---------- Forwarded message ----------
Date: Thu, 18 Dec 1997 10:06:50 -0800 (PST)
From: Sid Shniad <[EMAIL PROTECTED]>
To: Canadian Centre for Policy Alternatives <[EMAIL PROTECTED]>,
[EMAIL PROTECTED], Centre for Research on Work & Society <[EMAIL PROTECTED]>,
End Legislated Poverty <[EMAIL PROTECTED]>,
National Anti-Poverty Organization <[EMAIL PROTECTED]>,
Council of Canadians <[EMAIL PROTECTED]>
Subject: Sachs knocks IMF
The Financial Times Thursday December 11 1997
IMF IS A POWER UNTO ITSELF
By Jeffrey Sachs
It is time that the world take a serious look at the International
Monetary Fund. In the past three months, this small, secretive institution �
has dictated economic conditions to 350m people in Indonesia, South
Korea, the Philippines, and Thailand. It has put on the line more than
$100bn of taxpayers' money in loans.
These bailout operations, if handled incorrectly, could end up
helping a few dozen international banks to escape losses for risky loans by�
forcing Asian governments to cover the losses on private transactions that�
have gone bad. Yet the IMF decisions have been taken without any public
debate, comment, or scrutiny.
While it pays lip service to "transparency", the IMF offers virtually
no substantive public documentation of its decisions, except for a few
pages in press releases that are shorn of the technical details needed for �
a
serious professional evaluation of its programmes. Remarkably, the
international community accepts this state of affairs as normal.
The world waits to see what the Fund will demand of country X,
assuming that the IMF has chosen the best course of action. The world
accepts as normal the idea that crucial details of IMF programmes should �
remain confidential, even though these "details" affect the well-being of �
millions. Staff at the Fund, meanwhile, are unaccountable for their
decisions.
The people most affected by these policies have little knowledge or
input. In Korea, the IMF insisted that all presidential candidates
immediately "endorse" an agreement they had no part in drafting or
negotiating - and no time to understand.
The situation is out of hand. However useful the IMF may be to the
world community, it defies logic to believe that the small group of 1,000 �
economists on 19th Street in Washington should dictate the economic
conditions of life to 75 developing countries with around 1.4bn people.
These people constitute 57 per cent of the developing world
outside China and India (which are not under IMF programmes). Since
perhaps half of the IMF's professional time is devoted to these countries -�
with the rest tied up in surveillance of advanced countries, management,
research, and other tasks - about 500 staff cover the 75 countries. That is�
an average of about seven economists per country.
One might suspect that seven staffers would not be enough to get a
very sophisticated view of what is happening. That suspicion would be
right. The IMF threw together a draconian programme for Korea in just a
few days, without deep knowledge of the country's financial system and
without any subtlety as to how to approach the problems.
Consider what the Fund said about Korea just three months ago in
its 1997 annual report. "Directors welcomed Korea's continued impressive �
macroeconomic performance [and] praised the authorities for their enviable �
fiscal record." Three months ago there was not a hint of alarm, only a call�
for further financial sector reform - incidentally without mentioning the �
chaebol (conglomerates), or the issue of foreign ownership of banks, or
banking supervision that now figure so prominently in the IMF's Korea
programme.
In the same report, the IMF had this to say about Thailand, at that
moment on the edge of the financial abyss. "Directors strongly praised
Thailand's remarkable economic performance and the authorities' consistent �
record of sound macroeconomic policies."
With a straight face, Michel Camdessus, the IMF managing
director, now blames Asian governments for the deep failures of
macroeconomic and financial policies that the IMF has discovered. It
would have been more useful instead, for the IMF to ponder why the
situation looked so much better three months ago, for therein lies a basic�
truth about the situation in Asia.
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. Asia's
fundamentals are adequate to forestall an economic contraction: budgets
are in balance or surplus, inflation is low, private saving rates are high,�
economies are poised for export growth.
Asia is reeling not from a crisis of fundamentals, but from a self-
fulfilling withdrawal of short-term loans, one that is fuelled by each
investor's recognition that all other investors are withdrawing their claim�
s.
