Max's drawing a line post is very timely, very to the point: we really must
hash out what a progressive position on bailouts should be. I agree that
these are the sorts of crises we will see more of. As evidenced by the NYT
article attached below, the mainstream press also seems to see this as a
serious, recurring issue. I hope other pen-lers will follow up on this.
Some questions for Max (and others) follow.
>The US labor movement is going to be told, not
>without reason, that a collapse of Asian
>economies will destroy US jobs, through I presume
>reduced imports of our goods and low-ball export
>pricing to US consumers.
Are there any quantitative analyses out there on this?
>The question of greatest interest to me is
>whether there is some practical way to accomplish
>the sort of restructuring alluded to without
>going up the blind political alley of simply
>advocating state takeover of whatever and
>restitution to whomever.
Could you spell this out a bit?
And a note: it seems to me that a central part of a progressive "no bailout"
policy would be pointing to the record of how such bailouts "structurally
adjust" millions outside the US into ever greater instability, vulnerabilty
and lower wages. In fact, I would suggest that working out a progressive
bailout policy would have to be a multinational activity.
Tom
--------------
New York Times, December 8, 1997
I.M.F.'s New Look: A Deeper Role in Risky Business in Crisis Economies
By RICHARD W. STEVENSON and JEFF GERTH
WASHINGTON -- For more than 50 years the International Monetary Fund
has been imposing austerity plans on countries in crisis. But with the
bailout package it agreed to with South Korea last week, the fund is pushing
far more deeply than ever before into the day-to-day operations of one of
the world's largest economies.
The program will include many of the usual I.M.F. prescriptions,
including raising interest rates and taxes, to deal with financial problems
that were more dire than the South Korean Government had let on. But the
program will try to go much further to overcome stiff resistance within
South Korea and bring sweeping changes to a business culture built on close
coordination and cronyism between the Government and crucial industries like
automotive, shipbuilding and steel.
As the bailout of South Korea suggests, the financial crisis that has
spread across East Asia has marked a turning point in the role of the fund.
Long a stern monitor of general economic probity in developing nations, it
has been forced, along with the World Bank and other institutions, to take
on bigger, more complex and riskier roles in recent years, starting with
Mexico in 1995.
"These international institutions, built for the days of sheltered
national economies, must now meet the challenges of the new world of global
markets, where no economy can or should shelter for long behind national
controls and purely national barriers," said Gordon Brown, Britain's Finance
Minister.
So heavy has been the demand on the fund over the past few months that
for the first time some analysts are raising questions about whether it has
enough money left to cope with future crises, a concern that fund officials
said is premature.
In the last few months alone, the fund has had to come to the rescue of
three countries that had been models for economic development: Thailand,
Indonesia and South Korea.
The fund has also had to attempt to keep the upheaval from
destabilizing Japan, Russia, Brazil -- indeed, the entire world economy.
Under its leadership, international institutions and individual countries
have pledged more than $100 billion in aid to propping up Asia.
As details emerge of how the South Korea bailout will work -- and of
how the country's financial condition deteriorated at a frightening pace
over the past month -- officials in the United States and around the world
are focusing again on the abilities and limitations of the I.M.F., the
181-nation organization based in Washington that is the lender of last
resort to tottering economies.
The fund's emphasis has long been on lending to countries whose
economies have gotten in trouble because of currency and trade imbalances.
Its prescriptions, developed largely by professional economists operating in
effect under the authority of the richest countries, have tended to focus on
austerity, an approach that makes it less than welcome in many developing
countries.
But because it is the only organization that has the money and
expertise to keep entire economies afloat in a crisis, governments are often
left with no choice but to swallow its medicine.
After accounting for the cost of the South Korea bailout, of which $21
billion will come directly from the I.M.F., the fund will have immediate
access to about $44 billion to cope with future crises. In addition, it can
win fairly quick access to another $25 billion in backup funding provided by
a group of 11 industrialized nations, including the United States.
By virtue of its financial contributions, the United States is the
fund's largest shareholder, at 18 percent, and effectively wields a veto
over major programs and policies. But officials within the fund and the
Clinton Administration have become increasingly concerned about the
willingness of Congress to provide more financing.
The fund faces a variety of other issues, including whether the fund
can spot developing problems early enough to address them before they reach
a crisis point and whether, once a rescue is necessary, the fund has the
clout to force the governments of bigger and more powerful nations than it
typically deals with to carry out the painful adjustments these countries
have accepted.
For the last few years the fund has had only modest success in imposing
some financial discipline on one of the largest of its new breed of clients,
Russia. And in Asia the fund has grown increasingly frustrated with
Indonesia, in particular, for already wavering in its commitment to whip
itself into shape. As a result, officials from the fund and the United
States approached the South Korea bailout intent on winning agreement to as
many specific, detailed provisions as possible to restrict South Korea's
wiggle room.
So adamant was Treasury Secretary Robert E. Rubin that the South Korea
plan have teeth, people involved in the talks said, that the deal was held
up for 10 hours in its final stages before South Korea agreed to such
relatively arcane points as implementing accounting standards that would
force Korean companies to provide a clearer view of their financial condition.
"The only thing the United States did -- Secretary Rubin -- was to say,
look, Korea has no stronger supporter than the United States and we believe
in its economic potential and its economic future," President Clinton said
in an interview with The New York Times on Thursday. "But we want the plan
to be real. And that's what the I.M.F. said they wanted, and that's what we
got."
