> What triggered the crisis were factors largely out of national or > regional control. The various countries had exchange rates linked to the > > US dollar. When China devalued in 1994, the dollar appreciated > significantly starting in 1995, and the yen fell sharply. Southeast > Asian exports became less competitive and export earnings fell. At the > same time, the dollar pegs created unprecedented opportunities for > speculation. It was possible to borrow dollars in New York and lend them > > locally for at least twice the cost of borrowing - at no apparent > currency risk. The borrowers invested in real estate and excess plant > capacity, creating a dangerous bubble. Local currency became overvalued > and local currency holders converted into dollars, inviting speculative > raids - all without significant warnings from international financial > institutions. > The US Treasury, convinced that the matter could be dealt with > regionally and gun-shy after congressional reaction to the bail-out of > Mexico, refused to participate in the first round of the crisis. But > when the crisis spread to Indonesia, the largest country of Southeast > Asia, the threat to the global financial system could no longer be > ignored. > At US urging, the IMF intervened in both situations with its standard > remedies, leading to massive austerity. Thailand's democratic > institutions have so far proved relatively resilient. But for how long > can it sustain interest rates of more than 40 per cent, a negative > growth of 8 per cent and a 42 per cent devaluation of its currency? > In Indonesia - a rich country with vast resources and an economy which > was praised by the World Bank in July 1997 for its efficient management > - the IMF, advised by an administration afraid of being accused of > having political ties to leading Indonesian financial institutions, > decided to make its assistance conditional on remedying virtually every > ill of which the society suffered. It demanded the closing of 15 banks, > the ending of monopolies on food and heating oil, and the end of > subsidies. > But when 15 banks are closed in the middle of a crisis, a run on other > banks follows inevitably. The ending of subsidies raised food and fuel > prices, causing riots aimed at the Chinese minority that controls much > of the economy. As a result, as much as $60 billion of Chinese money > fled Indonesia, or more than the IMF could possibly provide. A currency > crisis had been turned into an economic disaster. > For a few months, a special Treasury representative worked with the > government and the IMF to ease the pressures. But by April the IMF was > back at the old stand. This time the explosion swept away the Suharto > regime. A currency crisis, having been transmuted into an economic > crisis, has become a crisis of political institutions. Any real economic > > reform stands suspended. The shortcomings of Suharto were real enough, > but to try to deal with them concurrently with the currency crisis has > produced a political vacuum in the most populous Islamic nation in the > world. > All this might make sense if the IMF programmes brought demonstrable > relief. But in every country where the IMF has operated, successive > programmes have lowered the forecast of the growth rate which, in > Indonesia, is now a negative 10 percent, in Thailand a negative 5 > percent and in South Korea an optimistic positive 1 percent. It is > possible to argue that without the IMF programme conditions would be > even worse, but this is no consolation to governments and institutions > facing massive discontent. > The inability of the IMF to operate where politics and economics > intersect is shown by its experience in Russia. In Indonesia the IMF > contributed to the destruction of the political framework by excessive > emphasis on economics; in Russia it accelerated the collapse of the > economy by over emphasizing politics. The IMF is, quite simply, not > equipped for the task it has assumed. > The immediate challenge is to overcome the crisis in Brazil and to > preserve the free-market economics and democracy in Latin America. A > firm and unambiguous commitment by the industrial democracies, led by > the United States, is essential to buttress the necessary Brazilian > reform programme. An expanding American economy is the key to > restoration of global growth. Whether this is achieved by a cut in > interest rates or a major tax cut, a strong commitment to reinvigorated > growth is essential. > Above all, the institutions that deal with international financial > crises are in need of reform. A new financial management to replace that > > of Bretton Woods is essential. It must find a way to distinguish between > > long-term and speculative capital, and cushion the global system from > the excesses of the latter. > The IMF must be transformed. It should be returned to its original > purpose as a provider of expert advice and judgment, supplemented by > short-term liquidity support. When the IMF focuses on multibillion > dollar loans, it plays a poker game it cannot possibly win; the "house," > > in this case the market, simply has too much money. Congress should use > the need for IMF replenishment to impose such changes. > Further, the central banks and regulators of the industrial democracies > need to turn their attention to the international securities markets, > just as they did to international banking after the debt crisis of the > 1980s. Regulatory systems should be strengthened and harmonized; the > risks that investors are taking should be made more transparent. > Finally, the private sector must learn to relate itself to the political > > necessities of host countries. I am disturbed by the tendency to treat > the Asian economic crisis as another opportunity to acquire cheaply > control of Asian companies' assets and to reconstitute them on the > American model. This is courting a long-term disaster. Every effort > should be made to work with local partners and to turn acquisitions into > > genuinely cooperative enterprises.-Dawn/Los Angeles Times Syndicate
