Testimony of Walden Bello before Banking Oversight Subcommittee, Banking and Financial Services Committee, US House of Representatives,

International Forum on Globalization, 21 April 1998

Let me first of all thank the members of the House Banking Committee for inviting me to participate in these crucial hearings on the proposed $14.5 billion replenishment for the International Monetary Fund. I am glad and grateful that a representative of the non-governmental community in Asia is being encouraged to share his views on an issue of paramount importance, before a vote of historic international significance. Allow me to state at the outset that the IMFs record in the Asian region does not inspire confidence in the institution nor in the possibility that the appropriated funds will be used wisely. I urge you to vote against the Clinton administrations proposal for the following reasons:

First, the Fund, by promoting a policy of indiscriminate capital account liberalization among the East Asian economies, has been a central reason for the Asian financial crisis.

Second, the IMF has exhibited a remarkable inability to anticipate and to predict the financial crisis because it is imprisoned by an economic paradigm that severely underestimates the destabilizing effects of unregulated global capital markets.

Third, the Fund is imposing stabilization and recovery programs that are worsening instead of alleviating the economic crisis in the region, raising the specter of a decade of stagnation, if not worse.

Fourth, the IMF is not so restoring our economies to health as bailing out the big international creditors. By not allowing the latter to face market penalties, the Fund is practicing what many in Asia sarcastically term socialism for the global financial elite.

Fifth, the Fund is being brazenly used by the Clinton administration as an instrument to promote the bilateral trade and investment objectives of the US, leading to the weakening of the legitimacy of the IMF as a multilateral institution and to a backlash that could hurt Americas ties with the region.

Sixth, the IMF, for its own bureaucratic self-interest, is preventing the Asian countries from developing innovative responses to the Asian financial crisis that would not be dependent on US taxpayers money.

Finally, replenishing the Fund would promote the Clinton administration's objective of monopolizing foreign economic policymaking at the expense of Congress' development that I, though not a US citizen, disapprove of as a partisan of democracy since decentralized, dispersed power provides the best condition for the exercise of democracy.

Indiscriminate Capital Account Liberalization

I think it can no longer be denied that the Fund was central to the development of the East Asian financial crisis. Two of the countries that are now in trouble, Indonesia and Thailand, were, not too long ago, the two model pupils of the Fund, for following the IMF's prescriptions, particularly on capital account liberalization. Until last July, Indonesia was consistently praised for having liberalized its capital account as early as the 1970's, making it the leader, in the view of the Fund and the World Bank, in Southeast Asian financial reform. The Bank of Thailand was also put on a pedestal as a model for central banks in the regions. The Bank of Thailand and the Thai financial ministry were especially complimented by the Fund for carrying out radical measures of liberalization in the early 1990's.

Let me focus initially on Thailand since it illustrates very clearly the problem with the Fund and its prescription of indiscriminate capital account liberalization. Prior to 1992, Thailand's financial system was highly regulated. While foreign capital played a limited role in the financial sector, the latter was also insulated from the highly destabilizing inflows and outflows of unregulated portfolio investment and bank capital. In 1992 and 1993, owing to IMF pressure, a set of radical deregulatory moves were carried out, which included: the removal of ceilings on various kinds of savings and time deposits; fewer constraints on the portfolio management of financial institutions and commercial banks; looser rules on capital adequacy and expansion of the field of operations of commercial banks and financial institutions; dismantling of all significant foreign exchange controls; and establishment of the Bangkok International Banking Facility (BIBF).

The BIBF was perhaps the most significant step taken by the Thais in the direction of financial liberalization. This was a system in which local and foreign banks were allowed to engage in both offshore and onshore lending activities. BIBF licensees were allowed to accept deposits in foreign currencies and to lend in foreign currencies, both to residents and non-residents, for both domestic and foreign investments. BIBF dollar loans soon became the conduit for most foreign capital entering Thailand, which came to about $50 billion between 1993 and 1996. With liberalization of the stock exchange, net portfolio investment also zoomed up, so that by late 1996, there was some $24 billion in hot money sloshing around in Bangkok parked in stocks, corporate paper, or in non-resident bank accounts. This was a massive amount of money entering -- in a very short period of time -- a country which had no period experience handling such an infusion.

What both the IMF and its Thai pupils failed to foresee was that while the liberalized capital account would be the conduit for huge capital inflows when there was confidence in the country, it would also be the wide highway through which capital would flee at the slightest sign of trouble. And, indeed, this is what happened in 1997, when billions of dollars exited in panic, bringing down the currency and the whole economy in the process.

Blind-sided by Ideology

Thailand's financial crisis was about two years old before it got global attention with the dramatic devaluation of the baht on July 2, 1997. However, it cannot be said that either the IMF or its sister institution, the World Bank, was worried about the possible consequences of the massive inflows of foreign capital in the form of portfolio investments and loans contracted by the Thai private sector