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HVK Archives: IMF can't tackle the crises (Part II of II)

IMF can't tackle the crises (Part II of II) - Dawn, Karachi

Posted By Ashok Chowgule (ashokvc@giasbm01.vsnl.net.in)
Fri, 09 Oct 1998 10:23:55 +0530

> 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

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