March 23rd, 5pm
Ruby Muller
17306116
International Political Economy
Evaluate the role of the IMF during the Asian Financial Crisis.
Introduction:
In my essay I will discuss the Asian Financial Crisis, and evaluate the International Monetary Fund's role in mitigating the situation. I will give a brief introduction of the establishment, functions and aims of the IMF, followed by a brief introduction to the Asian Financial Crisis and the IMF's policies in response to this crisis. I will then go on to attempt to evaluate the IMF's policy strategy, whether the programme was successful or not. I will do so by drawing on past work from scholars and academics and officials within the IMF. The role of the IMF during the Asian crisis has been faced with criticism in particular with regards to, 'the sequencing of its rescue programme, and the broadening of loan conditions to include the requirement of various microeconomic reforms'(Hutson and Kearney, 2007, p.406). Due to the IMF's policies during the crisis, the IMF underwent a number of changes in order to perform better in future crisis.
Establishment and Functions of The International Monetary Fund:
The international Monetary Fund is a large multi-national institution that was established in 1945, following negotiations at Bretton Woods in New Hampshire, USA. Consensus among delegates from 45 countries was reached very rapidly with 29 governments ratifying the Articles of Agreement (Zhang, 1998 p.4). This was a significant turning point in the history of global economics and also incited confidence of a more peaceful and prosperous world following World War Two (Zhang, 1998 p.4-5). The IMF's aims are to promote international monetary cooperation among its members, to maintain exchange rates and to help its members overcome their balance of payment problems (Sinha, 2017 p.195). Since its inception, countries all over the world have been faced with finacial crisis, due to fluctuating oil prices, currency devaluation and war. Many of these countries have turned to the IMF for assistance and in response, the IMF has advised the crisis-countries and imposed some tough regulations to try and relieve the negative impacts of the crisis and move the economy on a path to recovery (Kutan, Muradoglu and Sudjana, 2012, p.164). The effectiveness of the IMF's policies and intervention has been contested among many scholars, with many finding it inefficient in promoting any long lasting financial stability. Throughout the years it has helped numerous countries economic crisis by providing resources to them and by acting as a forum for consultation and collaboration on international monetary problems (Sinha, 2017 p.195). Sinha (2017) claims that IMF policies have not always produced positive results and have often been criticised for exacerbating the economic problems further instead of putting them on a path of development and prosperity. Zhang (1998 p.1) claims in his book that the IMF is commonly regarded as a 'Western-Dominated shibboleth' whose measures have a placebo effect at best. In my essay I will discuss the IMF's role in The Asian Financial crisis and whether it instigated, exacerbated or helped the situation in any way.
The Asian Financial Crisis:
The Asian Financial Crisis was a period of financial crisis affecting much of South East Asia including Indonesia, South Korea, Malaysia, the Philippines, Thailand, and Singapore
during 1997-1998. (International Monetary Fund, 1999, p.1). Stephan Radelet and Jeffery Sachs (1998) conclude that these issues alone were not enough to warrant a crisis of such magnitude. A combination of international panic and poorly designed international rescue programmes deepened the crisis further. On July 2, 1997, the Thai baht was floated. This marked the beginning of a crisis that spread to neighbouring countries in the following 6 months. As the baht depreciated in July, surrounding countries' currencies began to fluctuate. (Ito, 2007, p.17). By mid-January 1998, the currencies of all emerging market economies in East Asia had fallen to half of their pre-crisis values. The Indonesian rupiah was the worst affected currency, now valued at approximately one sixth of its pre-crisis value. Exchange rate stability thankfully returned following the summer of 1998, but deep problems in output activities and the banking sectors continued and balance sheets of multiple financial institutions were seriously damaged. (Ito, 2007, p.17). The Asian financial crisis was significant as it hit the most rapidly growing economies in the world with countries experiencing vast inflows of foreign capital throughout the 1990s (Zhang, 1998, p.69). It was also one of the largest financial bailouts in history (Radelet and Sachs, 1998, p.1). The IMF played a major role in this recovery, below I will further discuss, if the IMF was a positive or negative force and provide some opinions of past scholars.
