It is quite curious indeed that the following analysis bout the IMF appeared
in the Financial Times:
>Subject: Sachs on the IMF (from today's Financial Times)
>Date: Thu, 11 Dec 1997 06:29:17 -0800
>
>Jeffrey Sachs: IMF is a power unto itself
>THURSDAY DECEMBER 11 1997
>
>It is time that the world take a serious look at the International Monetary
Fund. In the past three months, this small, secretive institution has
dictated economic conditions to 350m people in Indonesia, South Korea, the
Philippines, and Thailand. It has put on the line more than $100bn of
taxpayers' money in loans.
>These bailout operations, if handled incorrectly, could end up helping a
few dozen international banks to escape losses for risky loans by forcing
Asian governments to cover the losses on private transactions that have gone
bad. Yet the IMF decisions have been taken without any public debate,
comment, or scrutiny.
>While it pays lip service to "transparency", the IMF offers virtually no
substantive public documentation of its decisions, except for a few pages in
press releases that are shorn of the technical details needed for a serious
professional evaluation of its programmes. Remarkably, the international
community accepts this state of affairs as normal.
>The world waits to see what the Fund will demand of country X, assuming
that the IMF has chosen the best course of action. The world accepts as
normal the idea that crucial details of IMF programmes should remain
confidential, even though these "details" affect the well-being of millions.
Staff at the Fund, meanwhile, are unaccountable for their decisions.
>The people most affected by these policies have little knowledge or input.
In Korea, the IMF insisted that all presidential candidates immediately
"endorse" an agreement they had no part in drafting or negotiating - and no
time to understand.
>The situation is out of hand. However useful the IMF may be to the world
community, it defies logic to believe that the small group of 1,000
economists on 19th Street in Washington should dictate the economic
conditions of life to 75 developing countries with around 1.4bn people.
>These people constitute 57 per cent of the developing world outside China
and India (which are not under IMF programmes). Since perhaps half of the
IMF's professional time is devoted to these countries - with the rest tied
up in surveillance of advanced countries, management, research, and other
tasks - about 500 staff cover the 75 countries. That is an average of about
seven economists per country.
>One might suspect that seven staffers would not be enough to get a very
sophisticated view of what is happening. That suspicion would be right. The
IMF threw together a draconian programme for Korea in just a few days,
without deep knowledge of the country's financial system and without any
subtlety as to how to approach the problems.
>Consider what the Fund said about Korea just three months ago in its 1997
annual report. "Directors welcomed Korea's continued impressive
macroeconomic performance [and] praised the authorities for their enviable
fiscal record." Three months ago there was not a hint of alarm, only a call
for further financial sector reform - incidentally without mentioning the
chaebol (conglomerates), or the issue of foreign ownership of banks, or
banking supervision that now figure so prominently in the IMF's Korea programme.
>In the same report, the IMF had this to say about Thailand, at that moment
on the edge of the financial abyss. "Directors strongly praised Thailand's
remarkable economic performance and the authorities' consistent record of
sound macroeconomic policies."
>With a straight face, Michel Camdessus, the IMF managing director, now
blames Asian governments for the deep failures of macroeconomic and
financial policies that the IMF has discovered. It would have been more
useful instead, for the IMF to ponder why the situation looked so much
better three months ago, for therein lies a basic truth about the situation
in Asia.
>There is no "fundamental" reason for Asia's financial calamity except
financial panic itself. Asia's need for significant financial sector reform
is real, but not a sufficient cause for the panic, and not a justification
for harsh macroeconomic policy adjustments. Asia's fundamentals are adequate
to forestall an economic contraction: budgets are in balance or surplus,
inflation is low, private saving rates are high, economies are poised for
export growth.
>Asia is reeling not from a crisis of fundamentals, but from a
self-fulfilling withdrawal of short-term loans, one that is fuelled by each
investor's recognition that all other investors are withdrawing their
claims. Since short-term debts exceed foreign exchange reserves, it is
"rational" for each investor to join in the panic.
