IMF may be hurting, not helping, Asia

Editorial from the Toronto Star
12 January 1998

In hindsight, it's easy to see what caused the crisis that has brought the seemingly invinceable Southeast Asian economies to their knees.

But the people charged with rescuing these economies appear to have very little foresight in charting a course to extricate the 350 million Asians suffering through this mess.

By pegging their currencies to the U.S. dollar, Thailand, Korea, the Philippines, Malaysia and Indonesia were asking for trouble when the dollar started to rise in 1995. As the dollar pulled their currencies higher, these nations priced themselves out of crucial export markets on which they depended to earn foreign exchange.

At the same time, Western banks kept shovelling short-term loans into Southeast Asia, where they were used to finance speculative real estate deals. Since the interest charges on these loans had to be paid for in dollars, yen, francs and marks, the growing need for foreign exchange was set on a collision course with the declines in export earnings.

The Asian currencies all began to give way, exposing the huge exchange rate risks which the domestic banks in these countries had taken on. Teetering on insolvency, these banks in turn found it even more difficult to service the foreign borrowings they had taken on. The situation deteriorated rapidly as foreign lenders panicked and called in their loans.

Respected Harvard economist Jeffry Sachs says, "There is no 'fundamental' reason for Asia's financial calamity except financial panic itself. Asia's need for significant financial sector reform is real, but not a sufficient cause for the panic, and not a justification for harsh macroeconomic policy adjustments."

Yet that's precisely what the International Monetary Fund is demanding from these countries - a severe macroeconomic tightening that is sure to push them deep into recession.

The IMF says it's the the only way to restore confidence and calm the markets. But that's just a euphemism for saying that foreign lenders who eagerly took on these risky loans must be assured that they will get all their money back - no matter how much pain ordinary Asians must bear.

Not only is such an approach unfair, Sachs makes a strong case that it's counterproductive. He says the policies imposed by the IMF on Korea have only intensified the panic, to the point where Korean banks may now be on the verge of default. "Just one day after the (IMF) measures were unveiled, the eleventh largest conglomerate declared bankruptcy when Korean banks abruptly refused to roll over its short-term debts."

How does that restore confidence or help anyone out?

And Sachs isn't the only one asking such questions. The Wall Street Journal reported last week that Joseph Stiglitz, chief economist at the World Bank, the IMF's sister institution, and former top economic adviser to U.S. President Bill Clinton, is openly critical of the IMF approach. "These are crises in confidence," he says. "You don't want to push these countries into severe recession. One ought to focus . . . on the things that caused the crisis, not on things that make it more difficult to deal with."

The IMF is supposed to put out economic fires, not fan the flames.

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