8 - The International Monetary Fund in the Wake of the Asian Crisis

Summary

The economic and financial crisis that erupted in Asia in 1997 and that had by the end of 1998 engulfed virtually the whole of the developing world has not embellished the reputation of the International Monetary Fund. The IMF has been chastened, challenged and castigated for its response to the crisis. In practice, many of the criticisms to which it is subjected are contradictory and incompatible. Some observers have criticised it for pushing currency devaluation on its developing-country members, with generally disastrous consequences, and for resisting the idea of currency boards. Others have denounced it for demanding that crisis countries hike interest rates to defend their currencies on the grounds that doing so only precipitated deeper recessions and more serious financial problems, and have argued that the IMF should insist that its developing-country members adopt more flexible exchange rates. Some criticise the IMF for lending too freely, thereby weakening market discipline and increasing the likelihood of future crises; others conclude that the prompter provision of larger loans, perhaps under the aegis of a new ‘precautionary’ facility, is needed to avert ‘self-fulfilling’ crises. Some criticise the microeconomic and structural conditions that the IMF includes in its programs as meddling in the internal affairs of countries – meddling which undermines political support for necessary reforms and therefore has the perverse effect of undermining investor confidence – while others insist that the IMF has no choice but to press for institutional reform because that is essential both for the restoration of confidence and for stability in a financially integrated world.