By Ibrahim Warde*
Le Monde Diplomatique
February, 1998
In its 1997 annual report, the International Monetary Fund "welcomed Korea's continued impressive macroeconomic performance [and] praised the authorities for their enviable fiscal record". Also, the IMF's "directors strongly praised Thailand's remarkable economic performance and " consistent record of sound macroeconomic policies". Indonesia was commended "for its prudent macroeconomic policy, its high investment and savings ratios and the reforms it had undertaken to open up its markets". Right up until the crisis broke, the Asian "tiger" economies seemed set to continue their upward march.. The credit rating agencies still viewed their debts favourably (1) and foreign banks were still aggressively competing for borrowers in these countries (2). Then, on 2 July 1997, came the crunch. The Thai baht fell, and the infection gradually spread to all the neighbouring currencies. The Malaysian ringgit, the Filipino peso, the Indonesian rupiah and even the Singapore dollar fell dramatically, and the stock markets in the region took a nosedive.
Thailand was the first to go knocking on the IMF's door. A $17 billion emergency rescue plan was devised, largely financed by the Japanese government. Interestingly, the US gave its agreement to the plan, but would not contribute. Indonesia was next: it was granted assistance amounting to $43 billion.
For President Bill Clinton, this financial crisis was just "a glitch on the road". Similarly, the Federal Reserve chairman, Alan Greenspan, described the crisis as "a salutary event" which would have no more than a modest impact on the United States. First, the collapse of the Asian currencies would have anti-inflationary effects. Second, there was a need for a "pause" in the vigorous Asian growth. American financial circles made no attempt to hide an optimism tinged with Schadenfreude. The Asian "miracle" had all along been a "mirage".
The turning-point came last November, when South Korea, on the verge of default, applied to the IMF for help. Bill Clinton changed his position, saying that the crisis had to be taken very seriously: if confidence could not be restored and the Asia-Pacific region as a whole could not recover, the US economy would be badly affected.
The problem was that South Korea, the world's eleventh largest economy, could drag all the other economies down with it. Its debt was estimated at $200 billion, 35% of which was owed to Japanese banks, already riddled with bad loans. This threatened to weaken Japan, the largest holder of American Treasury bills. And major American and European exporters - those who had successfully "tamed the tigers" - were starting to feel the effects of the collapse of their Asian customers (3).The biggest bailout package in history ($57 billion) was put together on 3 December 1997. Three groups of players were involved: international organisations, the governments of the wealthy countries and the creditor banks.
A first line of defence was put up by the IMF ($21 billion), the World Bank ($10 billion) and the Asian Development Bank ($4 billion). These amounts were available for disbursement, provided that South Korea undertook to introduce the necessary reforms.
A second line of defence, worth $22 billion, was assured by seven countries (United States, Canada, Japan, France, Germany, the United Kingdom and Australia). The creditor banks conducted negotiations separately on moratoria, debt rescheduling, bridging facilities - and their future involvement in the Korean financial system. In return, as with Thailand and Indonesia, Seoul entered into commitments in terms of growth, unemployment and inflation targets. The government also undertook to shut down a number of credit institutions and to allow foreigners to acquire holdings in the capital of banks and chaebols (4). The latter, heavily indebted, were also to be forced to publish consolidated accounts, work with internationally recognised auditing firms and make their accounting systems more transparent.
Last, with the country about to hold a presidential election, the three main presidential candidates had to give a written undertaking to comply with the IMF plan.
All three countries also had to make changes in political personnel and advisers. Indonesia asked Widjojo Nitisastro (the leader of a group of economists who studied in the United States, known as the "Berkeley mafia") to head up an agency which would supervise both the minister of finance and the governor of the central bank, and Paul Volcker, former American Federal Reserve chairman, became a government adviser. Thailand implemented ministerial changes to reassure investors. The Korean government, for its part, hired the services of two American investment banks, Salomon Brothers and Goldman Sachs (whose former chief was Robert Rubin, now US Treasury secretary), to negotiate with investors.
But the rescue packages could still prove insufficient. And it is not impossible that other countries - such as Malaysia, Russia and Brazil - might suffer similar liquidity crises. Worse still, the IMF, with its 2,100 staff, apparently does not practise what it preaches: it is short of cash, and its 181 members are being asked to increase their "subscriptions".
The IMF's funding mechanisms may be summed up in three figures. Member states' quotas amount to $190 billion, $50 billion of which are available for loans to countries in difficulties (5). A line of credit worth $25 billion (with the ten most highly industrialised countries, plus Switzerland and Saudi Arabia) may be used in the event of a threat to the international monetary system. The Fund is seeking to increase these amounts to $275, $73 billion and $50 billion, respectively (6).
It is essentially up to the United States, with a quota (which corresponds to its voting rights) at 18% of the total, to decide whether or not to allow these increases (7). Lawrence Summers, Treasury undersecretary (and the chief architect, alongside the IMF management, of the rescue plans), explains in all seriousness that the capital increase is essential "to keep pace with the scale of the global economy (8)". But he has not yet succeeded in winning US public opinion over to this, and still less Congress, which holds the purse strings.
