Khor: IMF and the E. Asia crisis

[Robert Weissman <rob@essential.org>]

IS THE I.M.F. REALLY BEHIND THE WORSENED EAST ASIAN CRISIS?

A debate is going on in academic and policy circles globally on the
role and effects of the International Monetary Fund's con-
tractionary policies that have deepened the crisis in many East
Asian countries.

By Martin Khor
Third World Network Features

     As the East Asian crisis continues to deepen, the debate on the role
of the International Monetary Fund's policies has heated up.

     The IMF's top officials continue to defend their macroeconomic
approach of squeezing the domestic economies of their client countries
through high interest rates, tight monetary policies and cuts in the
government budget. Their argument is that this 'pain' is needed to restore
foreign investors' confidence, and so strengthen the countries' currencies.

     However, some economists had already warned at the start of the IMF
'treatment' for Thailand, Indonesia and South Korea that this set of
policies is misplaced as it would transform a financial problem that could
be resolved through debt restructuring, into a full-blown economic crisis.

     The prediction has come true, with a vengeance. The three countries
under the IMF's direct tutelage have slided into deep recession. Partly due
to spill over effects, other countries such as Malaysia and Hong Kong have
also suffered negative growth in the year's first quarter. Even Singapore
is tottering on the brink of minus growth.

     For the countries afflicted with sharp currency depreciations and
share market declines, the first set of problems involved: the heavy debt
servicing burden of local banks and companies that had taken loans in
foreign currencies; the fall in the value of shares pledged as collateral
for their loans, with its resulting weakening of the financial position of
banks, and inflation caused by rising import prices.

     But then came a second set of problems resulting from the high
interest rates and tight monetary and fiscal policies that the IMF imposed
or advised. For companies already hit by the declines in the currency and
share values, the interest rate hike became a third burden that broke their
backs.

     But even worse, there are thousands of firms (most of them small or
medium-sized) that have now been affected in each country. Their owners and
managers did not make the mistake of borrowing from abroad (nor did they
have the clout to do so). The great majority of them are also not listed on
the stock market. Therefore they cannot be blamed for having contributed to
the crisis by imprudent foreign loans or fiddling with inflated share values.

     Yet these companies are now hit by the sharp rise in interest rates, a
liquidity squeeze as financial institutions are tight-fisted with (or even
halt) new loans, and the slowdown in orders as the public sector cuts its
spending.

     The interest rate hike and the reluctance of many banks to provide new
loans have caused serious difficulties for many firms and consumers. This
has led to open complaints against the financial institutions by the
business sector, and to calls by political leaders, including the Prime
Minister, to find measures to reduce the lending rates.

     In this matter, countries subjected to currency speculation face a
serious dilemma. They have been told by the IMF that lowering the interest
rate might cause the 'market' to lose confidence and savers to lose
incentive, and thus the country risks capital flight and currency
depreciation.

     However, to maintain high interest rates or increase them further will
cause companies to go bankrupt, increase the non-performing loans of banks,
weaken the banking system, and dampen consumer demand.

     These, together with the reduction in government spending, will plunge
the economy into deeper and deeper recession. And that in turn will anyway
cause erosion of confidence in the currency and thus increase the risk of
capital flight and depreciation. A higher interest rate regime, in other
words, may not boost the currency's level but could depress it further if
it induces a deep and lengthy recession.

     This is in fact what is happening. The main bright spot for Thailand,
South Korea, Indonesia and Malaysia is that as recession hits their
domestic economies, there has been a contraction in imports, resulting in
large trade surpluses.

     Unfortunately, this is being paid for through huge losses in domestic
output and national income, the decimation of many of the large, medium and
small firms of these countries, a dramatic increase in unemployment and
poverty, and social dislocation or upheaval.

     A price that is far too high to pay, and which, in the opinion of many
economists (including some top establishment economists) is also
unnecessary for the people of these countries to pay.

     They argue that instead of being forced to raise interest rates and
cut government expenditure, the countries should have been advised by the
IMF to reflate their economies through increased public spending and
interest rates that are lower than the present levels. -- Third World
Network Features

                                  -- ends --

About the writer: Martin Khor is Director of the Third World Network.

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