The Asian Bailout

Dear Fred,

       On the most basic point, you and I agree. The International Monetary Fund should be saved, certainly from the zealots who would close the fund and those who would link its fate to anti-abortion legislation.
       What apparently raises your ire is my thought that the IMF “needs fundamental reforms” before any additional funding is given. You say “it would be the height of irresponsibility, however, to delay increasing IMF resources until such reforms were instituted.” Fortunately, the administration and even IMF allies in Congress do not agree with your reasoning. The Treasury and congressional supporters of the IMF have been working intensively–and effectively, I might add–to get the IMF straightened out before handing over more funds.
       You write that you “have no idea why [I] continue to rail about ‘IMF secrecy,’ ” because IMF programs for Thailand, Indonesia, and Korea are now on the Internet. This badly misleads the readers of Slate. Yes, a few of the most recent IMF documents are now on the Internet–and have been for roughly the past six weeks. They are there because of the drumbeat of public pressure in these high-profile cases, and also because some of the documents found their way to the press in these countries, which then put them on the Internet.
       Almost all observers now acknowledge that the IMF is a secretive institution. That is why the draft legislation that passed the House Banking Committee calls for the U.S. secretary of the Treasury to make public IMF loan documents that have been treated as confidential for the past 50 years. The Treasury worked with the congressional committee to achieve these greatly improved conditions of public disclosure.
       Fred, let’s discuss this important subject more honestly. The first round of loan agreements for Thailand, Indonesia, and Korea were all secret, according to long-standing IMF procedures. When I was in Jakarta in January, I found that the Indonesian public, including the elite of the elite, were in the dark as to what was in the confidential IMF agreement. The IMF first offered press releases, not the programs themselves. In fact, almost all the current IMF loan programs around the world–perhaps now numbering around 60–are still being held as highly confidential and won’t be found on the Internet or anyplace else. The vast majority of the thousands of loan documents that the fund has negotiated over the years is still being held as secret. Until a couple of years ago, the confidentiality was without any time limit at all. Then the IMF graciously agreed that it would declassify many documents after a 30 year period!
       Does the secrecy make a difference? Yes, Fred. The IMF makes dreadful mistakes and then hides them. In 1992, it made a profound error in the advice it gave to Russia and other post-Soviet states when it told them to keep a common ruble currency for at least a year. This error contributed directly to the hyperinflation that year, as some of your own colleagues were among the first to point out. When I tried to explain the IMF’s mistake in a paper that I delivered at the 1994 Annual Development Conference of the World Bank, I quoted briefly from confidential IMF documents to show what the IMF had actually recommended. The IMF and World Bank forced me to remove the offending sentences from the text, at the threat of withholding the paper from circulation and publication. The IMF staffer at the conference, protected by the cloak of secrecy, then flatly denied exactly what he had recommended two years earlier.
       The Asian crisis is the same. The IMF helped to blow up the Indonesian banking system in November of last year by recommending a sudden closure of 16 banks in a context of high uncertainty and no deposit insurance. But Slate readers shouldn’t have to take my word for it. They could read the IMF staff’s own internal analysis in early January 1998. That is, except for the fact that this particular document, presented by the IMF staff to the IMF executive board, is confidential. I recently debated the point about the bank closures with a senior IMF official. He denied the IMF’s role in causing the Indonesian bank panic. When I said that the debate could be most effectively advanced by simply making the January document public, he growled that the document “belonged to the IMF executive board, not the staff.” How true … and how convenient. But do we really have to hand over money to the IMF under such circumstances?
       Ironically, you yourself acknowledge that the U.S. government and the IMF’s own management want to release information “but some major countries continue to resist.” I’m not sure who really wants to do what–I have my doubts that IMF management wants to see its dirty linens in public–but the legislation passed by the Banking Committee cuts to the chase, and rightly so. The U.S. Treasury is simply instructed to make the documents available to the American people.
       You claim that we have no time to consider these reforms (as if such reforms require much legislative time!). You claim that the IMF is now without resources to handle even one more major crisis. This is contrary to what the IMF itself has said and what the data on the IMF’s resources suggest. Moreover, you fail to recognize that the IMF could accomplish much more with much less money. If you’re right, though, it means that the IMF has egregiously and shockingly mismanaged its own vast resources.
       The IMF orchestrated $118 billion in bailout loans to the three Asian countries in a matter of a few months, and got precious little in return. A promise of $57 billion of its own and others’ funds to Korea in early December did not stop the panicked outflow of capital from Korea. The outflow stopped when the creditor banks and debtor banks agreed to reschedule the short-term loans coming due. And, you know, such a rescheduling did not cost a penny of IMF money!
       The Korea negotiations illustrate a much better way to proceed: force the private-sector creditors and debtors to an orderly workout rather than a public bailout. A properly managed workout wouldn’t require taxpayer money–either ours or the debtor country’s–or at least it wouldn’t require nearly as much as the IMF has recently put on offer. And again, I’m happy to say that Congress seems to agree. Rep. Joe Kennedy, D-Mass., proposed, and the House Banking Committee agreed, to insist that the U.S. Treasury and the IMF pursue orderly workouts between private-sector debtors and creditors to relieve the pressures on IMF funds.
       All these problems would be less urgent if the IMF knew what it was doing in Asia. It doesn’t. For a detailed analysis, I invite you to read my paper on the Asian crisis co-authored with my colleague Steve Radelet. In short, the IMF didn’t stop the panicked outflow of funds from Asia in 1997 and in fact probably added to it. In practice, the IMF’s strength is dealing with government fiscal problems rather than private-sector financial issues. It has missed every target it established in the 1997 programs. The Asian economies are sinking in 1998, contrary to the IMF’s own projections in 1997. Consider, for brevity, the case of Thailand. In the August IMF program, the IMF projected Thailand’s growth in 1998 at 3.5 percent (see the IMF’s press release, Aug. 20, 1997). In the first program review a few months later, it downgraded the forecast to 0 percent to 1 percent. In the February renegotiation, it has downgraded the forecast to -3 percent to -3.5 percent! Senior IMF staff have expressed surprise at these outcomes, and I take the IMF at its word. It simply has not understood the highly contractionary force of its own policy recommendations. Some of us have been warning about these errors from the start.
       The IMF eventually gets around to correcting many of its errors (including the Soviet ruble advice, the abruptness of bank closures, and the insistence on budget surpluses in the midst of economic contraction) but only after tremendous damage has been done. There is a better way. Let’s improve the IMF. The fund can be much more effective, and at a lower cost.