The powerful number crunchers keep getting it wrong, writes Alex Brummer
Every decade or so the men in grey suits from the International Monetary Fund (IMF) in Washington touch all of our lives. Today it is happening in Asia.
In its early years the fund’s main customers were the Western economies themselves: even the mighty United States was forced to take out an IMF loan as recently as 1980, as a result of the combination of the revolution in Iran, a catastrophic surge in oil prices and the collapse of the dollar.
In the last two decades, however, as so much of the world’s production and finance has moved to the emerging market economies of Latin America, Eastern Europe and Asia, the fund’s focus has changed radically. It has increasingly become the West’s instrument for forcing its economic wisdom — from privatisation to free movement of foreign exchange — on to rapidly changing societies in the developing world.
The fund has rewarded economies which have adopted its market reforms: Russia is in receipt of a $10,2-billion programme. But more than that, an IMF programme provides an imprimatur for the rest of the financial world. Of the $60-billion of Western loans pledged to South Korea to support its creaking financial and industrial system, about $10-billion comes from the IMF; the rest consists of loans from other international agencies such as the IMF’s sister organisation, the World Bank, and from individual countries.
Given that the IMF can unlock billions of dollars in new funds for troubled countries to replace those pulled out by the smartest international investors, one might expect it to be welcomed. That is rarely the case. In Latin America, after the debt crisis of 1982 (which came close to bringing down, among others, Lloyds Bank in Britain), it was more often than not greeted by riots on the streets from Venezuela to Argentina. Similarly, the fund’s arrival has been greeted with trepidation in Asia.
IMF loans come cheap; the interest rate is usually far below that in the recipient’s troubled economy. The price, however, is a loss in economic and political sovereignty to bureaucrats with little knowledge and experience of the political or economic systems with which they are dealing.
They are largely number-crunchers working to an economic model based upon the Victorian idea that austerity is good for you. And that model does not always match the circumstances. In the case of South Korea, for instance, where the problem was one of financing rather than one in the real economics of growth, exports and full employment, the IMF’s model could not have been more of a mismatch.
In Indonesia the IMF has privately acknowledged that its fixed ideas on how economic disasters should be resolved made matters worse. In its determination to clean up a corrupt banking system when it was first called into Jakarta last November, it demanded that the government close down 16 unsound banks, including one controlled by President Suharto’s son. This was the fund at its crusading best.
Unfortunately, instead of stabilising the credit system in the country — which had been its intention — its precipitate action triggered even greater financial panic. Investors and depositors in the banks withdrew a further $2-billion from the country, sending the Indonesian currency, the ringgit, plummeting even further.
A leaked internal IMF report acknowledges that, as a result of the IMF’s mistake, there was a more broadly based run on the banks, with almost two-thirds of deposits being removed. As a result, the Suharto administration was required to pump in new resources equivalent to 5% of the nation’s wealth.
Indeed, across the region, and in the Wall Street Journal and the Financial Times, there has been advice for the fund from almost every international economist of note, much of it highly contradictory. Even Joseph Stiglitz, chief economist of its sister organisation, the World Bank, felt the need to weigh into the debate: he argued that the fund should be careful not to make the situation worse by tipping the economies of Asia into recession.
The criticism of the IMF’s handling of Asia has rolled in from the right and left. From the right, Milton Friedman, high priest of modern monetarism, argued that the fund had long outlived its usefulness. “If you had a private enterprise whose function disappeared, it would go bankrupt and out of existence,” he said — a fate he recommended for the IMF.
At the other extreme, Jeffrey Sachs of the Harvard Institute (who has been called in as personal adviser to Suharto’s government) has expressed the view that the IMF has not been tough enough in its approach. It gave in to Thailand’s demands for almost $20-billion of bail-out cash too easily, Sachs argued, without insisting on the basic economic and democratic reforms needed.
Nor do the criticisms stop there. Non- governmental organisations, deeply involved in the development effort, fear that the IMF/World Bank focus on Asia will mean a diversion of resources from the most needy countries in Africa, the Indian sub- continent and Central America. They warn that the intervention has done nothing to address the huge income inequalities that accompanied the spiralling growth over the last decade.
The Group of Seven largest industrial countries, which meets next month at Lancaster House in London, will have more practical issues on its agenda. It will be seeking to widen the IMF’s mandate for reforming capital markets; finding ways in which funds can be distributed more quickly to head off crises; and determining whether or not there is enough cash in the IMF’s kitty to deal with Asia as well as Russia, Latin America and the other patients in its care.
At the last count, the fund estimated that it still had $40-billion to $45-billion of resources, largely provided by rich member countries like the US and Japan, to deal with future catastrophes. Yet this is not seen as a comfortable cushion. The great debate currently opening up, in the US Congress and elsewhere, is whether the G7 nations should be the ones to open their coffers and provide more.