Since short-term debts exceed foreign exchange reserves, it is "rational" f�
or
each investor to join in the panic.
Without wider professional debate, the IMF has decided to impose
a severe macroeconomic contraction on top of the market panic that is
already roiling these economies. Consider the Korea programme (or at
least those parts that have been announced to the public). The won has
depreciated by around 80 per cent in the past 12 months, from around 840 �
a dollar to a record low of 1,565 yesterday; this currency depreciation wil�
l
force up the prices of traded goods. Yet despite that, the IMF insists that�
Korea aim for an essentially unchanged inflation rate (5.2 per cent in 1998�
,
in comparison with 4.2 per cent in 1997). To achieve unchanged low
inflation in the face of a huge currency depreciation, Korea will need a �
brutal monetary squeeze. And indeed this is just what the Fund has
ordered. Short-term interest rates jumped from 12� per cent to 21 per cen�
t
upon the signing of the programme, and have since risen further.
The Fund argues that these draconian monetary measures are "to
restore and sustain calm in the markets" and "[to] demonstrate to markets �
the government's resolve to confront the present crisis". It is hard to see�
how recessionary monetary policy will restore calm. Indeed the panic has �
so intensified since the signing of the agreement that Korean banks may
now be on the verge of outright default. Just one day after the measures �
were unveiled, the 11th largest-conglomerate declared bankruptcy when
Korean banks abruptly refused to roll over its short-term debts. In recent �
days more well-known local companies have gone under.
In addition to the rise in interest rates, the IMF is insisting that
fiscal policy be tightened by 1-1� per cent of GDP. On top of this, the I�
MF
required that 9 out of 30 merchant banks suspend operations. The IMF is
aiming for Korean growth to fall to 2.5 per cent in 1998 from 6 per cent in�
1997. But the projected slowdown may turn out to be the least of Korea's �
worries by next year, since the underlying macroeconomic measures could
easily push the economy into outright contraction. None of this overkill �
makes sense for an economy that was (rightly) judged to be pursuing sound �
macroeconomic policies just months earlier.
A better approach would have been for the IMF to stress the
strengths rather than the weaknesses of the Korean economy, thereby
calming the markets rather than further convincing them of the need to flee�
the country. Months ago, when the financial crisis began, the Fund could
have quietly encouraged Japan, the US and Europe to provide some credit
support to the Bank of Korea. It might well have worked with the major
banks to encourage them to roll over their short-term debts without
inflaming the panic. With appropriate confidence-building measures, Korea�
could probably have got by with a modest slowdown in growth, no credit
crunch, and a realistic time horizon of a few years to complete its needed�
financial reforms.
In more than six dozen developing countries, the IMF is in a
position to choose make-or-break financial policies. While its instincts ar�
e
often correct, they can sometimes be wrong, with serious consequences.
In recent years, the IMF mishandled the Russian reforms (for
example, by insisting for more than a year that all 15 successor states to �
the
Soviet Union share a common currency, thereby delaying stabilisation and �
undermining the political support for reforms). In Bulgaria, the IMF signed�
a programme in July 1996 based on 2.5 per cent growth and 20 per cent
inflation in 1997. Instead, Bulgaria has suffered an outright collapse of �
gross domestic product of more than 10 per cent, and inflation in the
hundreds of per cent. The IMF (in common with others) failed to foresee
the Mexico crisis in 1994, and the Asian crises in 1997.
Three general conclusions can be reached. First, the IMF is invested
with too much power: no single agency should have responsibility for
economic policy in half the developing world.
Second, the IMF's executive board should do its job of overseeing
the staff, rather than simply rubber-stamp the staffs' proposals. It is hig�
h
time the board consult outside expertise in the exploratory stages of IMF �
operations; it should also canvas international opinion about the origins a�
nd
policy implications of the Asian crisis.
Third, IMF operations should be made public, so that professional
debate and review can help ensure the highest possible professionalism of �
the institution, especially since (for all its faults) the Fund will surely�
continue to play an important role for many years in the future.
====
The author is head of the Harvard Institute for International Development.�
