IMF Cure: Worse Than the Disease
St. Louis Post-Dispatch, December 23, 1997
The Asian financial crisis has had the unanticipated side effect of pushing the International Monetary Fund (IMF) into the spotlight. This is an organization that prefers to operate in the shadows, so the publicity is welcome-- and so is the public criticism that the IMF has drawn for its handling of the crisis.
The IMF is the most powerful financial institution that exists. It is headquartered right here in Washington, and US taxpayers are its foremost contributors. Yet few Americans have any idea what it does.
Its role in putting together the "rescue package" for the troubled Asian economies-- Thailand, Indonesia, the Philippines, and South Korea-- provides a good illustration of how it operates. The IMF has put forth its usual prescription: cut government spending, raise taxes, reduce economic growth with high interest rates, and liberalize the rules for foreign investment and trade.
There are of course times and places where any one or more of these policies may make economic sense. But the IMF's dogmatic bias against growth and in favor of foreign creditors, free trade and foreign investment no matter what the consequences, have wreaked economic havoc throughout the world. A former IMF economist has estimated that the IMF's "Structural Adjustment Programs" are responsible for the deaths of some six million children every year since 1982. The victims are mostly poor people in poor countries, so there has been little public controversy about IMF policy.
That is beginning to change now that the "Asian Tigers" are about to be bled in the Fund's medieval barber shop. Harvard economist Steve Radelet summed up the irrationality of the IMF's plans for Indonesia and South Korea: "It makes no sense to ask for austerity from countries that have excess production capacity and are still saving 30 percent of their income."
The Fund's dogma is of course part of a larger problem of free-market excess and ultra-conservative monetary policy that have nearly conquered the world as the twentieth century draws to a close. Two great prejudices, which had been mostly unlearned during the Great Depression, have returned with a vengeance: first, that inflation is the only danger that policy makers should concern themselves with-- unemployment being irrelevant; and second, that whenever there is an economic problem, the government is the cause and the market holds the cure.
The Asian financial crisis illustrates the dangers of such narrow thinking. The influx of highly mobile foreign capital is a major reason for the severity of the crisis: a plummeting domestic currency is a much bigger problem when your banks have been borrowing abroad. When the domestic currency falls by 40%, as the Thai baht has since June, foreign debt service increases correspondingly. The precariousness of the whole situation feeds speculation against the currency, and it doesn't take much to set off a conflagration.
Solutions will therefore not be found in further opening to foreign capital, nor in IMF-imposed austerity. On the contrary, some sort of government-sponsored bailout analogous to our own resolution to the Savings and Loan crisis, combined with controls on international capital movements and more careful regulation of the banking system will be necessary.
The Clinton administration has used its muscle to get the APEC summit to endorse the IMF principles. The administration sees this whole process as something of a coup for the United States, since our government has the dominant voice within the IMF, and the European Union is completely excluded from APEC. And the Clinton administration supports the IMF goal of using the crisis to open up the Asian economies to foreign investment, especially in the financial sector.
And so they hover, like ambulance-chasing attorneys at a major airline disaster, hoping to convert the crisis to their own advantage.
But the interests of US multinational banks and insurance companies are not the same as the interests of the general public, either here or abroad. The austerity imposed on the Asian economies will force them to rely even more on exports for growth. With their currencies having crashed, their exports will be even cheaper in the United States. This will cost jobs here, and our trade deficit will grow.
The fallout from the crisis will depend on how much the affected governments actually follow the bad advice that comes with their bailout money. South Korea has certainly ignored IMF recommendations before, which is one of the reasons they were able to achieve one of the highest growth rates in history-- an annual average of 8.6% over three decades, with real gains in wages. The unions have threatened to strike if the government accepts the IMF's demands for mass layoffs and a tripling of the unemployment rate to record levels.
The IMF is the international financial equivalent of the CIA: its documents and proceedings are shrouded in secrecy, its bureaucracy is unaccountable, blinded by ideology, and dedicated to protecting the interests of the rich and powerful. And the Fund has probably toppled more governments, democratically elected and otherwise, than the CIA.
There was a hopeful sign last month when the Congress cut $3.5 billion from the IMF's funding. The IMF has far outlived the legitimate purposes for which it was created more than 50 years ago, and has become a monster. It's time to pull the plug.