IMF's Role in the Asian Financial Crisis

by Walden Bello The swift evaporation of the Asian economic "miracle" probably ranks second only to the unraveling of Soviet socialism as the greatest surprise of the last half-century. All at once, convention has been turned on its head as South Korea, Thailand and Indonesia line up for multibillion-dollar bailouts from the International Monetary Fund (IMF). Many of the same institutions and people who recently celebrated the Asian "tigers" as the engine of world growth into the 21st century now speak of them as a source of financial contagion, or, as the trigger for global deflation. With strong encouragement of the IMF and World Bank, many Asian countries followed a three-pronged strategy for attracting foreign capital: liberalization of the financial sector (i.e. elimination of restrictions on capital flows); maintenance of high domestic interest rates in order to suck in portfolio investment and bank capital; and pegging of the national currency to the dollar to reassure foreign investors against currency risk. In retrospect, these countries exemplified the perils of "fast-track capitalism." Foreign capital entered in the form of short-term loans to banks and enterprises, but this speculative investment capital never found its way into the real economy of domestic manufacturing or agriculturelow-yield sectors that would provide a decent rate of return only after a long gestation period. Instead, the capital was invested into highyield sectors with a quick turnaround time, such as the stock market, consumer financing and, in particular, real estate. Commercial banks and finance companies soon found they were horribly overinvested in these high-yield and high-risk sectors. Meanwhile, real estate and foreign portfolio investors and banks that had loaned to domestic entities discovered that their customers were carrying a load of non-performing loans (i.e. loans that produced no income). With a worsening balance of trade, the countries' capacities to repay the debts incurred by the private sector became very cloudy. The worsening balance of trade struck fear in the hearts of investors, who recognized the pattern as similar to that which happened in Mexico in 1994. By early 1997 many investors and speculators concluded it was time to get out before a currency devaluation ruined their investments. The ensuing devaluation resulted in a catastrophic combination of skyrocketing import bills, spiraling costs of servicing the foreign debt of the private sector, heightened interest rates spiking economic activity, and a chain reaction of bankruptcies. The Southeast Asian miracle had come to a screeching stop.

Expanded Role of the IMF Despite the failure of IMF policies in Asia, it has moved to revise its articles of association to include within its jurisdiction the liberalization of capital movement within its member countries. Currently, the Fund has the formal authority to monitor and supervise financial flows that are connected with trade in goods and services, exchange rate movements, and credit flows and debt servicing. This latest proposal would extend its formal authority to monitoring and supervising of financial flows connected with direct and portfolio investment. The main lesson to be learned from the Asian financial crisis, critics of the IMF contend, is that there is an urgent need to reverse current practices and re-regulate global capital flows. Yet the IMF is demanding that there be even less controls over currency movements by denying governments the right to ultimate control over capital movement. The IMF first formally floated the proposal to expand its authority during the annual meeting of the IMF and the World Bank in Hong Kong last September. Since then it has become clear, even to conservative monetary authorities such as U.S. Federal Reserve Chairman Alan Greenspan, that unregulated global financial movements have been a central cause of the Asian crisis. Yet, during its spring meeting in April, the IMF Board of Governors, according to a Fund communique, "reaffirmed its view that it is now time to add a new chapter to the Bretton Woods Agreement by making the liberalization of capital movements one of the purposes of the Fund and extend as needed the Fund's jurisdiction for this purpose...." This latest move has, not surprisingly, elicited opposition from developing countries, something expected by the IMF's technocrats. But what the IMF has failed to take into sufficient account is the mounting anger in the U.S. Congress. Many Republicans see the move as another major power grab by a sinister institution. And progressives view it as another instance of the IMF's failing to draw the appropriate lessons from events such as the Asian financial crisis. In addition to extending its control over capital movement, the IMF has requested an additional $18 billion from the U.S. in replenishment funds, implying that funds were depleted due to the Asian financial crises. However, even before the Asian financial crises, the IMF already had plans for a total capital increase of $90 billion that would be drawn mainly from the G-7 countries. A key test of the popularity of this request occurred on April 23, when the House of Representatives voted to remove the increased funding appropriations from a bill which included disaster aid for flood victims. This action signalled that the House wanted to investigate expanded IMF funding instead of rubber stamping increased funds with no discussion.

The IMF funding increase now faces several more months of congressional hearings and the Clinton administration is expected to fight tooth and nail to preserve the prerogatives of the Fund. To Treasury Secretary Robert Rubin and his deputy secretary, Larry Summers, the fight is not just over the merits or demerits of globalization and liberalization. It is also over which branch of the U.S. government will control foreign economic policy. Although some congressional conservatives fear that the IMF is a multilateral agency that diminishes U.S. sovereignty, in fact, it functions as an extension of the U.S. Treasury Department. The Treasury has always used the IMF's status as a multilateral institution to prevent it from being accountable to Congress, despite the fact that Congress provides the largest portion of its resources. Congress is no longer content with this arrangement; many members are arguing that no money can be appropriated without transparency and accountability. One of the likely consequences of this fight over the IMF between Congress and the Treasury Department is that other member governments of the Fund are also likely to seek greater accountability and transparency from the Fund.