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Global Policy
In this article Joseph Stiglitz recalls the 1997 East Asian financial crisis and analyzes how people and governments have not learned two important lessons from the crisis which affected not only Asian nations but the whole world. July, 2007
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One of the most important (and original) missions of the IMF is to help out countries with short-term balance-of-payment difficulties. Although it is widely acknowledged that an official lender is necessary in times of a global financial crisis, the way the IMF managed the last crises is very controversial. The three main operations of the Fund in the 1990s - the so-called shock-therapy for the new market economies of Eastern Europe, and the way the IMF handled the Mexican and Asian crisis - all drew criticism from academics, politicians and NGOs, representing a range of political views.
The Fund's role in the transition of the former Soviet Union to a market economy was criticized for establishing "shock-therapy" capitalism in countries without functioning political and economic institutions. With little knowledge of Russian history and ignoring the political realities of the independence movements in the former Soviet republics, the IMF persistently recommended a single ruble bloc for the Commonwealth of Independent States. Moreover, the Fund's demands for rapid privatization of industry and floating exchange rates allowed a small group of oligarchs to take over former state enterprises, and triggered an explosion in corruption and organized crime.
In the 1994-95 Mexican crisis, the rapid reaction of the Fund and the US Government prevented a possible breakdown of the international financial markets, unlike in the 1982 debt crisis where their reaction was slow and inappropriate. But, the so-called operation peso-shield was also interpreted as a bailout for financial speculators, which shifted the costs to Western taxpayers, bypassing any democratic controls and in this case even IMF regulations. Supported by the US Government, IMF Managing Director, Michel Camdessus, decided that the Fund would provide Mexico with additional 10 billion dollars to prevent the fall of the peso. According to IMF guidelines, the 7.7 billion dollars previously approved by the IMF Board were strictly speaking the maximum Mexico could receive.
In the 1997 Asia crisis the IMF was again the target of criticism. This time it was not only accused of bailing out rich investors but also of adopting the wrong approach to tackling the crisis. Critics said that the IMF was using the same remedy as it had applied in earlier crises in Mexico and elsewhere, even though the symptoms in this case were very different. The Asian crisis was due to a heavily-indebted private sector rather than mismanaged state budgets. The IMF, however, forced countries to cut public expenditure in order to restore financial credibility, thereby worsening the crisis. As some economists argued, these countries did not need economic austerity, but expansionary policies that could have prevented the financial crisis from becoming a deeper social and economic crisis. The IMF ignored this basic economic argument and also ignored the realities of the countries' fragile political and social systems, for instance in Indonesia. Moreover, the IMF bailout in Asia did not stop the financial panic, rather the crisis deepened and spread to other countries.
Although, IMF internal reviews accepted some of the criticism directed at it, the Fund again failed to impress in its management of the recent crisis in Argentina. The country had been under close IMF supervision for ten years before its currency collapsed without the Fund giving any prior warnings. Additionally, the IMF-imposed austerity measures were blamed for the country's economic problems.
As a response to its various critics, the Fund continues to argue that debtor countries are better off with its loans than they would be borrowing from private-sector creditors, who it says would inflict far harsher conditions in times of economic crisis.
This lecture identifies the failure of the IMF in Russia on several levels. The IMF overestimated the Russian economic growth and conducted inadequate risk assessment. It also wrongly assumed the Russian government would be capable of implementing the required economic reforms. And, it dealt with individuals, who disappeared from the political scene once the deal was secured (pdf-file).
The authors analyze the relationship between the IMF and Russia during the 1998 financial crisis. They conclude that disagreements arose because IMF programs are designed for stable states and were unsuitable for this transforming economy. Many of the conditions of the IMF were unpopular with the Russian government and difficult to implement in the transition period (pdf-file).
The former World Bank economists Joseph Stiglitz attacks the role of the IMF in the transformation of the Russian economy. Under IMF programs, the economy - with high interest rates, illegitimate privatization, poor corporate governance and capital-market liberalization – experienced an unprecedented decline. Growth only occurred when the currency was devaluated and capital controls were imposed.
The failure of the showcase: The financial crisis in Asia
This July marks the 10th anniversary of East Asia's financial crisis. In July 1997, the Thai baht plummeted. Soon after, financial panic spread to Indonesia and Korea, then to Malaysia. In a little more than a year, the Asian financial crisis became a global financial crisis, with the crash of Russia's ruble and Brazil's real. Looking back at what happened and why, it is clear the world has learned some lessons but that some actions are still necessary to reduce the risk of similar future meltdowns. July, 2007
In light of the Asian crisis these conservative authors argue for abolishing the IMF. Since its bailouts serve only as an insurance for private investors it encourages unsustainable lending. IMF involvement interferes with market mechanisms and will in the long-term only encourage more crises.
The former chief economist of the World Bank Joseph Stiglitz criticizes the IMF response to the Asian financial crisis and the transition in the former Soviet Union. The Fund delivered the same set of policies to each country in need despite the huge economic, political, and cultural differences of the individual cases.
Contrary to the Mexican crisis the problem in Asia was rather one of a heavily-indebted private sector than mismanaged state budgets. The IMF, however, forced countries to cut public expenditures in order to restore financial credibility, thereby worsening the crisis.
