The Wall Street Journal Interactive Edition -- February
Economists Criticize IMF
In a Study of Asia's Crisis
By EDUARDO LACHICA
Staff Reporter of THE WALL STREET JOURNAL
Table of Contents
WASHINGTON -- While the International Monetary Fund
Related Sites: blames crony capitalists and badly regulated banks for
Barron's Online the Asian crisis, a couple of Harvard economists are
suggesting that the IMF's own institutional blinders may
SmartMoney Interactive be part of the problem.
Business Directory The combination of poorly designed IMF rescue packages,
Publications Library investor panic and government missteps made the crisis
worse than it would have been otherwise, say Jeffrey
Sachs and Steven Radelet in a paper prepared for a
[Image] project by the National Bureau of Economic Research.
WSJ.COM Radio The paper is particularly critical of the fund's demand
Hear top news of the for higher interest rates, fiscal contraction and
hour with RealPlayer outright bank closures as conditions for bailing out
5.0 Asian economies. Mr. Sachs says that last November's
closure of 16 Indonesian banks triggered a banking
Search/Archives: crisis from which the country has yet to recover.
Quotes The IMF may have an opportunity to defend its actions as
Past Editions a participant in the same project by the NBER, a
Journal Links Cambridge, Mass., think tank. The project is being
organized by Paul Krugman, a Massachusetts Institute of
Special Reports Technology economist who hasn't taken sides in this
academic debate over the appropriateness of the IMF's
Resources: actions in Asia.
New Features The multilateral agency, however, is already learning
Your Account from its mistakes. The Harvard paper notes that the IMF
had to redesign its programs for Thailand, South Korea
Contact Us and Indonesia within weeks of signing the original
Glossary letters of intent. For instance, the IMF originally
insisted on a Thai budget surplus, but it's now willing
Advertising: to tolerate a small deficit.
E-Mart To compensate for its inexperience in banking reform,
the IMF has handed over that task in Indonesia to the
World Bank and to Stefan Ingves, the Swedish deputy
central-bank governor who had a key role in cleaning up
a 1992 banking mess in his own country.
There's muted support for the IMF's re-education even in
the higher circles of the Clinton administration. Deputy
Treasury Secretary Lawrence Summers has said -- partly
in jest -- that the IMF should stop standing for "It's
Mostly Fiscal" and get a stronger grip on the regulation
of the international financial system. Until recently
the IMF has concerned itself only with budgets and
payment balances, leaving others to worry about the
inner workings of member economies.
The Harvard paper reflects the frustrations of some
development professionals with what they see as the
IMF's arrogant ways. Mr. Sachs, the director of the
Harvard Institute for International Development, has
been at odds with the IMF since the early 1990s when he
questioned the fund's handling of Russia's economic
recovery. Mr. Radelet is an HIID aide working on
At the heart of the debate over Asia's economies is the
question: What caused them to crash in the first place?
Mr. Krugman -- who argued in 1994 that Asian nations
couldn't keep up their high growth rates because they
were simply throwing more resources at the economy,
rather than using them more wisely -- says in his
current paper that well-connected financial
intermediaries (he terms them "ministers' nephews")
gambled heavily with their money and lost, causing a
bubble of Asian wealth to burst.
The IMF's initial rescue programs reflected a similar
assessment of what ails Asia. There was a stress on good
governance, the IMF's euphemism for cleaning up corrupt
ties between business and government.
Other economists believe that this emphasis was
misplaced. "If we're talking about reforming the
Indonesian economy, the IMF program is the right one,"
says Iwan Azis, an Indonesian economist teaching at
Cornell University. "If we're talking about overcoming a
currency crisis, this program is not. All economists in
Southeast Asia have been shouting for such reforms for
years but this should be done after the crisis, and not
while we're still having it."
The Harvard economists say that although Asian economies
were getting to be "financially fragile" in 1997, a
severe crisis wasn't inevitable. Panic partly induced by
the IMF's bank-closure strategy in Indonesia
unnecessarily deepened the crisis, they say.
Other observers only partially agree with the Harvard
paper's judgment that the IMF botched the process in
Indonesia. Jakarta-based analysts say the IMF team that
surveyed the banking scene in October didn't bother to
consult the World Bank and Asian Development Bank's
field officers in that country.
According to these analysts, the IMF initially targeted
as many as 50 banks for closure, but narrowed the list
to 29, and then finally to 16. Under policies set by
Indonesian authorities, depositors at those banks were
quickly paid a maximum 20 million rupiah (then
equivalent to about $5,600). People with larger deposits
were out of luck until last week, when the government
announced -- apparently in a new bid to boost confidence
-- that it had decided all depositors in closed banks
would be fully reimbursed.
The 16 closed banks accounted for only 2% of the
country's commercial banking activity, so there may have
been a presumption that their closure wouldn't seriously
hurt business. The closures took place without any
visible panic but subsequent events outside the IMF's
control prompted depositors to fear that the agency
would force more closures, the analysts say.
Independent reports suggest that money fled from weak
private banks to stronger ones or to state-owned or
foreign banks -- and even to homes. The Harvard paper
estimates that Indonesian savers shifted as much as $2
billion out of weak banks.
Impact of Closures
Observers in Jakarta believe that the secrecy of the
IMF's operations also contributed to the jitters.
If the IMF made a mistake, it was in assuming that a
dramatic action upfront would settle the market, a
Jakarta banker says. But what was really needed was just
"a lot of plumbing repairs and not grand architecture,"
Once the panic set in, several "powerful feedback
mechanisms" amplified it, the Harvard paper says. For
instance, undercapitalized Japanese banks with heavy
loans in the rest of Asia felt compelled to call them
in, putting even more pressure on the borrowers.
The IMF insists that it's prescribing the right
medicine. Higher interest rates, says IMF First Deputy
Managing Director Stanley Fischer, have the merit of
encouraging companies to shift their financing from debt
to equity. Allowing unsound banks to stay open would be
a "recipe for perpetuating the region's financial
crisis, not resolving it," Mr. Fischer told an audience
of U.S. bankers recently.
IMF officials admit, however, that they still don't have
the tools to closely monitor, much less regulate, the
kind of short-term capital flows that contributed to the
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