The International Monetary Fund's Response:
The first priorities of the IMF in dealing with the crisis were to attempt to fix the financial system and to re-establish confidence in economic management. Tight measures were needed to 'halt bank runs, protect the payment system, limit central bank liquidity support, minimise disruptions to credit flows, and to capital outflows'(International Monetary Fund, 1999, p5). IMF programmes in Indonesia, Korea and Thailand focused on financial sector reform mainly because restoring a stable banking system was crucial for restoring macro-economic stability. (International Monetary Fund, 1999, p.7). The IMF crisis management strategy was based on its ready-made Extended Credit Facility (ECF) and the Stand-by Credit Facility (SCF). These strategies set the conditions that states had to fulfil in exchange for liquidity (Kramf, 2015, p. 185). 'our approach to these tasks is straightforward: it is to encourage all members to pursue sound economic policies and to open their economies to trade and investment'(Fischer, 1998). Non-viable institutions were to be closed down, and other institutions had to make adjustments in order to "strengthen financial sector regulation and supervision, increase transparency in the corporate and government sectors, create a more level playing field for private sector activity, and open Asian markets to foreign participants" (Fischer, 1998). All these reforms would require a significant change on a domestic level but it was a step in the right direction. The programmes varied throughout the various countries. In Thailand, this meant a fiscal adjustment of 3 percent of GDP, 1.5% in Korea, and in Indonesia, 1 percent of GDP. Must of this was to be achieved by reducing public investments with little economic returns. (Fischer,1998). 'The IMF was to lend $US4 billion. Asian countries also joined the package with China, Australia, Hong Kong, Malaysia, and Singapore each promising $US1 billion, and South Korea, Indonesia, and Brunei each promising $US0.5 billion. The total amount of the IMF package was $US17.2 billion'(Ito, 2007, p.25)
Criticisms of response:
The IMF-supported programmes were initially less successful than hoped, with capital outflows and currency depreciations continuing, the countries faced much deeper recessions than initially anticipated. This was due do a number of factors including hesitation to policy implementation on a domestic level. This was seen mainly in the collapse in domestic spending, especially in private investment. The countries undertook large current account adjustments along with sharp drops in imports. There are conflicting opinions on the IMF's involvement in the Asian Financial crisis. Kutan, Muradoglu and Sudjana (2012) published a quantitative research report on financial and real stock sector returns in Indonesia during this time. They do so by analysing IMF related news and the effect they have on both the real sector and financial sector. Their findings show that IMF actions tend to have less of an effect on the real sector than the financial sector during a crisis and they claim that IMF policy actions do not necessarily turn a financial crisis into a full blown real crisis. Another important conclusion that derives from their findings is that the success of IMF policies relies heavily on strong support by both the government and the public (Kutan, Muradoglu and Sudjana, 2012, p.178). Hutson and Kearney (2007) on the other hand have been critical of the IMF's intervention. They believe that that IMF's rescue packages should have been dispensed faster with less harsh conditions. For example its insistence that Indonesia reduce its food and fuel subsidies in the middle of a crisis was overboard. There is a common sentiment among the countries affected : The Philippines, Indonesia, Thailand and Malaysia that they should deal with the IMF collectively 'to share the burden of adjustments between the creditors and the debtors'(Hutson and Kearney, 2007, P.410). This shows how the IMF was perceived during the Asian crisis. The animosity and mistrust continues today as the region struggles to get back on track and the international community searches to enhance the transparency, accountability international institutions including the IMF(Hutson and Kearney, 2007, P.410).
Change in Policy Strategy:
Following the Asian crisis and the results of the policy strategy, new thinking on the international financial system as well as new policy response to crises came about. Work is still underway to apply the lessons learned from the Asian crisis to the IMF's future activities. 'As an early step, the IMF made public in January 1999 a preliminary internal review of the design of, and initial experiences with, Fund-supported programs in Indonesia, Korea, and Thailand. This study sought to identify those aspects of the IMF's strategy that had worked as expected, and those that needed to be reconsidered. In September 1999, the IMF published a study reviewing its policy advice to Asia on financial restructuring' (IMF, 2000). Reforms of legal, institutional, and administrative structures have been started in order to introduce international standards and better practices (IMF, 1999, p.52). Reforms include the strengthening of supervisory powers, procedures, in order to handle risk-management with banks more successfully (IMF, 1999, p. 52). International action has been taken to improve 'financial sector architecture, surveillance over national and international financial markets, dissemination of data, macroeconomic vulnerability indicators, and prudential regulations and supervision of international lenders'(IMF, 1999, p.52).
Conclusion:
The Asian Financial Crisis was a complex situation, which needed significant intervention In order to curve its effects. The International Monetary Fund introduced tight reform fiscal policies to try and help the countries affected. The IMF response has been open to criticism among scholars and the public. Loans were given out in return for a number of conditions including the closure of financial institutions and banks, dissolving monopolies, reforms in agriculture, energy, transport, pension systems and also labour market reforms. These loan conditions resulted in a loss of autonomy for countries who want to secure these funds (Hutson and Kearney, 2007, p.407). Helleiner (1998) condemns the rate at which these fund were distributed to the Asian countries during the crisis. The IMF's rescue funds ought to have been released faster and with excessive conditions. Despite of this, overall I believe the IMF played a positive role in the Asian Financial Crisis. Tight monetary policies, when correctly applied, did eventually succeed in reversing exchange rate pressures and preventing inflation. In Korea and Thailand, after a few months, currencies recovered and conditions re-stabilised and interest rates returned to below pre-crisis levels (IMF, 2000).