Conservatives take issue with the IMF for obstructing the working of the market. Lauch Faircloth, Republican senator for North Carolina, complains that "The free market is no longer at work in the field of international finance. We have privatised the gains and socialised the losses (9)." By automatically coming to the rescue of floundering economies, the IMF raises the issue of "moral hazard". Indeed, assure bailouts encourage irresponsible behaviour and high-risk investments.
On the left, the government is criticised for spending large amounts of money to rescue operators on the financial markets and foreign governments at the expense of social and educational programmes. Some members of Congress go further. Bernard Sanders claims that the aid granted to the Indonesian government is illegal under the 1994 Sanders-Frank amendment, which prohibits the US Treasury from directly or indirectly bailing out countries whose social legislation does not recognise workers' rights (10).
Among the general public, the unpopularity of the IMF (and foreign aid in general) is such that some politicians - such as aspiring presidential candidates Malcolm (Steve) Forbes Jr. or Patrick Buchanan - have recommended the organisation's outright abolition. Despite such sentiments, any institution which enjoys the firm support of the markets has a bright future ahead of it. Jeffrey Garten, a former US under-secretary of commerce, who is now the dean of the Yale school of management, offers an explanation: "the IMF is a surrogate for what the markets want to see: a discipline, a plan to guide the economy (11)".
Back in December 1994, at the time of the Mexican crisis, the US Treasury dipped into its discretionary Exchange Stabilisation Fund for $12 billion in order to circumvent a likely Congress veto. The administration presents this operation as a resounding success. Passing over certain figures (the purchasing power of Mexicans has fallen by half; the poverty rate has risen from 30 to 50%), the architects of the Mexican rescue package cannot stress strongly enough that the Mexicans repaid their debt before the due date and that the operation proved profitable for Washington, netting the Treasury $500 million worth of interest.
Nevertheless, from the size of the sums involved, it is clear why the remedial measures which the potential beneficiaries are obliged to undertake are "necessary", even if they are absurd. The IMF is transposing measures which it knows (those administered to Latin American economies characterised by large bureaucracies, budget and trade deficits, high inflation, etc.) to the sharply-different Asian context.
Joseph Stiglitz, chief economist at the World Bank, went so far as to express his surprise, saying that these countries should not be pushed into a severe recession: "Virtually every American economist rejects the balanced-budget principle during a recession. Why should we ignore this when giving advice to other countries? (12)"
Moreover, a confidential IMF document reveals that some of its remedies have actually aggravated the Asian crisis. Shutting down the weakest Thai, Indonesian and Korean financial institutions was supposed to restore confidence, but in fact it produced the opposite effect, leading to huge withdrawals from sound, well-run banks (13).
As to the causes of the collapse, total confusion still reigns. Despite the severity and the overshooting of capital movements, the domino effects, the speculation and so forth, it runs counter to economic and financial orthodoxy that "real economies" could have been jeopardised by the "financial economy (14)".
Since the classic fundamentals (inflation, productivity, foreign trade) are, as everyone agrees, good, new scapegoats are needed: financial systems, institutions or even cultural characteristics which were being praised to the skies a few months ago are now in the dock. In this connection, The Wall Street Journal's ad hoc analysis was telling: "Savings can be good. But Koreans arguably save too much and spend too little. At 35%, Korea's savings rate is among the highest in the OECD. Consumption per capita in Korea is less than half that of Japan, and about a third of that in the US (15)."
Such instant analyses should be useful to the "experts", who, despite having been wrong all along, and having failed to see the crisis looming, are now engaged in a heavy-handed reshaping Southeast Asia.
* Lecturer at the University of California, Berkeley, co-author with Richard Farnetti of "Le Modí¨le anglo-saxon en question" (The Anglo-Saxon Model in Question), Economica, Paris, 1997.
(1) Financial Times, 9 December 1997. Moody's was later to explain that the Thai authorities left the financial
institutions a certain theoretical margin of error.
(2) William Cline and Kevin Barnes, "Spreads and risks in emerging market lending", Institute for International
Finance, Washington, December 1997.
(3) In this connection, see William Greider's far-sighted One World Ready or Not: the Manic Logic of Global
Capitalism, Simon & Schuster, New York, 1997.
(4) Conglomerates, which were behind the Korean economic miracle. Their name is contraction of the Chinese
words chae (property) and munbol (noble family).
(5) Note that these loans are not always repaid. The amounts outstanding now total $2.8 billion. Among the
countries which are behind in their payments are Iraq, Somalia, Sudan and Zaire.
(6) Los Angeles Times, 22 November 1997.
(7) Followed by Germany (5.7%), Japan (5.7%), France (5.1%), the United Kingdom (5.1%) and Saudi Arabia
(3.5%).
(8) The Wall Street Journal, New York, 22 September 1997.
(9) The New York Times, 13 January 1998.
(10) Multinational Monitor, Washington DC, November 1997.
(11) Los Angeles Times, 11 January 1998.
(12) The Wall Street Journal, 8 January 1998.
(13) The New York Times, 14 January 1998.
(14) See Michel Chossudovsky, "Une frénésie spéculative qui ébranle les économies réelles", Le Monde
diplomatique, December 1997.
(15) The Wall Street Journal, 24 November 1997.
Translated by Sally Blaxland
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