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Asia and the IMF – time for forgiveness?
Saturday, 08 January 2011 04:23


The 1997 Asian financial crisis took the world by storm.  No-one predicted that the region’s miraculous development would come to a screaming halt.  The International Monetary Fund was rushed in to the rescue, and allegedly made many mistakes.  The anti-IMF reaction by government and public opinion in East Asia was immense.  Nobel prize-winning economist Joe Stiglitz then savagely criticized the IMF in his book, “Globalization and it Discontents”.


For its part, the IMF recognized that it made mistakes.  It changed its policy prescriptions.  East Asia recovered rapidly from the crisis.  The IMF has sought to change the way it operates, and most would agree that it is a fundamentally different organization these days.  But Asians refuse to forgive the IMF.  Asian governments still talk of the “IMF Stigma”.  No self-respecting Asian government would ever accept money from the IMF, although they would accept finance from the US government which controls the IMF.  Surely the time has come to forgive and forget, and move on.  But Asians have long memories.


Asian Financial Crisis


First, let’s recall the key elements of the Asian financial crisis.  In the years leading up to the crisis, East Asia enjoyed miraculous development driven by export-oriented growth.  Initially, inflows of financial capital were very restricted.  But then these restrictions were eased.  Low interest rate foreign capital started flooding into the region.  This was aided and abetted by a lack of prudential supervision and regulation.  And fairly fixed exchange rates made foreign capital seems a safe bet.


But it wasn’t a safe bet.  When market sentiment changed, this capital left the region as quickly as it came in, leaving borrowers high and dry.  Indonesia, Korea and Thailand were caught in a capital account crisis.  Short-term, foreign currency loans had been taken on to finance long-term, domestic investments.  When these short-term loans were not refinanced, and the exchange rate collapsed, borrowers were faced with a double mismatch.  As the Asian Development Bank Institute argues this was not like a typical Latin American financial crisis (a current account crisis), where a reckless government over-borrows and over-spends, creates a large current account deficit, only to see markets turn against it.


Asian Perception of IMF Programs


When the IMF came to Asia to solve the region’s financial crisis, it had lots of experience in Latin America, but very little in Asia.  The Asian region had had very little need for the IMF.  Instinctively, the IMF applied Latin American medicine, policies to control a reckless government.  So in return for IMF financing, the Asian crisis-affected countries were obliged to cut government expenditure, and increase interest rates.  In other words, the IMF applied the medicine for a current account crisis to a capital market crisis. 


In reality, these countries did not have budget or debt or inflation problems, and did not even have very high current account deficits.  By forcing them to cut government expenditure and increase rates, the IMF policies only pushed these countries even further into crisis, including a social crisis as some social programs were also cut.  What’s more, the IMF obliged these countries to undertake many other reforms that were not directly related to the causes of the crisis.  In Korea, IMF came to be known as “I’M Fired”.


Everyone agrees that the IMF rapidly adapted its programs, and the crisis-affected countries enjoyed very quick recoveries.  Many will now even agree that the “irrelevant reforms” imposed on these countries have been a factor behind


Stigltz’s attacks on IMF


In 2002, Nobel prize-winning economist Joe Stiglitz published a book entitled “Globalization and its Discontents” which savagely attacks the IMF, and especially its policies in the Asian financial crisis.  Stiglitz claims that the IMF laid the foundations for the Asian financial crisis by pushing these countries to open up to capital inflows before they had established the necessary regulatory and supervisory policies to manage such capital flows.


And according to Stiglitz, the IMF exacerbated the crisis by its incorrect policy prescriptions.  Countries were forced to cut public expenditure, even though budget deficits were due to falling revenues, not excessive expenditure.  This only made the situation worse.  High interest rates caused more bankruptcies. 


In short, the IMF is the villain of economic development which forces many policies on weak governments like: trade liberalization which destroys local industry; opening to foreign banks which wipes out local banks; and privatization which does not work without regulations to prevent monopoly or without corporate governance for monitoring management. 


Overall, Stiglitz believes that IMF acts in the interests of creditor banks from rich countries, and rich elites, and against the interests of poor people who are burdened with repaying IMF loans.  He argues that the IMF is driven by the ideology of free markets, not facts on the ground and certainly not by the latest developments in economic theory regarding asymmetric information, and incomplete and imperfect markets.  Stiglitz claims that “intellectual consistency has never been the hall-mark of the IMF,” and the staff systematically practices “bad economics”. 


Academic Reactions to Stiglitz’s Book


The reactions of Sebastian Edwards from the University of California are fairly typical of the vast array of reactions from Stiglitz’s colleagues.  Edwards said, “I have no doubt that Stiglitz is sincere ….  However, he is also rather naïve.  And it is this naivete … what at the end makes this book fail.  Stiglitz has too much confidence on the ability of governments to do the right thing, and he exaggerates greatly the extent of market failures…. The agenda should not be to bring back bureaucrats, xenophobic autocrats, and corrupt politicians to run the economy.”  


