The Asian Bailout

Dear Jeffrey Sachs,

       Your diatribe of Feb. 2 against the International Monetary Fund is full of errors and unsupportable assertions. Let’s start by getting a few facts straight.
       First, it is not the IMF that is seeking financial support from Congress. The request comes from the president of the United States with the full support of the secretary of the Treasury, the chairman of the Federal Reserve Board, and every other economic- and foreign-policy official of our government. They obviously believe the proposal is in our national interest.
       Second, “the American people” are not being asked to put up a penny. Every dollar we pledge to the IMF is immediately matched by our automatic right to draw an equivalent amount of DM, yen, or any other currency we might need ourselves. This benefit to the United States is very practical; we drew $3 billion of foreign currencies in 1978, when we had to defend the dollar, and have taken similar advantage of IMF funding on 22 other occasions. Under an arrangement I negotiated with Congress in 1977, while serving as assistant secretary of the Treasury for international affairs, any U.S. contribution to the fund is treated as an “exchange of assets” that carries zero cost to our budget and to the American taxpayer.
       Third, I have no idea why you continue to rail about “IMF secrecy.” Its programs for Thailand, Indonesia, and Korea are available to everybody on the Internet. There is certainly room for improvement: For example, to improve the early warning system and thus the prospect for heading off future crises, the fund should publish its staff analyses of country outlooks. This is not an issue of “secrecy,” however; the U.S. government and the IMF’s own management want to release the information, but some major countries continue to resist “intrusion into their sovereign affairs,” and the fund cannot just ignore them.
       Fourth, your biggest laugher is your reference to the fund’s “monopoly of power in the developing world.” The problem is, of course, the opposite, as President Suharto and the Indonesian power structure are unfortunately demonstrating at the moment. The fund’s programs work when–and only when–the target country wants them to work. The best current example is Korea, where new President Kim Dae Jung has campaigned against crony capitalism and its supporting banks for over 20 years and views the fund as a major ally in pursuing his democratic reforms.
       Finally, you talk about the “deep weaknesses” in IMF programs and their wrong predictions and programs. No one can, of course, be expected to get everything right in this complex world of huge financial flows and emerging market economies. I suspect that even the esteemed Harvard Institute for International Development has made a few mistakes, and I do not recall hearing it or you predict the Asian crisis, either. Neither did the supposedly prescient markets foresee trouble, continuing to pump new money into the problem countries until virtually the eve of their crises.
       Moreover, you fail to note some impressive IMF success stories. The clearest recent case is Mexico, which took a year of steep recession (1995) but recorded average growth of 7 percent in the next two years (1996-97). The IMF must have done something right there (including, as I recall, rejecting alternative suggestions from you that Mexico peg its exchange rate, and from others, who now counsel Indonesia in a similar vein, to adopt a currency board).
       Having cleared away this debris, let’s get to the serious business at hand: how to resolve the current Asian crisis. Your criticisms of the results to date are both incorrect and disingenuous. They are incorrect because, since you wrote your piece a month ago, Korea has successfully restructured a large piece of its private debt to foreign banks and has seen its debt rating partially restored. They are disingenuous because one can hardly charge the IMF with failure in the case of Indonesia, by far the greatest worry at the moment, when the problem is Indonesia’s failure to implement the agreed program.
       In any case, patience is required. Even Mexico, a clear success story that took very strong corrective action from the outset, experienced unstable markets for about six months after the crisis broke. Both the currency and equity markets have, in fact, bounced back considerably in all the Asian countries, even Indonesia. However, it will almost surely take considerably longer for them to stabilize on a lasting basis in light of the unique regionwide nature of the crisis.
       On the far more important issue of the impact on the real economies, studies by my colleague Morris Goldstein show that it normally takes between two years and two and a half years for a country to restore growth to the average of its two precrisis years. Mexico beat this norm by a year, and the Asians may do so too, given their strong underlying fundamentals. But the regional contagion–and the continued stagnation in Japan, which still accounts for two-thirds of the total Asian economy–suggests that it could take longer and that even more patience than usual may be required.
       I could keep going, but you get the drift. Of course the IMF makes mistakes–but so do you, I, and everybody else in the business. Maybe the fund didn’t handle bank closures in Indonesia very smoothly–but failed banks do have to be closed (and maybe Japan, which seems intent on bailing out the weak along with the sound, could use IMF advice). Sure it’s undesirable to maintain high interest rates when you’re trying to restore banking systems and limit economic slumps–but priority has to be given to slowing currency free falls, and that requires temporary hikes in rates. As has always been the case, the IMF has flexibly adjusted its growth, inflation, and budget targets as the situation changes, and little, if any, lasting harm was done by any excessive tightness at the outset.
       The IMF can definitely be improved, and all of us should (and surely will) seek to draw lessons for the future from the Asian crisis. My own top candidates for reform would be improvement in the early warning system, as noted above and as already instituted at the regional level by the APEC countries in their “Manila framework,” and systematic means to ensure that private creditors share the costs of all support operations in order to avoid the risk of moral hazard.
       It would be the height of irresponsibility, however, to delay increasing IMF resources until such reforms were instituted. The IMF is an international organization of 181 sovereign members, and amending its policies takes time. Meanwhile, it has inadequate funds on hand to deal with even one more major crisis–as could occur literally any day in Russia, Brazil, Argentina, Colombia, Turkey, the Philippines, South Africa, or half a dozen other places. Let’s fund the fund and work out the needed reforms when the dust has settled.