NCPA - National Center for Policy Analysis

The IMF and The Asian Economic Crisis

November 1, 2002

Although the Asian financial crisis is over, countries like Indonesia will feel its effects for year. Unfortunately, critics say, the policies imposed by the International Monetary Fund (IMF) during this tumultuous time worsened the situation -- causing exactly the consequences that have brought globalization under attack.

  • There is little doubt that IMF and U.S. Treasury policies contributed to an environment that enhanced the likelihood of a crisis by encouraging -- in some cases insisting on -- rapid financial and capital-market liberalization.
  • The IMF misdiagnosed conditions in East Asia, failing to realize the problem was not excess demand for goods and services, but insufficient demand -- thus dampening demand could only make matters worse.
  • Second, if firms have a low level of indebtedness, high interest rates can be absorbed -- but with high levels of indebtedness, imposing high interest rates is like signing a death warrant for many firms -- and for the economy.

The failure of the IMF to recognize the important interactions among the policies pursued in the different countries was hard to fathom, analysts say. By continuing to advocate contradictory policies, the IMF exacerbated the spread of the downturn from one country to the next.

IMF critics offer the following suggestions for handling the crisis:

  • Maintain the flow of finance and halt existing debt repayment.
  • Create a special bankruptcy provision that would allow for a relatively quick reorganization of a firm, rather than liquidation.
  • Strong intervention of the government aimed at financial restructuring - establishing clear ownership of firms, enabling them to re-enter credit markets.

The way the IMF approached the crises has left a legacy of private and public debt, critics conclude.

Source: Joseph Stiglitz, "Globalization and Its Discontents," book excerpt, "On Globalization," Milken Institute Review, Third Quarter, 2002.


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