By Paul Blustein
The Washington Post
December 3, 1998
The World Bank fired an extraordinary barrage of criticism yesterday at its
sister institution, the International Monetary Fund, denouncing as misguided
the high interest rates and other painful austerity policies the IMF
required
several Asian countries to pursue in exchange for international bailouts.In a report and in public comments at a news conference, World Bank officials sharply escalated a long-festering dispute with the IMF that has flared periodically since the advent of the Asian financial crisis. The World Bank's dissension has irritated and embarrassed the IMF and its supporters in the Clinton administration because it has bolstered criticism from many private analysts of the IMF's performance in managing the crisis, and aroused fears among some fund officials that their authority is being undermined.
Bank officials refrained from mentioning the IMF by name. But there was no mistaking their references to the policies favored by the fund, which is headquartered across the street from the World Bank in downtown Washington and was created at the same 1944 conference that led to the founding of the bank. The two institutions usually operate in tandem, with the World Bank lending for long-term development projects and the IMF providing short-term loans to tide over countries experiencing economic crunches.
Joseph E. Stiglitz, the bank's chief economist, was exceptionally scathing in assessing the results of the high interest rate policies adopted at IMF insistence by Thailand, South Korea and other Asian nations after investors began fleeing those economies in the summer and fall of last year. High interest rates were supposed to restore investor confidence and stop the plunge in those nations' currencies by offering returns attractive enough to lure investors back in.
"In fact, what one wound up with was both" suffocatingly high rates and collapsing currencies, Stiglitz said, because investors apparently concluded that the Asian economies would fall into deep recessions and the nations suffer social unrest.
His arguments echoed a bank report issued yesterday, which contained a chart showing "no simple connection" between higher rates and stronger currencies in Southeast Asia over the past 1 1/2 years.
Citing the case of Thailand, Stiglitz contended that once the panic was underway, it made little sense to increase interest rates to prevent an additional decline in the Thai currency, the baht. Real estate companies "were dead" because of a sudden collapse in property prices, "and further devaluation would not have made them deader," he said. Exporters, meanwhile, might be hurt to some extent by a declining baht, which made their foreign debts harder to repay, but they would also be helped because their products would become more competitive, Stiglitz said.
"You ask the question, 'Who are you protecting?' " by raising rates, Stiglitz said. "You're protecting firms that have gambled" that the currency would remain stable. "Who is paying the price? . . . Workers who are going to be put out of jobs."
The IMF declined to respond to the World Bank's latest broadside, just as it did in early October when the bank's president, James D. Wolfensohn, delivered a speech laden with implicit criticism that IMF-led rescues were insensitive to the needs of the poor. But the fund has vigorously defended high interest rates as a necessary evil in many cases to keep currency declines from becoming ruinous. In the IMF's view, the approach has worked.
At a news conference in late September, for example, Michael Mussa, the IMF's chief economist, contended that South Korea and Thailand -- after initially balking at raising interest rates -- had restored investor confidence by driving rates sharply higher and holding them there for several months. Both economies, which are showing signs of bottoming out, have eventually been able to lower rates, he said. "Those who argue that monetary policy should have been eased rather than tightened in those economies [when the crisis erupted] are smoking something that is not entirely legal," he added.
The bank's report was not entirely devoted to criticism of the IMF. The main section contained a forecast that global economic growth will slow by more than half in 1998, to a 1.8 percent annual rate, followed by a 1.9 percent rate in 1999. There also is a "substantial risk" of a global recession, the report warned, if Japan should fail to revive its economy, or if stock markets should crash in the United States and Europe, or if funds to emerging markets should dry up completely.
In the report and at the news conference bank officials also strongly questioned the value of unfettered capital flows across international borders and urged developing countries to impose controls over inflows of short-term funds from abroad.
The World Bank's latest statements on this issue are also likely to annoy the IMF, which has taken the lead in recent years in prodding developing countries to open their capital markets. The fund has grudgingly accepted that some countries may want to follow Chile in taxing short-term inflows to discourage "hot" money that can be withdrawn in a flash. But IMF officials have argued that the value of such controls is questionable.
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