IMF criticism grows as S. E. Asia Crisis Worsens

15 January 1998

Doubts about the IMF‘s capacity to deal with international currency problems are mounting as the South East Asian crisis worsens despite the IMF‘s bail-out efforts. South Korea and Indonesia may still default even though they have received financial packages worth $57bn and $40bn respectively (Thailand’s package is worth $17.2bn).

In the region unemployment has begun to rise and incomes fall. Migrant workers are especially vulnerable and many are being forced back to their home countries. People in Indonesia, Burma and the Philippines who benefit substantially from the wages migrant workers send home, are particularly likely to suffer.

The IMF‘s handling of the crisis has come under widespread attack from both left and right wing commentators, including the mainstream media. They are critical of the IMF for imposing its orthodox policy prescriptions (control on government spending and higher taxes, higher interest rates, and liberalised markets and fewer state controls) on countries which are not suffering from excessive government spending or inflation, but from profligate financiers who have cared little for the riskiness of their loans. Analysts have warned that these policies will stifle the economies. Joseph Stiglitz, chief economist at the World Bank, rebuked the IMF saying,

“you don’t want to push these countries into severe recession, one ought to focus on things that caused the crisis, not on things that make it more difficult to deal with”

Credit controls and high interest rates are causing severe problems for small and large businesses. Mr Supachai Panitchpakdi, Deputy Prime Minister of Thailand, remarked that “the deflationary effect was stronger than the IMF predicted.” Martin Wolf in the Financial Times, described the IMF‘s policy prescriptions as “little more scientific than for a doctor to bleed his patients.”

Others have criticised the IMF of failing to view the problems and needed solutions from a region-wide perspective.

An internal report of the IMF‘s handling of the crisis in Indonesia leaked to the press, admitted that the IMF‘s policy to close down the worst financial institutions in the country had in fact worsened rather than stabilised the situation. Nor have the Fund’s other packages and programmes fared better. A week after signing the largest ever rescue package, the South Korean won fell nearly 30% against the dollar, and following the IMF‘s failure to restore confidence both the Thai and South Korean governments called for revisions to their programmes.

The impartiality of the IMF‘s advice has been called into question by some in Asia who see its programmes as an extension of the United States’ foreign and economic policies. There have also been claims of double standards as Korean and Indonesian authorities are prevented by the IMF from bailing out their troubled financial institutions and corporations whilst international investors benefit from the IMF‘s packages and are making the most of the opportunity to buy Asian assets cheaply.

Harvard economist Jeffrey Sachs, writing in the Financial Times, echoed many NGO critics when he argued that the IMF ” is invested with too much power: no single agency should have responsibility for economic policy in half the developing world “, he called for more consultation with outside experts, and greater transparency at the IMF to facilitate wider professional debate and review of IMF policy prescriptions.

Bank Fears Social Crises

The World Bank fears the financial downturn will lead to social problems. Javad Shirazi, World Bank regional manager for East Asia, said that “the risk is that this crisis could prove prolonged and deep, if that is the case the poor are going to be hurt very seriously.” To try to alleviate the worst of these negative effects, which could create political pressure for governments to abandon the IMF‘s reform packages, the Bank is providing new loans for safety-net programmes as well as loans for financial sector and banking reforms:

  • Although South Korea “graduated” from the Bank in 1994, it has received $3bn of a package worth up to $10bn;
  • Indonesia will receive $4.5bn over 3years, of which $2bn was released immediately for balance of payments support. $500m is for safety nets;
  • A $300m loan to Thailand will establish a social investment fund and a $350m loan will support financial sector reforms.

The US$3bn loan to Korea was the largest ever provided by the Bank. It will be repaid at higher than normal interest rates and over a shorter time period, and is thus very profitable for the Bank. The loan was agreed and disbursed extremely quickly in support of the IMF‘s rescue package. “We feel it is very important to step in to try to limit the economic domino effect,” commented Vice President Mark Malloch Brown. This brings into question the distinction between the Bank and the IMF and how the Bank should prioritise the use of its resources.

Articles and IMF briefings available from the Bretton Woods Project.