Agence France Presse
January 19, 1999
The IMF acknowledged Tuesday it had misjudged the severity of economic crises in Thailand, Indonesia and South Korea but insisted that under its guidance the three were now poised to emerge from recession.
The assessment was contained in a report the International Monetary Fund described as its first systematic analysis of the crisis in the once-flourishing east Asian economies in 1997 and the IMF's response.
Pilloried in the US Congress -- as well as by certain private and academic analysts -- for its failure to foresee the meltdown, the Fund agreed that it had "badly misgauged the severity of the downturn."
It said its forecasts had been more optimistic than those put forward by outside observers, a stance that reflected pressures to agree with national authorities as well as a desire to avoid damaging confidence.
"However," the report argued, "it should also be noted that very few foresaw the severity of the downturn -- neither the authorities, the private sector, nor academic observers."
And, IMF Policy Development and Review Director Jack Boorman said the three countries only tentatively applied recommended remedies, including tightening monetary policies, in beginning, worsening the situation.
"They did not act soon enough or boldly enough to head off a full-blown crisis," Boorman told reporters at a news conference presenting the report.
The Fund responded by mobilizing billions of dollars in emergency credits from multilateral bodies and individual countries in exchange for commitments by Thailand, South Korea and Indonesia to tighten credit, restrain spending and carry out institutional reform.
The goal was to restore confidence and to halt a devastating outflow of private capital.
The Fund arranged a 17.2 billion dollar rescue package for Thailand in August 1997, followed by initiatives totaling 42 billion dollars for Indonesia in November and 58.2 billion dollars for South Korea the following month.
Although risks remain, notably from continued weakness in Japan and plunging commodity prices, "there are now signs ... that the recessions in these countries are bottoming out and financial market conditions stabilizing," the IMF said.
It added that while South Korea and Thailand had dutifully followed recommended policies and were now headed for recovery, Indonesia faced a more daunting challenge "due to the need to repair repeated policy slippages and arrest a side into an increasingly difficult social situation."
The report found that unlike typical crises, usually rooted in budgetary shortfalls, the troubles in east Asia stemmed from sloppy management of financial bodies and heavy-handed government intervention.
As a result, the massive capital inflows during the boom years of the early 1990s were misallocated. Such weaknesses were exacerbated in 1996 when all three countries suffered an export slowdown, which acted as a drag on economic momentum.
As currencies plunged, the IMF maintained that the first order of business was the stabilization of exchange rates to encourage investors to keep their money in the country.
That was accomplished by keeping interest rates temporarily high and credit tight, a position that according to Fund critics thwarted growth and increased social suffering.
The IMF report said it had to balance two objectives, curbing currency depreciation and capital flight on the one hand and spurring growth on the other.
The approach proved especially successful in South Korea and Thailand, where currency collapse was averted, according to the Fund, and where interest rates had returned to pre-crisis levels by the summer of 1998.
"This is not to deny, of course, that monetary tightening had a cost for the real economy," the report conceded.
"But the alternative would have been more costly."
Elsewhere in the study, the IMF found that its programs had not been sufficiently financed and that restoring confidence had been hampered by a perception that the three governments lacked the political will to reform.
While floating exchange rates, as adopted by Thailand and South Korea, led to currency depreciations, the two countries had no alternative. Defending exchange rates would have exhausted their dwindling supply of reserves, according to the IMF.
The report also took issue with critics who said the structural financial sector reforms demanded by the IMF imposed an excessive burden on already fragile economies.
"Attempting stabilization without strong structural reforms, especially in the financial and corporate sectors, would have been a costly effort to treat the symptoms without credibly addressing the causes of the disease," the report countered.
The IMF in addition defended its decision to press for the closure of struggling financial institutions at the outset of the crises, which detractors charged had undermined confidence.
"Delays in their closure may only have made their costs larger," said the Fund.
In hindsight, Boorman said there were three main reasons for the crisis: a lack of aggressive action in tightening monetary policies, overly optimistic growth reports due in part to a lack of transparency especially on foreign reserve information and slender private sector involvement in boosting staggering economies.
"It is possible that this crisis could have been avoided. It is a function of policy," he said.
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