David T. Griswold of the Cato Institute labels the book a “score-settling exercise distorted by the author’s personal prejudices and personal animus”


IMF Reaction to Stiglitz’s Book


At the time, Harvard professor Ken Rogoff was chief economist at the IMF, and published a powerful riposte on the IMF website.  Some extracts are set out below:


Dear Joe:


"Unlike you, I am humbled by the World Bank and IMF staff I meet each day. I meet people who are deeply committed to bringing growth to the developing world and to alleviating poverty … but in your speeches, in your book, you feel free to carelessly slander them…


Let me make three substantive points. First, there are many ideas and lessons in your book with which we at the Fund would generally agree, though most of it is old hat…


Second, you put forth a blueprint for how you believe the IMF can radically improve its advice on macroeconomic policy. Your ideas are at best highly controversial, at worst, snake oil…


In your role as chief economist at the World Bank, you decided to become what you see as a heroic whistleblower, speaking out against macroeconomic policies adopted during the 1990s Asian crisis that you believed to be misguided … In the middle of a global wave of speculative attacks, that you yourself labeled a crisis of confidence, you fueled the panic by undermining confidence in the very institutions you were working for. Did it ever occur to you for a moment that your actions might have hurt the poor and indigent people in Asia that you care about so deeply …and that your impulsive actions might have deepened the downturn or delayed—even for a day—the recovery we now see in Asia? …


Joe, throughout your book, you condemn the IMF …We at the IMF care a lot about employment … in blatant contradiction to your assertion, IMF programs frequently allow for deficits, indeed they did so in the Asia crisis. If its initial battlefield medicine was wrong, the IMF reacted, learning from its mistakes, quickly reversing course …


You say that the IMF is tone deaf and never listens to its critics. I know that is not true, because in my academic years, I was one of dozens of critics that the IMF bent over backwards to listen to …


Throughout your book, you betray an unrelenting belief in the pervasiveness of market failures, and a staunch conviction that governments can and will make things better. You call us ‘market fundamentalists’. We do not believe that markets are always perfect, as you accuse. But we do believe there are many instances of government failure as well and that, on the whole, government failure is a far bigger problem than market failure in the developing world.


Joe, as an academic, you are a towering genius. Like your fellow Nobel Prize winner, John Nash, you have a ‘beautiful mind’.  As a policymaker, however, you were just a bit less impressive.”


Where are we now


Even today, the IMF Stigma is very alive in Asia.  To some extent, it was used as a scapegoat by governments who were seeking to avoid responsibility for their financial crises, and it is difficult to unwind this syndrome.


But things have also moved on.  Especially following the global financial crisis, there is a growing frustration in Asia that it global economic importance is still not effectively represented at the IMF – and that the post-war formula of having a European head of the IMF and an American head of the World Bank has to change. 


Under its highly political French Managing Director Dominique Strauss-Kahn, the IMF has been on a charm offensive in Asia, including through a major July 2010 conference in Korea.  Straus-Kahn recognized that “Asia has emerged as a global economic powerhouse from the recent worldwide financial crisis”.  He also said that Asia’s rising role in the global economy needs to be reflected in stronger voice and representation for Asia in the international financial architecture, including in the IMF.  While adjustments have been made in Asia’s weight in the IMF, it is still vastly under represented relative to its economic weight, and Europe is still greatly overrepresented.  What’s more the US still maintains a veto over IMF decision making.


There are many proposals floating around arguing that the Managing Director should be appointed based on meritocracy.  This is a nice idea, but judging the technical, personal and political qualities of the various candidates is a very subjective process.  Others argue that the next Managing Director of the IMF should be an Asian.  How could this be decided?  Could we imagine China, Japan and Korea jointly agreeing on the best candidate?  Why not, we already have a Korean as Secretary-General of the United Nations.  But should the position then rotate around other continents?  At this stage, it is difficult to see the Europeans giving up the IMF too soon.


What about Joe Stiglitz?


Joe Stiglitz is still dining out on these IMF stories today which have been embellished by several subsequent books.  And of course, he believes that he has been vindicated by the present global financial crisis.  But while he always has interesting things to say, most people believe that he is basically a publicity seeker who takes too great a pleasure in “Washington-bashing”.


President Obama never seriously considered him for a position in his team.  Obama reverted to one of Stiglitz’s bêtes noirs in the form of Larry Summers.  And although Stiglitz was received for dinner at the While House along with a group of other leading economists, it was reportedly as an after thought.  His combination of arrogance and insecurity means that he will always be an outsider.  A more sympathetic description might be ‘The Most Misunderstood Man in America’.






Post-Crisis Development Paradigms in Asia, Masaru Yoshitomi and ADBI Staff, Asian Development Bank Institute



Globalization and Its Discontents by Joseph E. Stiglitz



Review of Joseph E. Stiglitz’s Globalization and its Discontents by Sebastian Edwards, University of California.  9 September 2002.



An Open Letter By Kenneth Rogoff, Economic Counsellor and Director of Research, International Monetary Fund To Joseph Stiglitz, Author of Globalization and Its Discontents, Washington D.C., July 2, 2002



Asia 21, High-level IMF Conference, Daejeon, Korea



Freefall: America, Free Markets, and the Sinking of the World Economy by Joseph E. Stiglitz



The Stiglitz Report.  Reforming the International Monetary and Financial Systems in the Wake of the Global Crisis



The Most Misunderstood Man in America by Michael Hirsh.  Newsweek, 18 July, 2009





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