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The Times

How IMF became part of the problem. By Joseph Stiglitz. June 22, 2002.

WHEN the Thai baht collapsed on July 2, 1997 no one knew that this was the beginning of the greatest economic crisis since the Great Depression — one that would spread from Asia to Russia and Latin America. By the end of the year what had started as an exchange-rate disaster threatened to take down many of the region’s banks, stock markets and even economies. Yet IMF policies which are supposed to deal with such crises, not only exacerbated the downturns but were partially responsible for the onset.

When the crisis broke out, I was surprised at how strongly the IMF and the US Treasury seemed to criticise the countries — the Asian nations’ institutions were rotten, their governments corrupt, and wholesale reform was needed. How, I wondered, if these countries’ institutions were so rotten, had they done so well for so long? The increases in incomes and the reductions in poverty in East Asia over the past three decades had been unprecedented. The difference in perspectives, between what I knew about the region and what the IMF alleged, made little sense, until I recalled that the countries of East Asia had been successful in spite of the fact that they had not followed the dictates of the Washington Consensus. In particular, governments had played a leading role in achieving economic success, the very opposite of the policy beloved of the IMF.

Trade was liberalised, but only gradually, as new jobs were created in the export industries. While the IMF emphasised rapid financial and capital market liberalisation, the East Asian countries liberalised only gradually. While the IMF emphasised privatisation, governments helped to create efficient enterprises that played a key role in the success of several of the countries. While the IMF paid little attention to inequality, the East Asian governments believed that such policies were important for maintaining social cohesion, and that social cohesion was necessary to provide a climate favourable to investment and growth.

When the crisis began, the IMF stuck to its preconceived ideas. They were so sure of their advice that they wanted to put more pressure on developing countries to liberalise their capital markets. Meanwhile, the leaders of the Asian countries were terrified. They viewed the hot money that came with liberalised capital markets as the source of their problems. In the end, only Malaysia was brave enough to risk the wrath of the IMF; and though Mahathir Mohamad’s policies — trying to keep interest rates low, trying to put the brakes on the rapid flow of speculative money out of the country — were attacked from all quarters, Malaysia’s downturn was shorter and shallower than that of any of the other countries.

The crisis spread, first to Indonesia, and then, in early December, to South Korea. Meanwhile, other countries around the world had been attacked by currency speculators. The IMF’s response was to provide huge amounts of money (the total bailout packages, including support from G7 countries, was $95 billion) so that the countries could sustain the exchange rate. It thought that if the market believed that there was enough money in the coffers, there would be no point in attacking the currency, and thus “confidence” would be restored. The money served another function: it enabled the countries to provide dollars to the firms that had borrowed from Western bankers to repay the loans. It was thus, in part, a bailout to the international banks as much as it was a bailout to the country.

And in country after country in which the IMF money was used to sustain the exchange rate temporarily at an unsuitable level, there was another consequence: rich people inside the country took advantage of the opportunity to convert their money into dollars at the favourable exchange rate and whisk it abroad. The IMF itself had become a part of the countries’ problem rather than part of the solution.