How the IMF helped create
and worsen the Asian financial crisis
The late 1990s Asian meltdown was caused in large part by South Korea, Thailand, the Philippines, Malaysia and Indonesia's heavy reliance on short-term foreign loans and openness to hot money -- a reliance that came from following advice proferred by the U.S. Treasury Department, the IMF and other international sources of "expertise."
When it became apparent in 1997 that private enterprises in those nations would not be able to meet their payment obligations, international currency markets panicked. Currency traders sought to convert their Asian money into dollars, and the Asian currencies plummeted. That made it harder for the Asian countries to pay their loans, and it made imports suddenly very expensive.
There were other underlying causes for the financial crisis, including overinvestment in real estate and other speculative and unnecessary ventures, but almost everyone agrees the currency crash and financial disaster were vastly disproportionate to the weaknesses in the Asian economies.
Having contributed in important ways to the development of the crisis, the IMF proceeded to make it worse.
The IMF treated the Asian financial crisis like other situations where countries could not meet their balance of payment obligations. The Fund made loan arrangements to enable countries to meet foreign debt payments (largely to private banks in these cases) on the condition that the recipient countries adopt structural adjustment policies.
But the Asian crisis differed from the normal situation of countries with difficulties paying off foreign loans. For example, the Asian governments were generally not running budget deficits. Yet the Fund instructed them to cut spending -- a recessionary policy that deepened the economic slowdown.
As former World Bank Chief Economist Joseph Stiglitz explains in a New Republic article, "I thought this was a mistake. For one thing, unlike the Latin American nations, the East Asian countries were already running budget surpluses. In Thailand, the government was running such large surpluses that it was actually starving the economy of much-needed investments in education and infrastructure, both essential to economic growth. And the East Asian nations already had tight monetary policies, as well: inflation was low and falling. (In South Korea, for example, inflation stood at a very respectable four percent.) The problem was not imprudent government, as in Latin America; the problem was an imprudent private sector--all those bankers and borrowers, for instance, who'd gambled on the real estate bubble.'
The Fund also failed to manage an orderly roll over of short-term loans to long-term loans, which was most needed; and it forced governments, including in South Korea and Indonesia to guarantee private debts owed to foreign creditors.
In retrospect, even the IMF would admit that it made things worse in Asia.
Malaysia stood out as a country that refused IMF assistance and advice. Instead of further opening its economy, Malaysia imposed capital controls, in an effort to eliminate speculative trading in its currency. While the IMF mocked this approach when adopted, the Fund later admitted that it succeeded. Malaysia generally suffered less severe economic problems than the other countries embroiled in the Asian financial crisis.
The result of the Fund's bungling has been intensified and needless human
In South Korea, a country whose income approaches European levels, unemployment skyrocketed from approximately 3 percent to 10 percent. "IMF suicides" became common among workers who lost their jobs and dignity.
In Indonesia, the worst hit country, poverty rates rose from an official level of 11 percent before the crisis to 40 to 60 percent in varying estimates. GDP declined by 15 percent in one year.
In September 1998, UNICEF reported that more than half the children under two years old in Java, Indonesia's most populous island, were suffering from malnutrition.
At one point, the food shortage became so severe that then-President
B.J. Habibie implored citizens to fast twice a week. Many had no choice.