approach is to take painful steps such as raising interest rates to lure back investors. But even some IMF supporters concede that the fund needs to move faster at figuring out how to cope with new-style investor panics in countries that differ vastly from the profligate Latins of the 1980s. "The world has changed, and the fund staff is making major efforts to catch up," said David Folkerts-Landau, the former head of the IMF's capital markets division. "But it's a big ship that you've got to turn around."
Warning Signs
The IMF had kind words for South Korea in a November 1996 report. It "welcomed Korea's continued impressive macroeconomic performance" and praised Seoul's "enviable fiscal record." The report contained only the subtlest hints of problems in areas where the IMF just one year later would insist on wholesale reforms. There was no specific reference, for example, to the cozy ties between banks and chaebol conglomerates. There were no calls for insolvent financial institutions to be closed or foreign banks to be allowed greater entry into the market. In classic IMF vernacular, the report "noted the challenge of ensuring . . . the speed of structural reforms in the financial sector." It is easy to beat up the IMF for failing to see the Asian crises coming. What is less easy is to figure out what the fund might have been able to do about it.
The IMF has immense power to compel governments to accept its remedies when they land in trouble. Not only can the fund extend or withhold loans, its approval of a rescue for a country also implicitly signals it's all right for private international investors and banks to again put in money. But in countries that aren't seeking its help, the IMF is relatively toothless. Even when fund economists grow concerned about a country's economic shortcomings, they deliver their bluntest warnings secretly to government authorities to avoid unnerving markets. They couch their public advice in diplomatic language, hoping that polite phrasing will make it more likely to be accepted. IMF officials maintain they were worried about South Korea's banking system for some time. Folkerts-Landau recalls warning top bureaucrats in the South Korean finance ministry and central bank in April 1997 that the country's bad loan problem looked ominous.
But the South Koreans essentially ignored the IMF admonitions, Folkerts-Landau said, because they were confident in their stewardship over a fast-growing export powerhouse. Like most governments, "When I tell them, 'You've got a big problem,' they nod and say, 'Yeah, yeah, we're going to take care of that,' " Folkerts-Landau said. IMF staffers like to think they can make particularly well-informed judgments about countries' economies because financial and monetary authorities generally provide them with access to confidential information on matters such as bad bank loans. That is one reason why the fund refrains from "blowing the whistle" when it sees problems developing in a country, because doing so would likely cause the authorities to become considerably less cooperative. But the IMF still can be caught flatfooted about the depths of a country's woes.
When the mission led by Hubert Neiss arrived in South Korea in late November, "of course we knew the situation was pretty worrisome," said Wanda Tseng, one of Neiss's deputies. Financial markets had fixated on weaknesses in Asian economies that they had overlooked before, and South Korea's currency, the won, was nose-diving. But as Tseng and Neiss looked at figures in the central bank on their first day in Seoul, "it really dawned on us that we had a major problem," Tseng said. The figures showed that about $1 billion a day was flowing out of the country as foreign banks pulled their lines of credit to South Korean banks and companies. Moreover, the reserve supply of dollars that the central bank could tap for paying South Korea's obligations to foreigners was, in practical terms, much lower than the official figures suggested.
Back in Washington, it was Thanksgiving, and the IMF's top management was hardly prepared for the news that the 11th largest economy in the world was days away from default. Camdessus was in Paris. Fischer was attending a seminar in Egypt. John Boorman was at his Rehoboth vacation home, expecting 24 guests for dinner; he spent most of his holiday in conference calls. "We felt we were operating in a tinderbox," Fischer recalled. At the back of their minds, fund officials said, was the Latin debt crisis, when first Mexico stopped paying its obligations and then other countries followed -- a blow to financial confidence from which the region took years to recover. But while they were determined to avert a South Korean default, fund officials were willing to go only so far in softening their demands for economic reforms, because a weak program would undermine IMF credibility. "The Koreans said to us at one point, 'You have to give us money. We're too important,'" Fischer said. "And we said, 'You're not more important than Russia, and we just cut off the Russians.'"
Multiple Rescue Efforts
In the end, it took more than a single IMF rescue to restore financial stability to South Korea and Thailand. Both countries' currencies continued to weaken until new leaders came to power who enthusiastically embraced the IMF's approach and endorsed stronger reform packages. Today, the buzzword cited by hopeful IMF officials is "differentiation," the apparent recognition by markets that South Korea's and Thailand's prospects have dramatically improved, even if Indonesia's haven't. But Anoop Singh recalls an incident that illustrates how easily the fund has been lulled into thinking that Asia's financial storm has passed. To reward a secretary who had stayed up an entire night working in Bangkok on the Thai rescue, Singh bought her a silver box and Neiss opened a bottle of champagne. "We did that partly to thank her," Singh said, "but in the back of our minds was that this [the Thai agreement] was a unique and satisfying event, and we would not have to repeat it." The box was inscribed: August 14, 1997. In less than four months Neiss would be on a plane bound for Seoul.
To the Rescue
Major IMF bailouts during the recent Asia crisis
Thailand: $17 billion
(August 1997)
Indonesia: $43 billion
(October 1997)
South Korea: $57 billion
(December 1997)
International Monetary Fund
Headquarters: 700 19th St. NW
Founded: In 1944 to oversee postwar system of fixed currency rates
it began financial operations in 1947.
Members: 182 countries.
Staff: 2,600, includes about 1,000 economists
Managing director: Michael Camdessus
1997 finances: Member countries deposited about $200 billion; the United
States provides about 18 percent.
Web site: www.imf.org
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