IMF, in Self-Critique, Says It ‘Misgauged’ Asian Crisis

The International Monetary Fund, long criticized as aloof and insensitive to the pain that its bailout policies cause in needy countries, conceded Tuesday that it had “badly misgauged” the Asian financial meltdown of 1997 and 1998.

In a 147-page critique of its own performance, the secretive global lender bluntly acknowledged that its early efforts failed to stop a fast-moving financial firestorm that differed from any crisis it had ever seen.

Because the IMF underestimated the crisis at first, it pushed governments to adopt inappropriate spending policies, took longer to recognize the scope of the banking overhaul needed in the troubled region and possibly misjudged the proper supply of money required by nations, according to the analysis.

But the much-maligned IMF also sounded a defensive tone, maintaining that its basic approach to upheavals in Thailand, Indonesia and South Korea ended up on target.

“It should be noted that very few foresaw the severity of the downturn--neither the authorities, the private sector nor academic observers,” the report stated.

The IMF’s policies have been blamed for prolonging and worsening unemployment, recession and even violence across the region by forcing interest rates higher, drying up credit and slashing government spending. An estimated 50 million Asians have been forced into poverty in the last 18 months.

The IMF’s demands that Indonesia lift subsidies on fuel prices, for example, helped spark riots that killed hundreds and ultimately toppled the government of its longtime leader, Suharto.

The analysis comes amid a fresh Brazilian crisis that has only added to doubts that the IMF offers the right prescriptions for the complex ailments of today’s global financial system. An IMF-engineered aid plan of $41.5 billion for Brazil failed to head off a currency devaluation last week after Brazilian politicians balked at the fiscal reform measures demanded in return for the bailout.

Moreover, Tuesday’s point-by-point review of the crisis stirs a far-reaching, complex debate on what policies the United States and other rich nations should undertake to keep the global economy on an even keel in an era when colossal flows of private investment money can destabilize entire continents. Some of the IMF’s critics maintain it is not equipped to deal with the new era and that its efforts cause more harm than good.

“The important question is, should the IMF be there to manage the crisis?” said David DeRosa, adjunct professor in the Yale School of Management.

The IMF was responding to its critics, including officials of its sister lender, the World Bank, who last month argued that IMF policies during the Asia crisis--notably high interest rates and fiscal belt-tightening--protected financial speculators at the expense of ordinary workers.

“If we were doing this over again with the wisdom of hindsight, I think we would have been more insistent on earlier and more aggressive tightening of monetary policy and raising of interest rates,” Jack Boorman, director of the IMF’s policy department, said at a news conference in Washington.

IMF officials also argued that the embattled nations themselves might have eased their financial distress and the fierce downward pressure on their currencies if they had followed IMF advice on interest rates and money supply “earlier, more aggressively and more consistently.”

In addition to Brazil, the partially disbursed rescue plans added up to $42 billion for Indonesia, $58.2 billion for South Korea and $17.2 billion for Thailand.

The public airing represented a sort of humbling for the traditionally aloof, button-down institution that dictates economic terms to entire nations yet has been embarrassed by the financial turmoil of recent times. Tuesday’s report reflects the slow change coming to IMF culture and policy, including greater public disclosure.

The recent bailout for Brazil illustrated changing practices as well, because the IMF is releasing money much more quickly than in the past.

For all the unusual self-criticism, some observers Tuesday maintained that the IMF did not go far enough. Indeed, they saw an irony in the fund’s call for better financial regulation and supervision in Asia. The IMF was among the major advocates of greater financial openness in the developing world in recent years, pointed out Jonathan A. Fox, a specialist on Latin America at UC Santa Cruz.

“Both in Latin America and Asia they have now realized that opening up financial systems before regulatory systems are in place is extremely risky,” Fox said.

“The IMF program for Brazil was the correct one,” said David D. Hale, chief global economist for Zurich Group in Chicago.

In the new report, IMF officials left no question that they were thrown off guard by the virulent financial crisis that ignited in Thailand in July 1997.

IMF officials said Tuesday that their early forecasts “badly misgauged the severity of the downturn.” The errantly optimistic forecasts, they said, reflected an IMF concern that gloomy predictions would damage investor confidence. Also, the forecasts may have been influenced by pressures to be consistent with the forecasts of local countries, the IMF said.

“Erring on the side of optimism in this way was probably detrimental to the programs’ credibility,” the IMF said.

More broadly, however, the economic misreading threw awry some of the fund’s early policy prescriptions and delayed effective solutions. For example, underestimating the gravity of the crisis “meant underestimating the magnitude of the financial-sector restructuring needed,” according to the report.

Similarly, the fund acknowledged that its requirements of fiscal belt-tightening in South Korea, Thailand and Indonesia were too severe and exacerbated those countries’ hard times.

“After taking into account the unexpected severity of the recessions . . . the programs’ original fiscal targets now appeared to have been tighter than necessary,” IMF Managing Director Michel Camdessus acknowledged in a summation of the report.

In its efforts to reassure investors and boost their confidence, the IMF said, “the reverse happened,” with the crisis intensifying amid a “vicious circle” of capital flight and plunging national currencies.

“It is thus clear in hindsight that the programs were not adequately financed to be carried out in an environment where the crucial effort to restore confidence failed,” the IMF said, although it added that funds were not available for larger bailouts.