Dissatisfaction Over IMF Policies

By Abid Aslam, IPS, 9 December 1997

WASHINGTON, Dec 9 (IPS) - The International Monetary Fund (IMF), long under fire for its handling of financial crises throughout the world, was tested and found wanting in dealing with the recent turmoil in Asia, critics say.

Grassroots activists and left-wing scholars, who have lambasted the IMF for being secretive and coercive, now have been joined by free-marketeers and the political right - traditionally among the Fund's supporters. All have misgivings over the bank's ability to peddle a limited set of wares that seemingly bring only austerity to the masses.

The contention has centred on what is seen as a wider theological debate about 'moral hazard', or the belief that financial bail-outs encourages the type of risky behaviour that led to crisis in the first place.

Much of the criticism, however, takes the IMF to task. Is it prescribing the wrong medicine, and does it practice the transparency it now is pushing on its clients?

The IMF is by tradition one of the most secretive institutions ths side of the average missile base, editorialists at the 'Wall Street Journal' complained last month.

At that time, the IMF had assembled rescue packages for Thailand and Indonesia, offered to prop up South Korea, and given a series of press conferences saying everything now will be all right...None of this has stopped the Asian chain reaction, the newspaper said.

IMF Managing Director Michel Camdessus moted that to restore badly-needed confidence in Asian markets right now, there is a need for 'a free flow of timely, accurate and comprehensive information so that the market can assess the extent of underlying problems', the newspaper said. It added its own solution: Start by uncloaking the IMF.

A columnist in Britain's respected 'Financial Times', Tuesday complained that the latest bail-out of South Korea, is the same old IMF medicine.

The bail-out is spectacular in size, said columnist Martin Wolf but, by imposing a damagingly tough squeeze on economic activity...the IMF risks undermining, not restoring investor confidence. Moreover, by inisting on faster liberalisation of capital inflows, the IMF may exacerbate financial vulnerability.

The World Bank's chief economist Joseph Stiglitz, speaking in Kuala Lumpur last week, questioned te need for tight fiscal and monetary policy measures - required by the IMF - in a region with among the world's highest savings rates and most conservative fiscal policies.

Other commentators too have noted that exchange rate overvaluation among the region's countries was generally moderate, and that current account deficits had been run up by the private sector, not by excessive government spending.

So why have (these countries) been subject to such vicious market attack? Wolf asked. The chief answer is that they possess significant financial weaknesses, including inadequate systems for evaluating loans, personal and political interference in banking, and inadequate equity.

IMF First Deputy Managing Director Stanley Fischer told reporters last week that banking and financial sector restructuring is absolutely at the heart of the programme in Korea. But officials and observers alike y the agency is exploring new waters - and may be out of its depth.

Fiscal profligacy may require austerity, but crony capitalism does not, the editors of 'Business Week', a leading U.S. magazine, argued this week, in an editorial addressed to the IMF. To restart its economic engine, Asia needs deep structural change that promotes markets and breaks up elite power, not out-of- date contractionary policies that put common people out of work.

In Korea alone, job losses are expected to top one million in a country of only about 44 million people.

Wolf and 'Business Week' in part echoed observations made months earlier by such commentators as Doug Henwood, publisher of the 'Left Business Observer' and author of the recent book, 'Wall Street'.

A chorus of complaints about the problem of 'moral hazard' also has reached a crescendo. The 1995 Mexico bail-out sent a signal to Asian governments that if they got into terrible straits, the IMF would help them, too, argued James Glassman, a fellow at the right-wing American Enterprise Institute.

No country would put itself through the wringer of a monetary crisis and subject itself to the tender mercies of the IMF simply because rescue funds were available, countered C. Fred Bergsten, a former U.S. assistant treasury secretary who is now director of the Washington-based Institute for International Economics (IIE).

Nor would private investors keep coming, with countless alternative opportunities around the world, if the Fund requires them to share the costs of adjustment programmes as it must, Bergsten testified before a Congressional banking committee last month.

Where there are borrowers, there also must be lenders. Vast ail-outs may encourage further folly, Wolf argued, but this would be mainly by lenders.

Much of the 'cheap money' blamed for Asia's turmoil was supplied by privatised pension funds, mutual-fund managers, and other 'institutional investors' in the wealthy nations.

Some large investors must get a haircu in order to avoid the impression that Wall Street is being bailed out at the expense of Main Street, or ordinary, tax-paying citizens, Morris Goldstein, said a former IMF research director at a recent meeting here of financiers and the media.

Large uninsured creditors have to take a hit, Goldstein mused. But how do you hit them without hitting innocent bystanders (such as) individual pensioners in privatised pension funds?

Even IMF officials have noted that those investors are being spared the pain now being inflicted on Asian workers and families. What's more, investors in the wealthy nations are likely to suffer least the consequences of a resulting global economic slow-down.

World economic growth could slow to around 3.5 percent in 1998, according to revised projections scheduled to be released by the IMF Dec. 23 and alluded to by Fischer. In October, the agency had forecast 4.3 percent growth in 1998.