The author states that contrary to IMF claims there is very little evidence for any correlation between IMF programs and the recovery of South Korea, Thailand and Indonesia after the crisis. Rather, IMF shock-therapy deepened and prolonged the crisis.
This Korean activist describes the consequences of IMF policies in Korea after the Asian financial crisis. According to him the structural adjustment led to unprecedented levels of poverty and inequality.
This report from the Fund’s Independent Evaluation Unit lists shortcomings in IMF surveillance of the crises. Fund’s staff underestimated the depth and responded inadequately, partly due to inexperience of staff and different views among the IFIs (pdf-file).
The trouble with the peso: Latin America and the IMF
The author concludes that the IMF bailout in the Mexican financial crisis 1994/95 was costly both for the Mexican people and the world economy. The private market would have offered less expensive solutions in exchange for real financial reforms.
This book presents different views on the Argentinean crisis reaching from IMF critics who largely blame the institutions’ austerity measurements for the economic downturn to IMF staff who believe that the dollar-pegged peso and unsustainable budget-policy of the Argentinean government were mainly responsible for the collapse. The eight chapters can be downloaded as pdf-files.
The Fund’s evaluation office is currently assessing the role of the IMF in the Argentinean crisis. This paper summarizes the background and the main issues related to the financial turmoil. It includes an extensive bibliography. The results of the evaluation will be published in 2004 (pdf-file).
The Argentinean government refused to accept all IMF conditions and succeeded in receiving a loan regardless. However, this “victory” for Argentina was partly a result of US pressure, who feared the rise of another leftist government in Latin America. Additionally, the loan is still bound to the Fund’s orthodox adjustment policies.
The IMF projections for economic growth (World Economic Outlook http://www.imf.org/external/pubs/ft/weo/weorepts.htm) in Latin America were regularly overly optimistic in the past 17 years. This systematic bias has serious implications for the countries’ debt burden. Overly optimistic growth projections will make a debt burden appear more manageable than it actually is. Countries may try to service debt levels that they would recognize as unmanageable if they possessed unbiased growth projections. In this sense, the IMF projections may lead countries to follow a long-term path that they would quickly reject if they possessed more accurate information.
The Latin American and global scenario was astonished by recent announcements made by Brazil and Argentina with regards to their cancellation of debt to the International Monetary Fund (IMF). The crises both countries went through at the end of the 20th century and early 21st century forced governments to resort to the IMF and thus increase their degree of indebtedness as well as the exposure of their economies. At the present time, the prevailing strategy in the region, earnestly supported by the IMF, is that of “dis-indebtedness”. December, 2005
When Argentine sovereign default in December 2001 led to a collapse of the peso, the burden of dollar debt became demonstrably unsustainable. But it was not clear what restructuring was feasible, nor when. Eventually, in 2005 after a delay of more than three years, a supermajority of creditors accepted a swap implying a recovery rate of around 37 cents in the dollar. In this paper a bargaining approach is used to explain both the settlement and the delay. Factors not explicit in the formal framework are also considered - heterogeneity of creditors, for example, and the role of third parties in promoting “good faith” bargaining. (pdf format) Enero, 2006
"The public service policy of a country cannot be decided by a litigation at the World Bank's International Centre for Settlement of Investment Disputes (ICSID)" said yesterday the Argentinian Justice Minister Horacio Rosatti in an interview with the local newspaper La Capital. The ICSID was created in 1966 to arbitrate conflicts between States and foreign investors, and it is frequently invoked as the conflict resolution instance in bilateral and multilateral investment treaties. April 2005.
Argentina successfully closed its debt swap and Brazil did not renew the agreement with the International Monetary Fund and is starting to walk alone. Both governments highlight the virtues of their policy strategies. However, not all opinions coincide when it comes to evaluations. April, 2005
In spite of all the pessimistic predictions, the Economy Minister Roberto Lavagna announced the end of Argentina's external debt swap. This announcement closes a three-year default period and opens up an interesting space for negotiation for Argentina, in spite of the pressure exerted by developed countries on the Argentinian government will continue to be on the table in future negotiations. In this article the author analizes some of the many challenges Argentina should face in its road towards economic recovery and the increase of its capacity in terms of autonomy and sovereign decision-making with regards to the development model to be followed. March 2005
In response to critical remarks about its operations in Russia, the IMF argues that there is no link between its loans and capital flight. The IMF is regularly reviewing Russia’s compliance with the programme. While the Fund underestimated the difficulties related with the transition to a market economy, its programmes are designed to prevent capital flight in the long-run.
In this response to critics, the Director of the IMF Office in Europe points out that, although governments of countries in a financial crisis are advised to limit the build-up of public debt to restore investors’ confidence, budgets deficits might be allow to grow depending on the individual situation. While programs seek to reduce wasteful public expenditure they allow social safety nets to expand.
This article addresses the critical positions on the IMF regarding conditionality, bail-outs, poorly-designed programs and forced liberalization of the capital markets. It concludes that the IMF generally uses adequate measures to overcome financial crises and offers far better solutions for debtor countries than private investors would do.
