--------- Begin forwarded message ----------
From: "Taylor-Kamara, Obai A." <OATaylor-Kamara@WLRK.COM>
To: LEONENET@MITVMA.MIT.EDU
Subject: NY Times on IMF
Date: Fri, 2 Oct 1998 10:19:42 -0400
Message-ID: <B7484198F92DD211AE7200805FBEF7AE68799E@mail3.wlrk.com>
October 2, 1998
I.M.F. Role in World Economic Woes Is Hotly Debated
Related Articles
Rubin Urges More Disclosure in Global Finance
I.M.F. Lets Its Rule on Full Repayment Slip (Aug. 26)
Second-Guessing the Economic Doctor (Feb. 1)
By DAVID E. SANGER
ASHINGTON -- When the world's finance ministers and
central bankers gathered last year
in Hong Kong, they nervously congratulated each other
for containing -- at least for the
moment -- a nasty financial brush fire in Asia. In a year's
time, many predicted in hallway chatter, the
troubles in Thailand and Indonesia would look like a replay of
Mexico in 1995 -- a rough bump in
the road for a world enjoying remarkable prosperity.
Talk about bad market calls. Twelve months later, as the same
financial mandarins clog Washington
with their limousines and glide through endless receptions at
the annual meeting of the International
Monetary Fund and the World Bank, just about everything that
could have gone wrong in the world
economy has: the worst downturn in Japan since World War II,
economic meltdown in Russia, a
depression in Indonesia that is plunging 100 million people
below the poverty line, and deep fears
over what happens next in Latin America.
What makes this year's IMF meeting most remarkable, though, is
that the harshest criticisms are
directed at the monetary fund itself, and, by extension, at
the U.S. Treasury, which is viewed as the
power behind the IMF.
This year, in place of confident predictions, there are mutual
recriminations. Arguments are breaking
out over whether the true culprits were crony capitalists and
weakened leaders like Russian President
Boris Yeltsin, or huge investors who poured money into the
world's emerging markets with reckless
abandon in the mid-1990s and panicked in the past 12 months.
Whatever the reason, one reality prevails: Hundreds of
billions of dollars have fled from economies
on four continents -- seeking the safest havens possible,
often in the United States -- and the money
is not returning anytime soon.
And the subtext of every seminar on capital flows and every
conclave of nervous ministers will be
some painfully blunt questions: Can this be stopped? Or is the
world headed for a global recession?
Fifty-three years ago the IMF was created after the Bretton
Woods conference which sought to
stabilize the world economy and secure the peace after World
War II. Now it is under attack from
all sides, charged not only with worsening a bad situation by
misjudging the economics, but with
being politically tone-deaf in some of the most volatile
capitals in the world, from Jakarta, Indonesia,
to Moscow. For the first time, there are disturbing questions
about whether the institution itself is still
capable, financially or politically, of containing the kind of
economic contagion that caught the world
unaware.
Once, the IMF's critics were largely found in Africa and South
Asia, were the fund was often viewed
as arrogant; today they include Wall Street's biggest players
and top officials in the most powerful
economies of Asia and Europe.
Only a few -- including former Secretary of State George
Schultz and members of Congress who are
increasingly suspicious of all international institutions --
are talking about scrapping the IMF
altogether. But almost everyone is talking about creating a
"new financial architecture" that can do
what the old one clearly cannot: smother financial wildfires
before they leap around the globe.
President Clinton, British Prime Minister Tony Blair and other
leaders, after months of silence, have
edged into the debate, in some cases wresting the issue for
the first time from their finance ministers
and central banks. Their fear, their advisers say, is that 15
months of financial turmoil are now
threatening political stability.
The blunt-speaking Prime Minister of Singapore, Goh Chok Tong,
recently described the cost of
failure in stark terms that both Clinton and Treasury
Secretary Robert Rubin have avoided. "A
prolonged economic downturn in Asia will revive latent
tensions against the West," he warned.
Such concerns have turned this year's meeting into a tumbled
mass of worries and a groping for short
and long-term solutions. The Japanese, the French, the
Southeast Asians are all arriving in
Washington with different diagnoses of what went wrong, and
different solutions about how to set it
right. The United States has its own set of plans, a mix of
suggestions to force more disclosure of
financial data in countries around the world and to impose
more American-style financial standards
and regulation.
Meanwhile, an ideological argument is breaking out over
whether the world should slow down a long
march toward more free and open markets -- a strategy pressed
by the Clinton administration for the
past six years. Others argue that it is unwise to start
rebuilding the hospital while the patients are still
on the operating tables.
