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REALITY CHECK FROM THE IMF
A Letter to the Editor
By Flemming Larsen
Deputy Director of the International Monetary Fund’s (IMF’s)
Research Department

Business Week
February 8, 1999 (International Edition)

"In Brazil, the IMF Made Things Worse," (Editorial, February 1, International Edition) needs a reality check. First, the International Monetary Fund has spent nowhere close to $200 billion on containing the recent financial crisis. The sum committed so far to Thailand, Korea, Indonesia, Russia, and Brazil is about $67 billion, with some $43 billion of that actually disbursed--and Korea has already begun repaying the IMF.

Second, it is not the case that Thailand and Korea began to dig themselves out of recession only "'when they repudiated IMF policies." It is the IMF- supported programs in place that have helped restore financial market confidence, allowing these countries to lower interest rates and stimulate demand.

Third, you claim "'there is no end in sight" to the financial crisis. This flies in the face of recent developments. Indications are that the worst is probably behind us, with Korea and Thailand expected to resume growth this year, and Indonesia at least bottoming out.

As for Latin America, it is true the crisis is not over. But remember that Brazil fought off the worst of the contagion last fall, with the help of the IMF and the international community. A recession in 1999 is inevitable, as a result of the crisis and belated efforts to adjust, but there is scope for Brazil to stabilize and avoid a protracted decline.

The biggest problem is with your basic premise: that insufficient demand was at the heart of the problem in Asia in 1997. We beg to differ. In 1997, the world economy was growing at a rate of 4%, and world trade was growing even faster, at 10%. The crisis originated in the region's earlier overheating, excessive credit expansion, financial sector weaknesses, and structural shortcomings. It then developed into a funding crisis, sparked by rapid capital outflow.

Undeniably, the world economy has slowed since this crisis. But with growth of 2% in 1998-99, we call it a cyclical downturn rather than global deflation.