WSJ: IMF Admits Errors in Asian Crisis, But Defends Tight-Money Policy (fwd)

[Robert Weissman <rob@essential.org>]

The Wall Street Journal Interactive Edition -- January 20, 1999
Business and Finance - Asia


 IMF Admits Errors in Asian Crisis, But Defends Its Tight-Money Policy

 By RICHARD BORSUK, G. PIERRE GOAD and MICHAEL M. PHILLIPS 
 Staff Reporters of THE WALL STREET JOURNAL

 The International Monetary Fund, in its first comprehensive review of its
Asia rescue packages,
 admits it made some mistakes.

 But the IMF didn't give an inch on its favorite and much-criticized crisis
weapon: tight money, the fund's insistence that countries jack up interest
rates to strengthen their currencies and keep inflation low. "We have no
apologies for the advice on monetary policy," said Jack Boorman, director
of the agency's policy development and review department.

 However, on other controversial components of its rescue programs in
Thailand, South Korea and
 Indonesia the IMF is far less emphatic.

 The acknowledgment by the IMF that things didn't go exactly as planned in
Asia won't come as a
 surprise to the region's residents, to be sure. And the IMF offered ready
excuses for its errors. Still, the self-criticism, in a staff study
released Tuesday in Washington, answers some lingering questions about the
Asian crisis and points to the issues that the IMF, other agencies and
governments must grapple with to prevent a similar disaster in the future.

 'Misgauged the Severity'

 The study highlights the failure of the initial IMF programs in each
country to accomplish the prime objective of stemming the outflow of
private-sector capital. In Thailand, South Korea and Indonesia, capital
outflows were much bigger after the rescue programs were introduced than
the IMF anticipated. The programs also "badly misgauged the severity" of
the economic downturns in the three countries, the study said. The result
was a "vicious circle": Capital continued to flee because the initial
programs failed. The programs didn't work because they failed to restore
confidence.

 "Yes, there were optimistic projections, but those projections were based
on the programs working as planned," Mr. Boorman told reporters in Hong
Kong and Singapore.

 There's plenty of blame to go around. The IMF report said that a key
reason the economic crisis
 has been much deeper in Indonesia, compared with Thailand and South Korea,
was failures in
 Jakarta's monetary policies. Korea and Thailand tightened monetary
policies more or less in line with IMF recommendations, but in Indonesia
there was "a virtually complete loss of monetary
 control" in the face of the banking collapse and political turmoil, the
report said.

 Korea and Thailand "have, on the whole, been rather successful in
implementing the [IMF] programs as agreed," the report said, adding,
"whereas in Indonesia, in part due to the severity of the underlying
political crisis, the program has repeatedly veered off course and required
substantial modification."

 Many critics of the IMF approach in Indonesia argue that the fund erred as
soon as it and Jakarta agreed on a rescue program in October 1997, when it
asked Indonesian authorities to shut 16 of the country's approximately 220
banks. Rather than boost confidence that Indonesia would act firmly to
tackle its banking and economic woes, the closures sparked massive
withdrawals from the banking system as panicked depositors worried that
their banks, too, would be shut.

 The bank runs, the IMF report notes, "led to calls for massive liquidity
support" from Indonesia's central bank. Such support, the report adds, was
provided "quite indiscriminately," causing money supply to balloon. "No
monetary program could have withstood this kind of stress," the fund said.

 Mr. Boorman, asked whether the decision to close the 16 banks was a
mistake, said the IMF
 "agonized greatly" over the closures, and the impact of the move was "one
of the most difficult
 questions" for the review committee. He defended the closures on the
grounds that in a country
 with Indonesia's "history -- or lack of history" in dealing with problem
banks, "the line had to be drawn somewhere."

 Turning to other issues, the IMF report said that in all three countries
fiscal policy was, in hindsight, too tight in the first versions of the
rescue packages. The staff study argues that the recommended reductions in
government spending in the original packages made sense based on the
then-optimistic economic assumptions. Critics argued that a cutback in
government spending just as consumption and investment were plunging
reinforced the economic slowdowns. Fiscal policy has since been loosened
considerably with the IMF's blessings. "The easing of fiscal policy could
have come more promptly," Mr. Boorman said.

 IMF Guide

 Some economists and government officials have criticized the scope and
complexity of the
 structural reforms in the rescue packages. While perhaps desirable in
theory, the reforms
 demanded by the IMF have in practice been an unnecessary distraction in
the middle of a crisis,
 critics say. What's more, failure to meet reform deadlines helped
undermine confidence. Mr.
 Boorman said it is too early to conclude that the emphasis on structural
reform was a mistake.

 The study isn't just a bureaucratic autobiography; it's also a guide for
IMF activities. In fact, after Brazilian authorities let the country's
currency, the real, move freely against the dollar last week, they met with
IMF officials who insisted on high interest rates and huge budget cuts to
restore investor confidence.

 That policy combination might support the value of the real, stem
inflation and encourage investors to keep their money i Brazil, eventually
allowing interest rates to fall. But the risk is that, as happened in Asia,
it will stunt economic growth by making it extraordinarily difficult for
companies and consumers to borrow, and aggravate Brazil's foreign-debt burden.

 Even officials at the IMF's sister organization, the World Bank, have been
critical of the
 tight-money approach, saying it's too hard on the local population. In a
speech Tuesday, however, bank President James D. Wolfensohn said that in
Brazil's case the policy is a reasonable way to stabilize the economy. He
doesn't think the IMF "in its wildest expectations is talking about
maintaining high interest rates."
                                                                     



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