On a general level, the fund's growing role in overhauling the private
sector is making it a more explicit advocate of the style of capitalism long
championed by the United States, centered on free markets, reduced
government involvement in business decisions and more openness.
As a result, the fund is increasingly under attack as a pawn of
American policy and as an agent of destruction among Asian countries that
have always pursued a more closed, authoritarian capitalism.
Almost by default, the fund has also become the closest thing the world
has to a global financial regulator, prodding countries to make sure their
banking systems are sufficiently strong and sophisticated to deal with the
risks that accompany the huge capital pools that race around the world in
search of higher returns.
What's Different, What's New
"What's different about the last three programs -- and different from
Mexico -- is that banking- and financial-sector restructuring is absolutely
at the heart of the program," said Stanley Fischer, the fund's No. 2
official. "That's new."
Whether it can effectively play the role of regulator remains a
question, given the magnitude of the task and the fund's mixed record in
foreseeing and heading off the Asian crisis. In the end, the fund may
frequently find itself putting out financial fires rather than preventing them.
Indeed, many experts feel that the very nature of the fund will limit
its ability to monitor the inner financial dealings of countries at risk and
force them to take painful steps to shape up before their problems worsen.
The experts said the fund's only real leverage is over countries that
are already under I.M.F. programs, which Thailand, Indonesia and South Korea
were not. Even when the fund has a good handle on emerging problems, as it
had with Thailand's deteriorating condition earlier this year, it feels
constrained in warning the markets, fearing that disclosure would create the
very panic and crisis it is seeking to avert. Mr. Fischer says the fear of
making a mistake also acts as a deterrent.
"The problem is that the I.M.F., even when it suspects major problems
in a country, has no way of making that country do the right thing until
there is a crisis," said John G. Heimann, chairman of global financial
institutions for Merrill Lynch. "Pre-crisis, the I.M.F. has a lot of carrots
but not sticks. Once the crisis happens, then the I.M.F. can tie
conditionality -- the stick -- with money -- the carrot."
The Thailand case illustrates Mr. Heimann's point. The fund's staff
became nervous about Thailand's economy last year, but the Thai Government
largely ignored repeated I.M.F. warnings, say fund officials.
In the case of Thailand, the fund's mistake was underestimating the
seriousness of Thailand's condition because the Government over-reported its
foreign currency reserves, a crucial indicator of financial health.
The I.M.F. missed the shrinkage of South Korea's foreign currency
reserves, too, say fund officials. The South Korean central bank had been
lending some of those reserves at below-market rates to private Korean
banks, who needed the money to repay short-term loans from international
banks in the so-called interbank market.
How to Defend Plunging Currency?
As foreign banks grew increasingly nervous about extending credit to
South Korea, the interbank market tightened in November. Therefore, the
central bank could not collect its loans. To the outside world, including
the I.M.F., South Korea had $30 billion in foreign currency reserves, but
the Government actually had no more than half that amount available to
defend its plunging currency.
The depth and speed of South Korea's deterioration may have surprised
the I.M.F., but fund officials say their swift reaction prevented a real
catastrophe.
"The drama of this negotiation resulted from the realization when the
mission arrived in Seoul on Wednesday, Nov. 26, of the alarming state of the
foreign reserves," Mr. Fischer said. "When we were invited in, Korea was
possibly 10 days away from a financial catastrophe, and the urgency to
compress negotiations into one week required a ruthless concentration on
priorities."
The lesson the fund has learned from the Asian crisis is to improve its
surveillance of the financial markets and require better and more timely data.
The Asian situation "shows the importance of having much more
transparent information," said one fund official, who said the fund was
examining how to get better data on a country's foreign reserves.
This is not a new lesson.
After the Mexican crisis of 1995 caught the fund by surprise, the fund
commissioned a secret study that recommended improved data collection and
more focus on financial flows, as opposed to trade patterns.
The fund beefed up its ability to analyze financial data and created a
new international data standard. Forty-three countries now follow that
standard, but Thailand, Indonesia and South Korea are not yet fully in
compliance, says a fund official.
The I.M.F. studies every country once a year and issues a report.
Countries have resisted efforts by the United States to make the reports
public, but starting this year parts of the report can be released, though
only with the permission of the individual country.
Study of Fund Finds Quandary
This illustrates a quandary highlighted by the 1995 study of the fund:
its reliance on member countries. This difficulty is already being played
out in Indonesia.
The agreement with Jakarta is not as specific as the agreement with
Seoul, and fund officials privately fear that President Suharto may be using
the vagueness to backslide on pledges to dismantle inefficient and costly
government projects.
The notion of meddling in a country's regulations for private
corporations is a long way from the I.M.F.'s creation in 1944 at Bretton
Woods, N.H., as the guardian of the world's currencies.
Some critics question whether international organizations, financed by
tax dollars from member nations, should have any role in bailing out nations
undone by their own failed policies and by investors and lenders who made a
bet on them. They favor letting market forces determine winners and losers.
"Absent an I.M.F. bailout, the amount of market reform that would occur
and the amount of market opening would be greater," said Lawrence Lindsey, a
former Federal Reserve governor who is now a fellow at the American
Enterprise Institute.
Copyright 1997 The New York Times Company
Tom Kruse / Casilla 5869 / Cochabamba, Bolivia
Tel/Fax: (591-42) 48242
Email: [EMAIL PROTECTED]