"Last year the standard answer that all of us were given came
down to this: 'We have the IMF and
the World Bank, and they know best,"' Indonesian Foreign
Minister Ali Alatas said over breakfast in
Washington the other day, reflecting on how the crisis turned
30 years of astounding growth in his
country into an overnight depression.
"Then they said everything that went wrong was our fault," he
said. "But now, now I think people
know that much of the problem came from the outside, and we
need something better."
And the IMF itself is beginning to fight back, an awkward role
for an institution dominated by Ph.D.
economists who are unaccustomed to being openly challenged.
"Every place you turn you read the same story, that we came
in, that we made things worse," said
Stanley Fischer, the deputy managing director of the fund, who
was born in Northern Rhodesia --
now Zambia -- and became chairman of the Massachusetts
Institute of Technology's economics
department before taking a job that has now put him in the
center of the financial storm.
"We frequently get the blame, some of it well-deserved," he
said. "But it is politically convenient for
governments around the world to cry, 'The IMF made us do it,'
and pin their mistakes on us. That's
fine. We'd rather be loved, but more than that we'd like to be
effective."
MISCALCULATIONS, POLITICS AND SAFETY NETS
On a steaming January day, Michel Camdessus, the IMF's top
official, slipped into Jakarta to the
private residence of President Suharto and sat down for a
four-hour meeting to tick off, line by line,
the huge reforms Indonesia would have to implement in return
for tens of billions of dollars in
emergency aid. Two previous deals had collapsed when Suharto
ignored the fund's conditions, so
Camdessus insisted that he strike a deal directly with
Suharto, then Asia's longest-serving leader.
It was a meeting of men who knew different worlds of power
politics: Suharto rose as a general in
central Java, and Camdessus had detonated mines in Algeria for
the French army before entering the
French Treasury on his way to becoming head of France's
central bank.
"It was all there," a senior IMF official recalled. "He was
told he had to dismantle the national
airplane project, the clove monopoly, all the distribution
monopolies."
At one point, Camdessus looked at the impassive Suharto and
said, "You see what this means for
your family," a reference to their vast investments in the
country's key industries.
"He said, 'I called in my children, and they all understand."'
But within months, that exchange in Jakarta came to symbolize
the IMF's twin troubles: Its inability to
understand and reckon with the national politics of countries
in need of radical reform, and its focus
on economic stabilization rather than the social costs of its
actions.
Suharto had no intention of fulfilling the agreement. It was,
one of his former Cabinet members said,
"a delaying move that was obvious to everyone except
Camdessus."
Perhaps one reason why the IMF sometimes appears tone-deaf is
that its senior staff is almost
entirely composed of Ph.D. economists. There are few officials
with deep experience in international
politics, much less the complexities of Javanese culture that
were at work in Indonesia. Historically,
experts in politics and security have gravitated to the United
Nations, development experts to the
World Bank, and economists to the IMF -- creating dangerous
gaps in a crisis like this one.
As a result, the fund had only a rudimentary understanding of
what would happen if its demands were
met and all Indonesia's state monopolies were quickly
dissolved. While that system lined the pockets
of the Suhartos and their friends, it also distributed food,
gasoline and other staples to a country that
stretches for 3,000 miles over thousands of islands. To help
balance the budget, the fund demanded
a quick end to expensive subsidies that keep the price of food
and gasoline artificially low.
But that, combined with the huge currency devaluation that
sparked the crisis, resulted in high prices
and shortages that fueled riots that continue to this day, as
millions of Indonesians lose their jobs.
The IMF -- unintentionally, its officials insist -- also sped
Suharto's resignation, insisting on the
elimination of "crony capitalism," code words for removing the
Suharto family from the center of the
economy. Ultimately, that may prove to be Indonesia's
salvation, if the new government can contain
the rioting against the ethnic Chinese minority -- whose money
is desperately needed to save the
country's fast-shrinking economy.
"It is worth noting," Fischer said this week, "that our
programs in Asia -- in Indonesia, Korea and
Thailand -- only took hold after there was a change in
government."
Nonetheless, the Indonesia experience has revived the argument
that the IMF is so focused on
stabilizing banks and currencies, on preventing capital flight
and freeing up markets, that it is blind to
the social costs of its actions. Among the toughest critics
has been its sister institution, the World
Bank, whose main charge is alleviating poverty.
