Mea culpa: IMF failed Asian test
By Michael Dwyer
The International Monetary Fund has admitted that it failed to anticipate much of Asia's financial turbulence, imposed excessively harsh policies on economies in crisis and lacked the expertise to deal with many of the region's problems.
The global agency has also acknowledged that the Asian crisis, and ensuing financial turmoil in other areas, has been such a drain on its resources that it has less than $US9 billion ($15 billion) to lend to economies needing emergency funding.
And it has warned that the huge drain on its funds over the past year will make it much harder to respond effectively to new problem areas emerging in the world economy - particularly in Latin America.
The IMF's candid assessment of its own role in the Asian financial crisis is contained in the 1998 annual report of the agency's executive board, released yesterday in Washington.
The report includes a frank admission by the IMF that it was "taken by surprise" by many of the events in Asia over the past year and that the design of its emergency rescue programs for countries like Indonesia were seriously flawed.
"With hindsight, it was clear that the affected countries' vulnerabilities had been underestimated, including by the markets," the IMF report says.
The report also shows there has been considerable debate within the IMF over whether it should condone the use of exchange rate controls by developing countries to regulate short-term capital flows as a way of easing pressure on their currencies. But the most alarming issue that the latest annual report has raised is the potential problems the IMF would face if a major bailout of Latin American economies was required in the near term.
The IMF's deputy managing director, Mr Stanley Fischer, told a press conference in Washington the agency had less than $US9 billion to lend to countries in need.
Mr Fischer said the recent instability in Latin American markets meant it was imperative the US Congress approve a further $US18 billion contribution to the IMF.
"The situation in the global economy unfortunately, very regrettably, is becoming extremely difficult and the resources now available are limited in ways that are unhelpful to increasing confidence in the international system," he said.
The release of the IMF annual report came just a day before Group of Seven deputy finance ministers met in London to discuss ways in which to stabilise the Russian economy and to prevent further destabilisation of global markets.
The report acknowledges that the IMF's performance in identifying problem areas in Asia had been mixed, noting that it had not attached "sufficient urgency" to the financial tensions which were emerging in South Korea in early 1997.
The IMF appeared to have been more aware of the risks in Thailand's economic policy course than were most market observers.
"In other cases in Asia, however, the IMF - while having identified critical weaknesses, particularly in the financial sector - had been taken by surprise, owing in part to the lack of access to requisite information and also to an inability to see the full consequences of the combination of structural weaknesses in the economy and contagion effects."
But the IMF noted that it had to learn "valuable lessons" from the Asian crisis, including the design of its rescue programs and the need for greater collaboration with other international institutions like the World Bank.
The report acknowledged that the tough fiscal conditions which it placed on some Asian countries as part of their rescue packages was an inappropriate policy response.
"Attempts at complying with a fiscal rule through excessive reliance on tax rate increases and unsustainable or cosmetic expenditure cuts, or one-off measures, might tend to be counter-productive," it conceded.
It said some IMF directors "questioned the need for significant tightening of fiscal policy since Asian economies in crisis generally did not suffer from fiscal imbalances".
The report also highlighted the need for more expertise within the IMF on financial sector reform, which is more properly the domain of the World Bank.
The annual report shows member countries drew about $US25.6 billion from the IMF's general resources account in the 12 months to April 1998 - nearly four times the level of the previous year.
The IMF report pointed out the intensity of the debate over the role which capital controls could play in a new global financial architecture.
"A number of directors saw merit in imposing selective capital controls to limit the severity of the currency depreciation in the aftermath of an exchange rate crisis, as well as to reduce the risks of crises in the first instance," the annual report said.
"Several other directors, however, cautioned that such controls were likely to be ineffectual beyond the short run and could even prove counter-productive, by leading to a surge in capital outflows."
IMF, short of cash and credibility, has its own crisis
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