Larry Elliott and Alex Brummers
A Second Look
From the offices of the International Monetary Fund (IMF) in downtown Washington, DC, the ambush of the Thai baht by currency speculators a year ago this week looked like a brief but violent tropical storm. That great edifice, globalisation, had sprung a leak, but the problem was minor, mere running repairs.
A year later, things look rather different. No longer is it a case of damp in the attic; whole rooms are in rising flood waters.
The IMF has come under rigorous scrutiny. A crisis that started in Thailand has affected Malaysia, Indonesia, South Korea, Japan, India, Russia, South Africa, New Zealand and Australia.
The IMF has come under fire from economists of the right, left and centre. Nobel laureate Milton Friedman led the charge from the right. He accused the IMF of being interventionist: meddling with the invisible hand of the free market to prevent economies from correcting themselves.
From the economics mainstream came the charge that the IMF made a series of bad decisions. Reacting to its closure of Indonesian banks last year, Harvard economist Jeffrey Sachs said: ”Instead of dousing the fire, the IMF in effect screamed fire in the theatre.”
From the left, two lines of attack. First, the IMF got it wrong about globalisation and, second, it is in cahoots with the United States Treasury to force Asian countries to adopt one-size-fits-all American capitalism. The big currency devaluations have made Asian assets cheap, while moves to secure complete liberalisation of capital will make it child’s play for US companies to pick up companies at bargain basement prices.
The fund fought back. In the Financial Times earlier this year, IMF managing director Michel Camdessus was asked why it imposed its same old belt- tightening adjustment programmes on Thailand, Indonesia and Korea – programmes inappropriate to their present needs.
”Mr Camdessus became indignant. The new agreements represented a marked departure from the IMF’s traditional approach. They were built not on a set of austerity measures, but rather on far-reaching structural reforms to strengthen financial systems, increase transparency, open markets and restore market confidence.” These are not universally held views, even within the IMF.
Joseph Stilglitz, chief economist of the World Bank, gave voice to dissidents’ mis-givings. At the start of this year, he made his feelings about the IMF austerity packages plain when he argued that ”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.”
One by one Stilglitz laid into the sacred cows of the IMF. First, the cavalier way in which the emphasis on macro-economic stability ignored growth and jobs. Then there was the Camdessus argument that the need to restore confidence to the currency necessitated high interest rates.
Macro-economic policy needed to be expanded beyond ”a single-minded focus on inflation and budget deficits; the set of policies that underlay the Washington consensus are not sufficient for macro-economic stability for long-term development”.
The IMF is not used to such scorn. It has long enjoyed the reputation of a focused bureaucracy with the world’s best economic and financial staff. Its view has been that one country’s economy is much like another and by applying its rational, neo-liberal economic model, it could restore economic stability.
Created at the 1944 Bretton Woods Con- ference in New Hampshire, the IMF’s remit was at first a narrow one. It was the world’s central bank, lender of the last resort to member countries. Its clients were advanced industrial countries and the system worked well, fixed exchange rates making it easy to police. All that changed in 1972 when President Richard Nixon uncoupled the dollar from gold.
The new world was different, primarily because the end of fixed rates brought new opportunities for speculators to take on the weak links in the financial system. The fabled ”Gnomes of Zurich”, who undid the Wilson government in 1967, were joined by fellow spirits in financial markets from New York to Tokyo. Forced British and US borrowings from the fund in the late 1970s hurt; the richer industrial countries would at all costs avoid similar humiliation. The IMF would still supervise their economies, but capital shortages would be met by borrowing from the increasingly free and open private sector capital markets.
Just as there was talk that the IMF has out-lived its usefulness, the Mexican crisis broke. In 1982 the Mexican government reneged on its debts with private sector banks precipitating a crisis across Latin America, which threatened the Western banking system. The IMF stepped in as lender of the last resort. It discovered a global clientle among developing countries. Instead of making short-term bridging loans it was in for the long haul.
When the Berlin Wall came down and the former Soviet Union aspired to capitalism the fund acquired almost two dozen new clients. Despite its doctrine of fiscal austerity, it added hundreds of new economists to its staff, doubled the size of its Washington headquarters and increased its budget to $507-million in the 1997/98 financial year.
But its lending programmes and approach to member countries was the same. Its operations were surrounded by secrecy, its advice to governments private, its focus fiscal deficits, monetary policy and inflation.
Even before it started throwing its weight around in Asia, it was not short of critics. Robert Wade and Frank Veneroso argued that Asian economies were different from those the IMF usually deals with. They had high levels of saving recycled as loans to corporations; and companies were closely linked with governments.
”Because of this difference, IMF ‘austerity’ and ‘financial liberalisation’ will have higher costs and smaller benefits in Asia than elsewhere. The showdown of the IMF’s packages for Thailand, Indonesia and Korea to revive confidence reflects both their imposition of impossibly far-reaching institutional liberalisation and their inappropriateness for Asian structures.”
The IMF points out – rightly – that the lack of a body like it deepened the global crash of the 1930s. But critics argue that a result of the 1930s was the formation of a Keynesian international system fortified with capital controls.
The fund’s recent actions have even given diehard free-traders reason to question what it’s doing. According to Jagdish Bhagwati, ”it is a lot of ideological humbug to say that without free portfolio capital mobility, somehow the world cannot function and growth rates will collapse”.