"You've seen the tension almost every day," one senior World
Bank official said recently. The bank
has gone to extraordinary lengths in recent months to
differentiate its role from that of the fund, and to
announce a tripling of aid to the poorest in the countries hit
by the economic chaos.
Even U.N. Secretary General Kofi Annan has joined the
argument, warning in a speech at Harvard
recently that "if globalization is to succeed, it must succeed
for poor and rich alike. It must deliver
rights no less than riches. It must be harnessed to the cause
not of capital alone, but of development
and prosperity for the poorest of the world."
IMF officials say they are changing strategies when they see
they are exacting too great a social cost.
"It's a very difficult formula to get exactly right," Fischer
said in August, as Russia was teetering and
the IMF was sending in $4.8 billion in aid that was rapidly
wasted. "You need enough discipline to
send the right message to the markets and keep investors from
fleeing. But you need enough leeway
to keep people from suffering more than they otherwise would."
In recent months, he noted, the IMF has allowed more spending
to sustain subsidies for basic goods
for longer periods in Indonesia, Korea and elsewhere.
"There is a new flexibility at the IMF" a senior Indonesian
official concluded recently. "It is a lot
better."
A U.S. PAWN, OR A RUNAWAY AGENCY?
The Clinton administration admits that the IMF has many
failings, many of them on display this year.
But it insists that the world has gone through global
financial crises without an IMF once before in this
century -- and the result was the 1930s.
"I have no doubt the situation over the past year would have
been much worse -- with greater
devaluations, more defaults, more contagion, and greater trade
dislocations -- without the program
agreed with the IMF and the finance it has provided," Deputy
Treasury Secretary Lawrence
Summers told Congress last week.
Many Republicans and some Democrats are unconvinced. Even
though the Senate has
overwhelmingly approved an $18 billion contribution to the
fund to help it fight new crises, the House
defeated that measure two weeks ago. The fund's last hope of
getting the money, which will free up
nearly $100 billion in contributions from other nations
waiting for the United States to act, will come
when the House and Senate try to resolve their budget
differences in a conference committee in the
next 10 days.
A rejection, Rubin insists, would send a message around the
world that the United States is turning its
back on the one institution charged with restoring economic
stability.
Everywhere else in the world, though, politicians and
businessmen insist that one of the biggest
problems with the IMF is that, contrary to the view of
Congress, it acts as the U.S. Treasury's lap
dog. Ask in Jakarta or Moscow, and the response is the same:
The IMF never ventures far without
looking back for the approving nod of its master.
That view may not be far wrong. In ordinary times, the United
States largely leaves its hands off, as
the IMF's executive board -- made up of 24 representatives of
the 182 member nations -- delve into
the intricacies of budget policy in Greece or banking
regulation in Argentina. "Surveillance" of the
world's economies is the fund's main activity.
When the United States weighs in, however, is when the IMF is
called on to rescue a country in deep
trouble. Only then does the IMF -- and the U.S. Treasury --
have the leverage to extract
commitments in return for billions in aid. In theory, the U.S.
influence is limited: It has an 18.5 percent
vote in the fund. Germany, Japan, France and Britain have
about 5 percent each. But in practice the
United States usually gets its way, exercising its influence
behind the scenes, often in interactions
between Fischer and Summers.
The two met when Fischer was on the MIT faculty and Summers
was a graduate student taking one
of his classes, later becoming a colleague at MIT. Each served
as chief economist of the World
Bank. It was Summers who was instrumental in placing Fischer
in the fund's no. 2 job, and these
days they talk constantly.
"It's usually a warm relationship," Fischer said this summer.
"Remember, this is a job where you
cannot turn to outsiders for advice -- you can't call the
chief economist at a Wall Street firm, or even
many of your academic friends, because so many of the issues
are confidential."
The Treasury's relations with Camdessus are often more
strained as he plays the role of world
diplomat, traveling the globe and trying to coax along
political leaders. The tensions were obvious
from the start of the Asia crisis. The fund made little secret
of its displeasure that the United States
was not offering direct aid to Thailand, a major U.S. ally, as
a sign of support and confidence.
Mindful of the backlash in Congress when Mexico was bailed out
with U.S. money, that was the last
thing the Treasury planned to do. Summers, in turn, thought
the fund was not forcing the Thais to
implement its reform commitments rigorously enough or disclose
their true financial picture. Within the
U.S. government there was other dissension: The State and
Defense Departments felt the United
States should do more for Thailand, but backed off when the
Treasury asked if they would like to
pony up some aid out of their own budgets.
