Next time will we believe the IMF?

2 May 2000

Just before the IMF meeting in Washington in April, Jo Stiglitz, the former chief economist at the World Bank, published a scathing attack on the IMF's handling of the Asian crisis. This is what he had to say.

The IMF's people are thick. Suppose students were asked in an exam what fiscal policy Thailand should have adopted in 1997. Those who gave the IMF's answer "would have gotten an F". That's because they are "third-rank students from first-rate universities". Bright kids don't want to work for the IMF. None of Professor Jo's clever students from Oxford, Yale, Stanford, Princeton and MIT have ever gone to work for the dreary organisation.

The IMF's people are bad economists. "Time and again, I was dismayed how out-of-date-and out-of-tune with reality were the models Washington economists employed." The Asian crisis was a capital account crisis - too much lending to private firms, and then too rapid capital flight. But the IMF economists were stuck with the mentality of current account crises caused by government profligacy. They just dusted off the plan used in Latin American crises. The plan took no account of huge levels of private debt. It was irrelevant, and likely to make things worse rather than better.

When Professor Jo suggested to them it was the wrong plan, they bridled. It worked in Mexico, they claimed, so it will work in Thailand. But it "worked" in Mexico because Mexico had just joined Nafta and the US wasn't about to see Nafta die at birth. Huge amounts of aid and investment poured in beyond the IMF's plan. None of that was going to happen in Asia. When Professor Jo pointed this out, the IMF guys breezily replied: well if it doesn't work, we'll try something else. But modern crises deteriorate fast. You only get one chance.

The IMF people are colonialists. They think they have a mission. They even use the word "mission" to describe the teams they despatch around the world. "The older men who staff the fund - and they are overwhelmingly older men - act as if they are shouldering Rudyard Kipling's 'white man's burden'." And like colonialists through the ages, they think the natives are stupid. "IMF experts believe they are brighter, more educated, and less politically motivated than the economists in the countries they visit." Again like colonialists, they love telling the natives what to do. "In theory, the fund supports democratic institutions in the nations it assists. In practice, it undermines the democratic process by imposing policies . . . Sometimes the IMF dispenses with the pretence of openness altogether and negotiates secret covenants." (So Chavalit was right?)

The IMF people are arrogant, secretive and deaf. "Smart people are more likely to do stupid things when they close themselves off from outside criticism and advice." The IMF certainly wasn't listening to anyone in Asia who knew about Asia. They wouldn't even listen to the chief economist in their sister institution across the street.

The IMF people are religious fanatics. They believe in the gospel of the free market. Over-zealous liberalisation had helped cause the Asia crisis. But then they pushed more liberalisation as the cure. Even worse, in Russia they promoted rapid market liberalisation as "shock therapy" to get rid of the economic heritage of a communist past. The result? Production cut by a half, poverty levels soaring from 2 to 50 per cent of the population, gangsters in control, and wars breaking out.

Nothing that Stiglitz wrote in this article is new. It has all been said before, thousands of times. But this is different. Stiglitz is not a fiery radical. He's a conventional mainstream economist. He wrote this article in a prominent and essentially conservative journal, The New Republic. He has been part of the policy establishment - first on Clinton's team and then at the World Bank. He was recruited into this establishment, at a time it adopted a mission to spread US-style free market economics around the world, because he believed in the same goals.

The criticisms are not at all original. But it is one thing to hear dissent from the rabble in the marketplace. And quite another to find a former high priest standing in the heart of the cathedral and spitting at the bishops. This is heresy. And heresy is always more dangerous, more frightening, and more disturbing than ordinary dissent.

What seems to have made Stiglitz really angry are the attempts by the IMF to claim credit for creating Asia's recovery. On his farewell tour through Bangkok in March, Michel Camdessus claimed Thailand had "graduated from the IMF University summa cum laude . . . graduation means victory . . . the job is done." Stiglitz will have none of this. "Nonsense. Every recession eventually ends. All the IMF did was make East Asia's recessions deeper, longer, and harder."

But Stiglitz barely starts to question why the IMF should have been so stupid, arrogant, colonial, insensitive, secretive, out-of-date and so on. He hints that the problem may not have been Camdessus and the IMF staff, but "the IMF board of executive directors - the body, appointed by finance ministers from the advanced industrial countries". He suspects this board was pushing the IMF staff to be "even more severe" in the policies imposed on Asian countries.

Also, he only starts to question the US role. "Did America . . . push policies because we . . . believed the policies would help East Asia or because we believed they would benefit financial interests in the United States and the advanced industrial world? And, if we believed our policies were helping East Asia, where was the evidence? There was none."

In retrospect, it is clear that the IMF had three priorities in the way it approached the crisis in Thailand and elsewhere. The first priority was to preserve the stability of the international financial system. That's fine. That is what the IMF was created for. The second priority was to seize the opportunity to force Thailand (and other countries) to accept many changes in the structure of the economy, the aims of economic management, legal systems, and much besides. This is not part of the IMF's original duties. This is a new American mission. The third priority was to achieve recovery.

Given that recovery was only the third priority - and that the second priority of reform implied a lot of "creative destruction" of existing businesses and institutions - we can understand why the crisis was so bad.

Stiglitz probably believes in the second priority. He is angry at the IMF for handling it so badly, and hence raising the level of opposition to this American mission around the world.

Stiglitz's outburst comes on the heels of the US Congress's Meltzer Report, which also criticised the IMF handling of the Asian crisis, and recommended scaling back the IMF's role. A few months ago, the mainstream consensus was that the IMF may have made a few mistakes. Now the mainstream consensus is that the IMF screwed things up royally.

What does this mean for the Thai politicians, technocrats and economists who clung to the IMF in 1997 and argued passionately that resisting any part of the IMF's plans would only lead to greater disaster? Of course they argued at the time that the Chavalit government was so hopeless that even the IMF was preferable. But next time round, would these politicians, technocrats and economists be so passively deferential, so trusting in the IMF's greater wisdom?

Stiglitz points out: "Thailand, which followed the IMF's prescriptions the most closely, has performed worse than Malaysia and South Korea, which followed more independent courses." Next time, would anyone in the Thai policy-making establishment have the guts to resist?