>Without wider professional debate, the IMF has decided to impose a severe
macroeconomic contraction on top of the market panic that is already roiling
these economies. Consider the Korea programme (or at least those parts that
have been announced to the public). The won has depreciated by around 80 per
cent in the past 12 months, from around 840 a dollar to a record low of
1,565 yesterday; this currency depreciation will force up the prices of
traded goods. Yet despite that, the IMF insists that Korea aim for an
essentially unchanged inflation rate (5.2 per cent in 1998, in comparison
with 4.2 per cent in 1997). To achieve unchanged low inflation in the face
of a huge currency depreciation, Korea will need a brutal monetary squeeze.
And indeed this is just what the Fund has ordered. Short-term interest rates
jumped from 12½ per cent to 21 per cent upon the signing of the programme,
and have since risen further.
>The Fund argues that these draconian monetary measures are "to restore and
sustain calm in the markets" and "[to] demonstrate to markets the
government's resolve to confront the present crisis". It is hard to see how
recessionary monetary policy will restore calm. Indeed the panic has so
intensified since the signing of the agreement that Korean banks may now be
on the verge of outright default. Just one day after the measures were
unveiled, the 11th largest-conglomerate declared bankruptcy when Korean
banks abruptly refused to roll over its short-term debts. In recent days
more well-known local companies have gone under.
>In addition to the rise in interest rates, the IMF is insisting that fiscal
policy be tightened by 1-1½ per cent of GDP. On top of this, the IMF
required that 9 out of 30 merchant banks suspend operations. The IMF is
aiming for Korean growth to fall to 2.5 per cent in 1998 from 6 per cent in
1997. But the projected slowdown may turn out to be the least of Korea's
worries by next year, since the underlying macroeconomic measures could
easily push the economy into outright contraction. None of this overkill
makes sense for an economy that was (rightly) judged to be pursuing sound
macroeconomic policies just months earlier.
>A better approach would have been for the IMF to stress the strengths
rather than the weaknesses of the Korean economy, thereby calming the
markets rather than further convincing them of the need to flee the country.
Months ago, when the financial crisis began, the Fund could have quietly
encouraged Japan, the US and Europe to provide some credit support to the
Bank of Korea. It might well have worked with the major banks to encourage
them to roll over their short-term debts without inflaming the panic. With
appropriate confidence-building measures, Korea could probably have got by
with a modest slowdown in growth, no credit crunch, and a realistic time
horizon of a few years to complete its needed financial reforms.
>In more than six dozen developing countries, the IMF is in a position to
choose make-or-break financial policies. While its instincts are often
correct, they can sometimes be wrong, with serious consequences.
>In recent years, the IMF mishandled the Russian reforms (for example, by
insisting for more than a year that all 15 successor states to the Soviet
Union share a common currency, thereby delaying stabilisation and
undermining the political support for reforms). In Bulgaria, the IMF signed
a programme in July 1996 based on 2.5 per cent growth and 20 per cent
inflation in 1997. Instead, Bulgaria has suffered an outright collapse of
gross domestic product of more than 10 per cent, and inflation in the
hundreds of per cent. The IMF (in common with others) failed to foresee the
Mexico crisis in 1994, and the Asian crises in 1997.
>Three general conclusions can be reached. First, the IMF is invested with
too much power: no single agency should have responsibility for economic
policy in half the developing world.
>Second, the IMF's executive board should do its job of overseeing the
staff, rather than simply rubber-stamp the staffs' proposals. It is high
time the board consult outside expertise in the exploratory stages of IMF
operations; it should also canvas international opinion about the origins
and policy implications of the Asian crisis.
>Third, IMF operations should be made public, so that professional debate
and review can help ensure the highest possible professionalism of the
institution, especially since (for all its faults) the Fund will surely
continue to play an important role for many years in the future.
>The author is head of the Harvard Institute for International Development.
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