Date: Sun, 1 Feb 1998 16:01:58 +1100
From: Rob Schaap <rws-AT-comserver.canberra.edu.au>
Subject: Re: M-TH: Fixing Asia


                 Jeffrey Sachs: IMF is a power unto itself

                          THURSDAY DECEMBER 11 1997

           The head of the Harvard Institute for International
           Development explains why the IMF needs reassessment.


                        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 claims. Since short-term debts exceed foreign exchange
reserves, it is "rational" for 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
will 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 cent 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 IMF 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 are 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, andinflation in the
hundreds of per cent. The IMF (in common with others) failed to foresee the
Mexicocrisis 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 high time the board consult outside expertise in the
exploratory stages of IMF operations; it should also canvas international
opinion about the origins
and 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.


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Rob Schaap, Lecturer in Communication, University of Canberra, Australia.

Phone:  02-6201 2194  (BH)
Fax:    02-6201 5119

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'It is questionable if all the mechanical inventions yet made have
lightened the day's toil of any human being.'    (John Stuart Mill)

"The separation of public works from the state, and their migration
into the domain of the works undertaken by capital itself, indicates
the degree to which the real community has constituted itself in
the form of capital."                                    (Karl Marx)

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