Excuse me, I’m the IMF

28 April 1999

The IMF has announced that the Asian crisis is over and, implicitly, it wants the credit.

The IMF is proving again that it is not so good at international economics but quite excellent at international public relations. When criticism of the IMF swelled towards the end of last year, the IMF generated two large and weighty documents on its role in the Asian crisis. This avalanche of statistics and torrent of prose came down on one point: the high interest rates imposed by the IMF at the start of the Asian bailouts were necessary and successful in preventing even worse falls in currency values. This argument may have been right. It was also very devious. The criticism of the IMF had ranged widely over its disastrous macro policies and its enthusiasm for launching financial restructuring in the eye of the crisis. But the defence focused on one point. The most defensible point. The other issues were simply ignored. This is excellent PR.

More recently, the IMF has claimed that its original (August 1997) package for Thailand would have been perfect, but was undermined by the "unexpected" contagion around the region. But why was this contagion so unexpected? Had the IMF really forgotten that its interventions in Latin America always induced a contagion effect? Had it not noticed that the other countries in the region tried to help Thailand in early 1997 precisely because they knew that a Thai crash would quickly rebound on themselves? Did they not listen to the international financiers who were saying they would treat Asia as one region? Of course not. The IMF knew there would be contagion. This is another bit of thick-faced PR.

The real reason for the IMF’s self-congratulation is that the Asian crisis has not badly affected the western economies and particularly their financial corporations. Asian governments were easily strong-armed to guarantee their bankers’ overseas debts. The backlash on the hedge funds was contained (by using the Japanese convoy model). The contagion was stemmed at Brazil’s northern border.

Now that the crisis is "over", the IMF and Washington are saying that there is no need for any major change in the international financial system, no reason for major reform of the IMF, no justification for challenging the IMF’s bailout strategies, and in particular no reason for any restraint on the free movement of international capital.

This conviction will have a cost. It is no coincidence that immediately Washington made this position clear, the idea of an Asian Monetary Fund resurfaced, and talk about capital controls has increased. Many people in the region are not convinced the IMF did such a great job, and are not so sanguine about leaving their countries exposed to free flows of money.

Take Ammar Siamwalla. He ranks as one of Thailand’s most eminent mainstream economists. He is no fiery radical, and in normal times he would line up on the side of the free marketeers. Long before the IMFers discovered the term "crony capitalism", he was arguing for market liberalisation to undermine the bad habits of Thailand’s capitalists. From the eve of the crisis, he has taken a leading public role in criticising Thailand’s technocrats for failing to adjust to the new era of liberalised markets. By any standard, Ammar should be the kind of economist which Washington can count on for support.

Yet last week, at a conference on Thailand’s future beyond the crisis, he stated the need for "some degree of capital controls". He added that such controls could not be imposed yet because capital is still flowing out of Thailand. He favoured the Chilean form which discourages short-term inflows by warning that a tax will be imposed on funds which exit too fast.

Ammar sounded another note of caution. Since the start of the crisis, Washington has launched an all-out attack on "Asian capitalism". It has argued that the typical Asian firm’s preference for bank loans rather share capital, for family and personal connections rather than strict legal relations, has been at the root of the crisis. It would like to sweep away such Asian capitalism and replace it with the Anglo-American variant. The legal reforms, financial restructuring, and decimation of the Thai corporate families, are leading towards that end.

But, Ammar warns, such a transition is much harder than it looks. The Anglo-American business tradition is based on a very specific legal heritage, which in turn has given rise to habits and practices evolved over centuries. You cannot establish such a tradition in a new setting through a few laws and decrees.

The point is this. In the past, Ammar has been highly critical of Thai corporate practices. Yet now even someone with such attitudes is nervous about the crude and hasty attempts to sweep away systems which worked relatively well in Thailand over two previous generations, and to import something which is very foreign.

Ammar’s dissent reflects a growing divide between the IMF and its Washington patrons on the one hand, and just the kind of people who should be its good friends and supporters in the region. Through the first year of the crisis, such people clung to the orthodoxy of the free market, and trusted in the ability of the IMF. But now more and more mainstream economists are disgusted by the IMF’s self-congratulation for such a shabby job; dubious about the medium-term consequences of crude attempts to re-engineer Asian capitalism; and concerned that none of the financial reforms made to date will prevent a recurrence of this kind of crisis.