The IMF and Its Critics - A Commentary

November 12, 1998

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The IMF and Its Critics
A Commentary
By Michel Camdessus
Managing Director of the International Monetary Fund (IMF)

The Washington Post
November 10, 1998

Reproduced with the permission of The Washington Post

The International Monetary Fund has come under heavy criticism in recent months both for its handling of global financial contagion and its proposals for defending against future crises. While many of the critics have offered constructive advice, at times the discourse has lost sight of the facts -- and the true significance of the proposed remedies.

First, the sources of the continuing Asian economic crisis -- and its cures -- are more complex, and run deeper, than is generally recognized. They originated in serious deficiencies in national economic policies and in major flaws in the international financial system. Admittedly, it does seem almost unimaginable, even in retrospect, that so much could go wrong so quickly for the economies in Asia. The very success of these economies, however, made it especially difficult for political leaders in the region to accept the quiet counsel (yes, possibly too quiet!) of the IMF, the World Bank and other institutions to reform their financial systems and correct the glaring deficiencies of corporate governance.

In a recent op-ed article [Oct. 5], Henry Kissinger suggested that shortcomings such as cronyism and corruption were little more than the "cost of doing business" in these countries. In fact, they were the rot at the core of economies that appeared almost unblemished on the surface. Competitiveness and confidence in Asia had already begun to slip as insolvencies at banks and Korean business groups became known. But that decline reached Mach speed after governments failed to take decisive action. Temporizing measures taken primarily to defend pegged exchange rates soon proved ineffective.

Many outside observers have mistakenly assumed that the content and pace of structural reform measures were unwelcome concessions to the IMF. Of course, there was, and continues to be, opposition to deep reform from powerful interests that would have gladly opted for some illusory "quick fix." But there was no disagreement at the working level that structural reform was indispensable for restoring domestic and international confidence and achieving a sustainable economic recovery. To address this crisis, the IMF had to put together comprehensive programs in emergency situations.

And they include considerable adaptations. For example, the IMF has pressed countries in Asia and elsewhere to adopt and expand social safety net measures to help ease the impact of austerity on the poor.

Macroeconomic elements of programs have also been adapted. Fiscal targets have been eased, sometimes despite the misgivings of fiscally conservative governments. Most important, had we known that Japan's economic slowdown -- the crisis within the crisis -- would worsen, we would have pressed earlier for greater fiscal easing in some countries. The basic approach -- which included tightening monetary policy at the outset to stop the free fall of exchange rates, then subsequently easing interest rates as stabilization was achieved -- proves to have been appropriate. Positive results are becoming increasingly evident even though economies have fallen into recession. Interest rates have come down sharply in Korea and Thailand, foreign-exchange reserves have been rebuilt, exchange rates have strengthened and current accounts show impressive surpluses.

What Asian countries, Russia and too many other countries did not do was build sound financial systems quickly enough and give enough attention to the proper phasing and sequencing of capital account liberalization. Their "disorderly" liberalization now threatens to give liberalization itself an undeserved bad reputation.

But orderly liberalization is the correct ultimate goal. While there may be merits to maintaining temporary, limited restraints on short-term capital flows, they still resemble the Maginot Line: difficult and costly to construct, and astonishingly easy to avoid.

To my great surprise, Kissinger actually suggested that the IMF "too often compounds the political instability" and "weakens the political structure" in countries it seeks to help by urging "nearly invariable remedies" that "mandate austerity" and include reforms that are too ambitious.

Recent history -- in Asia, Latin America and Europe -- contradicts the notion that political leaders can gain favor by avoiding needed economic reform. Political leaders who have failed to grasp the nettle of economic stabilization and reform have been swept from office. Leaders -- especially those who are democratically elected -- who have ignored vested interests and tackled economic problems, explaining to the public why painful measures are required, have not only survived but achieved the economic turnarounds their countries required. The world is fortunate, indeed, that the best of modern political leaders do not cower when crisis looms. I could mention Presidents Cardoso, Kim and Menem, among a long list. I am proud that the IMF has been there to encourage and assist their countries in overcoming extremely difficult challenges.

Now we have another great task before us in improving the architecture of the global financial system. A formidable, but achievable, agenda for reform was laid out at last month's annual meeting of the IMF in Washington and endorsed by the G-7 governments. Greater transparency of economic information and policy making at both the national and international levels is the top priority. The IMF itself has come a long way in increasing its own transparency, and we are committed to going further. Pressing ahead with strengthening government systems for supervising and regulating financial systems is another priority. The IMF will be leading that effort, working closely with the World Bank, national authorities and other institutions.

The private sector will need to be engaged more fully and constructively in both crisis prevention and working out financial solutions for crises when they happen. This is a complex area that will require imaginative thinking and extensive cooperation. The IMF will still need to make major financial commitments to support policy reform packages, hopefully in most cases -- such as Brazil -- to head off actual crisis situations. So I am greatly encouraged that Congress has approved the U.S. share of increased resources for the IMF.

All of these ideas are likely to become part of the consensus on international monetary reform that I expect to see emerging in coming months. Thus, we can look forward with confidence to a sounder global financial system to underwrite greater prosperity in the 21st century.