Criticisms Mean Change--and Rebuttals--at IMF
The International Monetary Fund has begun making some modest procedural reforms in the face of widespread criticism of the way it has handled the Asian financial crisis, but it has rejected suggestions that it alter any of its controversial policy prescriptions.
A year after the Asian crisis began, the 182-country IMF has become visibly less secretive. Many of its warnings about countries’ economic shortcomings--documents whose existence it once barely acknowledged--are now posted on the Internet. Its leaders are more open as well.
Nevertheless, IMF officials insist their much-criticized demands that hard-hit countries slash their budgets and keep interest rates high--which have been assailed by some analysts as Draconian and counterproductive in Asia’s case--remain correct and should not be changed.
To encourage troubled countries to cut interest rates and let the value of their currencies plunge, as some critics have suggested, would only hurt their economies more and would be “fundamentally wrong,” Stanley Fischer, the IMF’s No. 2 official, said in an interview.
Moreover, the IMF’s stance has the backing of its most influential member, the United States. U.S. Treasury Secretary Robert E. Rubin publicly defended IMF policies during a trip to Asia last week, asserting that, “on balance, the IMF has had it about right.”
The series of moves to make the IMF more open and responsive to the public--aimed partly at meeting demands by Congress that the IMF must become more “transparent"--amount to a significant step for an international organization that is beholden to its member countries.
But they are certain to be viewed as inadequate both by congressional critics and outside international economic experts who believe that the IMF’s economic prescriptions are hurting Asia--and now, Russia--rather than helping.
Jeffrey D. Sachs, director of Harvard Institute for International Development and a vocal IMF critic, said that despite its recent innovations, the 54-year-old organization has changed only “in small bits at the margin.”
“Procedurally, they’re a little bit more open, and in policy terms they’re to some extent moving with events in Asia,” Sachs said in an interview. “But I don’t see any fundamental changes in their behavior. I don’t think they have Asia right yet.”
The issues are important because after a year of leading the effort to contain Asia’s financial forest fires and keep them from spreading, the IMF is facing its most difficult challenges since the Third World debt crisis of the 1980s.
With most of the former Asian economic powerhouses now mired in recession, the Fund, as it is known informally, must now be especially skillful in managing the situation, ensuring that countries are making needed structural reforms but still giving them room to grow.
At the same time, the organization is fast running short of available lending resources just as Russia, South Africa and other countries are heading into serious financial trouble. Congress is holding up efforts to replenish the IMF’s coffers.
To be sure, criticism of the IMF is nothing new. The staid, bureaucratic organization was lambasted during the 1980s for being too rigid in its handling of the Latin American debt crisis. Third World countries have complained for years that the IMF was unfairly harsh.
But the brickbats this time have been especially severe. Morris Goldstein, analyst at the Institute for International Economics, said some of the criticisms--particularly those coming from some members of Congress--are just plain misguided or misinformed.
The Fund, for example, does not constantly thwart U.S. national interests, as some lawmakers have asserted. Its policies are set largely by the U.S. and a few other big countries. If anything, many other governments consider it a handmaiden of the United States.
U.S. contributions to the IMF do not drain federal dollars. They essentially amount to a line of credit on which the Fund can draw to make loans to problem-plagued countries. When the IMF uses any of the money, it pays interest at market rates.
And while it is true that the Fund has been secretive throughout the years, that has been mainly because many of its own member governments do not want the information they provide the IMF to be made public. IMF officials are in the process of coaxing them to change.
On other points, the IMF itself has argued that it could not do more. Fischer, for example, insists that the Fund could not have warned publicly that the Asian countries were about to go under without itself setting off a run that might have brought on the crisis even sooner.
He also contends--with support from some outside analysts--that allowing banks to get off the hook on soured loans abroad might encourage them to make bad loans again, forcing them to take severe hits that could well backfire and cripple the global financial system.
The debate about the IMF’s basic approach in the Asian crisis has been especially pointed, pitting even Joseph Stiglitz, chief economist of the World Bank--the IMF’s sister organization--against IMF policies.
Essentially, the critics argue that the IMF’s classic prescription of austerity--of budget cuts and interest rate increases--might have been valid throughout the years for traditional economic crises, which have been caused largely by excessive government spending and borrowing.
But Asia’s problems, they point out, involve structural problems, such as a failure to build up solid financial systems. They say forcing further belt-tightening will not help fix that--but it almost certainly will exacerbate the inevitable economic recession.
Despite Fischer’s contention, critics such as Gregory B. Fager, an Asian specialist at the Institute of International Finance, says the IMF has altered its approach at least modestly during the last 12 months.
In Thailand, South Korea and Indonesia, for example, it softened its initial demands that the governments of these countries slash their budget deficits sharply, settling for less stringent fiscal targets.
It has also agreed to accept somewhat lower interest rates than the original rescue plans would have prescribed. And in Indonesia’s case, it has agreed to permit the government to phase out its subsidies for food and fuel more slowly than was initially required.
But IMF officials insist the high interest rates still are needed--if only temporarily--to prevent a run on the country’s currency that in turn would sharply increase the cost of servicing its foreign debt, crippling its business sector even more.
And they say countries still must cut their budgets at least somewhat to help offset the cost of restructuring their financial systems. Fischer argues that the budget cuts are not the centerpiece they are often portrayed to be.
“We mainly are pressing these countries to make structural reforms,” he said.
The Fund is also unapologetic about the way it has handled Russia’s economic problems--by first prodding Moscow to cut spending and improve its tax-collection machinery, rather than pushing Russia to enact property-rights laws and a bankruptcy code, as some critics suggest.
True to form, IMF officials are now pressing the Russians to support the ruble by keeping interest rates high when necessary to avoid another major run. They also support U.S. moves to pressure China into keeping the yuan stable.
Analysts say it is too early to tell which side ultimately will prove correct in the Asian crisis. Although the IMF contends that Asia’s problems would be worse without its prescriptions, there is no way to say whether that is true.
But there is little doubt that its handling of the Asian crisis will prove a watershed in the organization’s history, sparking ongoing debate both about its methods and its proper role.
Said the Institute of International Finance’s Fager: “One of the difficulties in the East Asian crisis was that neither the governments nor the IMF fully understood the magnitude of the problems.” That lesson, he contended, will not be forgotten for years.