There were other conflicts. When Japan used the last IMF
meeting to propose setting up a $100
billion "Asia Fund" -- one that would exclude the United
States and would probably offer aid under
much more relaxed conditions than the IMF does. Rubin called
up Camdessus at breakfast one
morning and told him that the Japanese proposal would undercut
the IMF's authority.
"We've just had a dispute with Michel," Rubin reported to his
aides as he returned to his orange juice
and croissant. One of them shot back: "And it's only 8 a.m."
Camdessus backed down at Rubin's insistence and walked away
from money that Asia could have
used. Japan says it will be back with a similar proposal this
weekend, this time for a $30 billion fund.
Camdessus has also rankled U.S. officials with statements that
amounted to cheerleading to reassure
the markets -- sometimes in the face of the facts. In June,
with Russia on its way to collapse,
Camdessus declared that "contrary to what markets and
commentators are imagining" about the slow
collapse of Russia's economy, "this is not a crisis. This is
not a major development."
The bailouts of Russia and South Korea were prime examples of
how Washington muscles into the
IMF's turf as soon as major U.S. strategic interests are
involved.
Last Christmas, as South Korea slipped within days of running
out of hard currency to pay its debts
in December, it sent a secret envoy, Kim Kihwan, to work out a
rescue package. "I didn't bother
going to the IMF," Kim recalled recently. "I called Summers'
office at the Treasury from my home in
Seoul, flew to Washington and went directly there. I knew that
was how this would get done."
Within days the Treasury dispatched David Lipton, its most
experienced veteran of emergency
bailouts, who is leaving his post as undersecretary for
international affairs this month, to shadow the
IMF staff's negotiations with the government in Seoul.
Fischer was displeased. "To make a negotiation effective, it
has to be clear who has the authority to
do the negotiating," he said.
WHO LOST RUSSIA?
The pattern was repeated this summer, when the United States
raced to put together a $17 billion
package for Russia. The IMF's staff in Moscow declared that
Russia needed no money at all -- it
just needed to enact policies that would restore confidence in
investors. The Americans and Germans
came to a different conclusion.
Soon after, U.S. officials gathered in the White House
situation room to consider what might happen
to Russia if the ruble was devalued and market reforms
collapsed and to push the IMF to come up
with emergency money. So the fund began assembling a
last-ditch program to prop up a country that
had resisted its reform plans for seven years.
Camdessus, though, was still hesitant, questioning whether the
IMF should risk its scarce resources in
Russia. "We had to pull Michel along," a senior Treasury
official recalled.
As it turned out, Camdessus' instincts were right while the
approach championed by Rubin and
Summers proved disastrously wrong. The first installment of
that payment -- $4.8 billion -- was
wasted, propping up the currency long enough, in the words of
one IMF official, "to let the oligarchs
get their money out of the country." Then Yeltsin reversed his
commitments, let the ruble devalue
anyway, began printing money with abandon and fired virtually
every reformer in his government --
resulting in a collapse of the IMF agreements and the
indefinite suspension of its aid program.
Now, inside the IMF and on Capitol Hill, there are
recriminations over "who lost Russia."
Publicly, Fischer argues that "there are no apologies owed for
what we attempted in Russia." But
some IMF officials complain privately that they let Rubin and
Summers run roughshod over them,
striking a deal that fell apart within weeks as the Russian
parliament rebelled and Yeltsin backed
away from his commitments.
Summers responds that the United States "took a calculated
risk" because "it was vastly better that
Russia succeed than not succeed."
The Russian collapse touched off new rounds of economic
contagion, with investors fleeing Latin
America, and triggering huge losses in hedge funds like Long
Term Capital, the Greenwich, Conn.,
investment firm that needed to be rescued by Wall Street
powerhouses whose money it had invested.
"Russia was a turning point," said Robert Hormats, the vice
chairman of Goldman, Sachs & Co. "It
made the world realize that some countries can fail, even if
the IMF and the Treasury intercede. And
that changed the perception of risk."
Now, as the countries meet to face a future that the IMF has
warned could be very bleak, they need
to reverse those perceptions, or watch countries slowly starve
for lack of capital. The emerging
markets are calling for controls on short term investments.
The French want a stronger IMF. The
Americans say the answer is more disclosure, so that investors
are better warned, and tougher
regulation.
"These are usually nice, quiet meetings; everyone very
polite," a top U.S. official said earlier this
week. "Not this year."
--------- End forwarded message ----------
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