By Janet Guttsman
Reuters, December 8, 1998
WASHINGTON - One year almost to the day after the International Monetary Fund approved a record-breaking rescue deal for South Korea, the Fund has been forced firmly on to the defensive.IMF experts say climbing currencies and falling interest rates show that the worst is over for the once-booming Asian economies caught up in a global financial storm.
But a senior official at the World Bank, the IMF's sister institution, lashed out last week at the high interest rates the fund prescribed for the troubled Asian states.
International financier George Soros, long a major investor in emerging markets, said the IMF was part of the world's economic problem.
"The present mode of functioning of the International Monetary Fund is far from satisfactory. They are, in fact, part of the problem," Soros told a meeting in Washington.
"[IMF programs] impose punitively high interest rates in order to stabilize the currency and re-establish the ability of the debtor country to service its debts."
The South Korean deal, a $58 billion package including $21 billion from the IMF, was approved by the IMF board on December 5, 1997, providing a massive cash injection to prevent default.
It was the third big international rescue program that year, and there have been two more massive deals since then -- a $22 billion package for Russia and $41.5 billion for Brazil.
The packages, involving money from the IMF, bilateral credits and loans from other multilateral institutions -- including the World Bank -- have always been controversial.
The money is released only if countries take stringent measures on budgets, interest rates and structural reforms, and some analysts have questioned if the pain is worth the gain.
World Bank President James Wolfensohn said the bank was not attacking IMF management of the Asian economic crisis.
But his chief economist, Joseph Stiglitz, said the high interest rates which helped in Latin America in previous years were of little use in Asia, where bankrupt firms would gain little if high rates prevented a further currency collapse.
Other experts say expectation that the IMF would step in to rescue ailing countries -- and the banks who invested there -- encouraged governments and investors to adopt irresponsible policies. They describe this phenomenon as "moral hazard".
But another group of experts believe that the IMF, racing against the clock to prevent Asian default and total economic collapse, did the best it could under difficult circumstances.
Some say the World Bank also shares the blame for any failures in Asia because it failed to warn about structural weaknesses, particularly in the financial sector, or to do enough to protect the poor.
"The World Bank has done too little, too late for the people of East Asia," said Njoki Nhoroge Njehu, director of the 50 Years Is Enough group, which lobbies for reform at the bank and the fund.
"These people have lived with the impact of the crisis for over a year. If these criticisms had been made a year ago, then maybe policies would have been different."
The Bretton Woods agreements which created the bank and the fund gave the bank responsibility for structural and development issues, while the fund took on responsibility for macroeconomic surveillance.
"I think if we respect each other's mandates, we can work well together," said Shailendra Anjaria, head of IMF external relations. "Certainly it would be helpful if the World Bank avoided jejune sentiment on macro, as we do on micro."
William Cline, chief economist of the Institute for International Finance, backed the IMF approach and said the damage done by the collapse of currencies could have been greater than that inflicted by high interest rates.
"Bear in mind that economists have debated for decades what was the cause of the Great Depression (of the 1930s), and they still have not got one answer that every economist with a PhD could sign up to," he said. "It's not surprising that there's a divergence of views at this stage of the crisis."
