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THE BAILOUT

Who Gave the IMF So Much Power?

January 04, 1998|David Friedman | David Friedman, a contributing editor to Opinion, is an international consultant and fellow in the MIT Japan Program

As the price of Asia's bailout skyrockets, the International Monetary Fund, a shadowy, World War II-era relic headed by a diminutive French banker almost no one knows, makes daily headlines.

Is it qualified for the job?

The answer raises troubling concerns about America's readiness for the light-speed economic challenges that so suddenly devastated once-thriving Asia.

The IMF was born in 1944, for reasons that no longer exist. Petrified that 1930s-style depression and hyperinflation might again provoke war, the major Western nations met in Bretton Woods, N.H., and created a fixed-currency exchange rate system. The 44 countries at the meeting invented the IMF to police the new rules.

Funded by exactions from members, for the next 30 years the IMF pursued its limited mandate. It could make loans for up to a year to buttress a temporarily discomfited country's gold or other reserves if fixed exchange rates were threatened. In return, borrowers agreed to certain conditions--reduced public spending, for example--to replenish national accounts and stabilize currencies.

In 1973, the Bretton Woods system was scrapped in favor of freely floating currency exchange rates. Its mission gone, the fund could have faded away. Instead, it rode the 1970s and '80s oil-shock and debt crises to a vastly expanded role.

By the late 1970s, as energy prices shot up, and countries such as Mexico, Brazil and Argentina suffered from out-of-control inflation and punishing debt, the IMF boosted its funds to more than $70 billion. It began making bigger loans of greater duration, especially to developing nations. Though these new efforts resembled Bretton Woods-era stabilization policies, in scores of cases, the fund was actually attempting far more complex, risky coordination of entire national economies.

Almost always acting in secret, the IMF would first "assist" a loan applicant by establishing detailed national account parameters--projections of what a country could "earn" and what it would have to "spend" to create a surplus. Acting like supra-national consultants, fund staffers estimated how much a country could produce and sell on world markets--its revenue sources--and how much it had to pay for raw materials or necessities like food or energy to achieve its goals and provide at least some comfort for its citizens. Loan conditions were then tailored to control how recipients could behave in ways IMF economists thought would realize national income goals.

However well intentioned this ambitious agenda may have been, there's striking evidence it didn't work. According to the Heritage Foundation, a vocal IMF critic, 81 of the 137 countries that received IMF loans in 1965-1995 actually increased, not decreased, their dependence on the fund over time. Of the 89 less-developed countries that borrowed from the IMF in the same period, 48 are no better off, and 32 are now actually poorer, than before the fund intervened.

In the early 1980s, this disappointing record, combined with the conservative Reagan-Thatcher resurgence in Britain and the United States, the fund's two largest donors, might have doomed the IMF. Instead, the U.S. savings-and-loan crisis, the second oil shock and the Latin American debt crisis gave it new life.

Michel Camdessus, formerly director of the elite French Treasury, was appointed in 1987 to head the fund with Reagan administration support--an ironic turn given his reputed French Socialist ties and suspected sympathy for Japanese and French state-led economies (policies he now blames for Asia's woes). By 1990, the IMF had 181 member countries and a war chest of $183 billion.

Mexico's 1995 debt crisis was a watershed for the fund. Working closely with U.S. Treasury Secretary Robert E. Rubin, who faced sharp congressional criticism, the IMF helped broker what was then history's largest national bailout and debt-relief deal. When Mexico paid back America's part of the loan before it was due, Camdessus and his Clinton administration allies scored a huge victory.

Can the IMF repeat this in Asia?

One troubling sign is that, despite its vaunted surveillance and planning skills, the IMF utterly failed to anticipate the crisis. Its 1997 annual report lauds Korea's "enviable fiscal record" and Thailand's "sound macroeconomic policies." A few months later, Camdessus was flying secret missions to these same countries, warning of impending catastrophe.

Asia's problems also differ from past challenges the IMF has faced. Unlike 1980s Latin America, the Asian economies had few current account deficits and low inflation. Their recent nightmares stem instead from monetary and borrowing strategies that made them vulnerable to speculative currency attacks.

To attract foreign capital, countries like Korea and Thailand exchanged their currencies at fixed rates for dollars or other "hard" currencies. This assured investors and lenders they could easily exit the country, and symbolized national confidence.

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