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World: IMF Reforms Prescribe The Cure

Washington, 13 January 1998 (RFE/RL) -- There are those in countries in financial crisis who cry that the rescue packages arranged by the International Monetary Fund (IMF) are too tough.

In the current crisis in southeast Asia, these critics even charge that the IMF reforms are causing the situation, not helping it.

But IMF officials and outside economists closely familiar with the fund's work say those criticisms usually come from people who are profiting in some way from the reasons behind the crisis and don't want their interests damaged.

Officials make the analogy of the drunk who is aghast when the doctor says that to get sober and stay that way, the person must first stop drinking.

"But that's too tough," the drunk in the analogy responds. "I want to be cured, so maybe I could just cut back the number of drinks each day by five percent this year and ten percent next."

The drunk's favorite bar-tender might agree, but like the doctor, when the IMF is called in to deal with a national financial crisis, it knows that partial, half-hearted efforts and reforms will only prolong the problem, not solve it.

The IMF's second-ranking official, First Deputy Managing Director Stanley Fischer, points to the Korean crisis as a prime example. When the IMF was first called in by Seoul authorities, Fischer says they discovered that Korea was ten days away from a complete financial collapse -- a catastrophe which had the potential of severely damaging the entire global economy.

The Korean crisis unfolded with "overwhelming speed and severity," said Fischer, but the fact is that whether it was dealing with any of the southeast Asian nations now in difficulty -- Korea, Thailand, Indonesia or Malaysia -- or with Mexico a few years ago, international authorities knew they had to act quickly and very decisively.

Financial systems are based entirely on the confidence of everyone involved, most especially on bankers who make decisions on loans, and investors, who decide where to place their funds, and on businesses and individual citizens, as well. Lost confidence, whether justified or not, can lead to even more serious problems.

World Bank official Danny Leipziger, who led the team which negotiated a World Bank loan as part of the Korean program, says it doesn't take much to completely erode confidence.

He told a seminar at the Institute for International Economics in Washington yesterday that when the IMF package was first announced, large numbers of private companies, investors and lenders around the world decided the Asian economic miracle was over and it was time to get out. Each one was acting in what it thought was its own best interest, but the result was that over 95 percent of Korea's short term lenders fled. That left the country's economy unable to function, necessitating the IMF, the World Bank and the Asian Development Bank to quickly speed up their disbursements to Korea in late December, and activate a part of the back-up lending from 13 richer nations.

That time it worked, says Leipziger, but only because the private sector realized that everyone can't pull out at once in a global economy. So large numbers of banks, investors and others are holding rounds of meetings in New York this month to work out private arrangements to keep the Korean economy on a more normal footing until the IMF reforms can be implemented.

The reforms the IMF recommends vary from country to country and situation to situation, but are very basic -- seeking a stable economy with sustainable growth. The reforms are negotiated and must be fully accepted by the country involved. "Too often, citizens have the impression that the programs their governments are attempting to carry out have been imposed from outside," says IMF Managing Director Michel Camdessus.

He told an ASEAN Business Forum in Kuala Lumpur, Malaysia, recently that to authorities who have to carry out painful measures, it might seem easier just to blame the IMF -- and many do. But in the long run, he said, it is counterproductive because it undermines public support for the needed reforms.

Camdessus said the fund gives its views on various adjustment measures and recommends which combinations are likely to work. "Needless to say, we do not support programs we think will be ineffective," he said, "but ultimately, it is the authorities' decision what the program consists of."

There are critics who say some of the specific recommendations the fund makes in these circumstances are terrible. One regular charge is that the IMF requires a country to contract its economy.

Not true, says Fischer. "The fund does not target the growth rate or require the growth rate. It is not an objective of an IMF program, it is an assumption needed to do calculations," he told the press conference announcing the program for Korea in early December.

The growth slowdown that Korean will experience, Fischer added, "is a result of things that happened before the IMF was called onto the scene." Given the situation Korea faced, he said, there was "no way Korea could have avoided a significant period of growth slowdown and restructuring -- things had just gone too far."

Said Fischer: "Actually, without our assistance, this would have been a much deeper recession and the amount of readjustment in Korea would have had to be even greater" without the IMF program.

For a commentary recently in the Financial Times newspaper, Fischer added: "Once a crisis erupts, easy solutions are not available, and a growth slowdown is inevitable."

Fischer says the first step in any program is to rebuild confidence, "which takes time and steady adherence to the economic program."

That program usually includes fiscal tightening and higher interest rates, but Fischer says the fund never asks for more fiscal adjustment "than necessary to cover the costs of financial sector restructuring and to help restore a sustainable balance of payments."

So while Korea is having to tighten its fiscal operations -- or governmental operating budget -- by only around one percent, Thailand is having to make an initial tightening of three percent of GDP (gross domestic product). These costs can't be offset by an expansionary fiscal policy, says Fischer, because external financing for such measures are not longer available to countries in crisis. In Asia, says Fischer, a large capital inflow "has turned into a massive capital outflow -- this is not the time to try to increase government borrowing."

Higher interest rates are necessary, says Fischer, because "people need to be persuaded to keep their money at home or not to withdraw it, (and) interest rates need to be raised, not excessively, not permanently, but to help restore stability."

Of course, he acknowledges, higher interest rates can create problems for the banking system, but the banks were already in crisis and as stability is restored, interest rates will come down again.

IMF External Relations Director Shailendra Anjaria says that high interest rates cannot be avoided in a country coping with a crisis of confidence. "The IMF does not support keeping interest rates high for a moment longer than necessary," he wrote recently, but "only until market confidence as reflected in movements in the exchange rate begins to be restored."

Anjaria noted that Mexico and Argentina in early 1995 had to temporarily raise interest rates by more than 20 percent to deal with that Latin American crisis. More recently, he said, "three countries -- the Czech Republic, Brazil and Russia -- have successfully withstood pressures originating in the Asian crisis by raising short-term interest rates."

There are debates on some specifics of various IMF programs, says the World Bank's Leipziger, but almost none about the fundamentals. Noted Korean economist Soogil Young of the Korea Institute for International Economic Policy says few like to admit that all of these crises are home-grown. "The immediate cause of the Korean crisis was the loss of confidence on the part of international investors in the Korean economy because of primary problems internal to Korea," he told the seminar in Washington.

Experts say the current flare-up of the Indonesian crisis, which prompted the leaders of the IMF and top U.S. finance officials to dash to the region on the weekend, occurred because Indonesian President Suharto presented a budget last week that effectively ignored his government's promises to severely cut wasteful spending.

When international investors saw that budget, they discounted Suharto's words that Indonesia would follow the IMF program, and began pulling out, prompting another crisis of confidence.

Camdessus calls this the "denial syndrome" by authorities who really can't accept the depth of the crisis their countries face. The denial syndrome kept Thai authorities from acting when the IMF first warned of a pending crisis early last year and it often delays implementation of reform programs, he says.

But like the doctor treating the drunk, the fund can only prescribe the cure. It is up to the country itself to take the medicine.