---------- Forwarded message ----------
Date: Thu, 4 Jun 1998 15:37:06 -0400 (EDT)
From: Robert Weissman <[EMAIL PROTECTED]>
To: Multiple recipients of list STOP-IMF <[EMAIL PROTECTED]>
Subject: Sachs: IMF $ Will Hurt Russia (fwd)
June 4, 1998
Rule of the Ruble
By JEFFREY D. SACHS
CAMBRIDGE, Mass. -- Here we go again. In its seventh
straight
year of ministering to the Russian economy, the
International
Monetary Fund is about to begin another "emergency
bailout." Just
five months ago, the I.M.F. pronounced the Russian economy on
its way
to recovery, declaring that "Russian economic reform is entering
a less
dramatic phase."
Now the Russian stock market is collapsing and the currency is
under
attack, despite a temporary lull in trading on Tuesday and
Wednesday.
The I.M.F. has promised to speed another $670 million in loans
and is
being called on by the Clinton Administration and the markets to
provide
much more. The Administration has also renewed its call to
Congress to
allocate more money for the I.M.F. itself.
The fund continues to fail in its economic advice. The bailout
loans are
unfair and ineffective. If we need a new global financial
architecture, as
Treasury Secretary Robert Rubin has urged, then we need a new
architect as well, a thoroughly revamped I.M.F.
Understand the logic of the bailouts first. In the past three
years, under
I.M.F. auspices, Russia has been borrowing short-term funds from
abroad to keep a corrupt and mismanaged Government afloat. The
fund
stood by as the Government squandered tens of billions of
dollars by
transferring state-owned oil and gas companies to cronies at
cut-rate
prices.
At the same time, the Russian Government borrowed from foreign
speculators at interest rates of 20 percent or more, and often
much
higher. The sky-high interest rates compensated the investors
for the risk
that the ruble might lose value against the dollar or that the
Government
might default.
Suddenly, foreign investors have called in these loans. They are
spooked
by several things, including the Asian crisis, the fall in the
price of oil (a
principal Russian export) and labor unrest.
Suddenly, the ruble is about to lose value. In short, the risk
that was long
implicit in Russia's high interest rates is about to be
realized.
The financial community in Moscow is understandably in a panic.
The
I.M.F. and the United States have been called in to save the
ruble. This
would insure that the earlier loans are repaid and that the
ruble keeps its
value long enough for speculators to get their money out without
large
losses.
Therefore, the name of the game is to defend the exchange rate
at any
cost. Predictably, the I.M.F. has cheered as Russia raised
short-term
interest rates to a crippling 150 percent a year to try to keep
the
investors from running.
But the ruble probably can't be saved at this point -- too much
short-term
money is fleeing the scene. True, the crisis that could follow a
steep
ruble devaluation might indeed be severe. But an I.M.F.-led
bailout will
likely do Russia more harm than good.
The problem is that the I.M.F. has become the Typhoid Mary of
emerging markets, spreading recessions in country after country.
The I.M.F. lends its client governments money to repay foreign
investors, with the condition that the government also jack up
interest
rates, cut the flow of credits to the banking system and close
weak
banks. The measures are intended to restore investors'
confidence.
Instead, they kill the economies and further undermine
confidence.
It would be much more sensible to keep interest rates moderate
and let
the economies continue to grow. True, currencies would lose
value and
speculators would lose their bets. But both borrowers and
lenders would
be more cautious in the future. The rare case for exceptional
monetary
tightness occurs when economies are suffering from exceedingly
high
inflation.
The I.M.F. orthodoxy has been put to the test in Asia in the
past nine
months. The fund gave us specific predictions about what would
happen
when it attempted its Asian rescue. It told us in its August
1997 rescue
plan for Thailand that the economy would grow by 3.5 percent in
1998. It
told us in October that Indonesia would grow by 3 percent. In
December, it predicted Korean 1998 growth of 2.5 percent.
The I.M.F.'s own bad advice destroyed its own forecasts. Every
few
weeks it has had to renegotiate its Asian programs, sharply
downgrading
the growth forecasts. It now predicts that Korea will shrink by
1 percent
or more, Thailand by 5.5 percent or more and Indonesia by a
staggering
10 percent or more.
In emerging markets all over the world, the drama is repeated.
Investors
who chased high short-term interest rates with short-term loans
in recent
years are calling in their loans. In just about every case, the
I.M.F. is
urging a heroic defense of the currency through draconian
interest rate
increases, sometimes backed by bailouts, sometimes not. The
monetary
medicine is now being applied with I.M.F. moral support in
Brazil and
South Africa, and with I.M.F. financial support in other parts
of Africa,
in Russia and throughout Asia.
The Administration and other financial observers should ask why
the
I.M.F. can't come close to its own targets. They should ask why
many
economies under its care continue to stagnate or collapse for
years. And
they should insist that the I.M.F.'s free run of the
international financial
system be brought to an end.
Jeffrey D. Sachs is the director of the Harvard Institute for
International Development. From December 1991 to January 1994,
he was an economic adviser to the Russian Government.
Copyright 1998 The New York Times Company
