SUNS  4357 Thursday 21 January 1999

Washington, Jan 20 (IPS/Abid Aslam) - The International Monetary Fund (IMF) has admitted that it mishandled financial crisis in Asia, but insisted its basic approach was sound.

The Fund, in a report released Tuesday, said it had painted too rosy a picture of troubles in Thailand, Indonesia, and South Korea in a bid to shore up investor confidence in their battered economies, but misjudged markets' response, sapping the effectiveness and credibility of IMF-led
international bailouts in the once-robust countries.

The IMF assembled some $120 billion in emergency loans for the three countries during the second half of 1997. Its report covered the period through last October. It was the agency's first systematic review of its own performance.

In sum, the report argues that the IMF's policy prescriptions "were broadly appropriate to the circumstances, given what was known as these programmes unfolded," said Jack Boorman, director of the agency's policy and research department.

Efforts to restore investor confidence - in the IMF's view, key to stabilisation and recovery - proved to be the agency's Achilles' heel but Fund staffers, who wrote the report, laid the blame on the victims of the crisis in what is a familiar refrain for economists: the model failed because people did not behave as they were supposed to.

"Several factors contributed to weak confidence, including hesitant programme implementation, political uncertainties and other factors casting doubt on the authorities' commitment to the programmes," the report said.

It added: "The IMF, like most observers, misread the extent of the recession - in part because, in all Fund-supported programmes, macroeconomic projections were predicated on the programmes' proceeding as planned."

Especially in Indonesia, those expectations were confounded by "political turbulence." Indonesians have spoken in the press, addressed the US Congress, and picketed IMF headquarters here in the hope of explaining their wide-ranging aspirations for national change. But the 147-page report dealt with such matters only as factors that disrupted the IMF programmes and, in Indonesia, sent "monetary developments ... seriously off-track."

The IMF defended high interest rates - broadly assailed for deepening recession in the local factories, farms, and shops that make up the 'real economy' - as necessary to keep currencies from falling further.
It also argued its insistence on spending cuts to balance government budgets did not hasten the countries' troubles.

However, because economic growth estimates were wrong, the Fund had probably recommended that budgets be held down for longer than necessary.

IMF forecasters have been at a loss to keep up with events: the agency's projections of global, regional, and national economic performance all have had to be downgraded every few months since mid-1997.

Keeping its focus on the three country programmes examined, Tuesday's report offered: "The Fund and authorities appear to have erred on the side of optimism, in part because of concerns that realistically pessimistic forecasts would have exacerbated the situation further. But the resulting large revisions in projections were detrimental to credibility."

Fund staffers also blamed their "more sanguine" assumptions on "pressures to agree with the authorities on a common set of programme projections."

But forecasters should have known better, especially following Mexico's 1994 currency meltdown, which was followed by declining output. They appeared not to have drawn on that experience, the report said, and so "the impression remains that both the Fund and outsiders erred in some ways that could have been avoided at the time."

The report was put together last year and discussed last month by the IMF's 24-member executive board. It was made public in the interest of "transparency", Fund officials said.

Its release also follows a growing barrage of criticism of the agency's handling of the crisis in Asia and the 'contagion' effects felt in Russia, which took a tumble last year, and Brazil, which some
economists say is now heading for its worst recession in two decades.

"There is little reason to believe that the IMF's bitter medicine will help Brazil any more than it helped Indonesia or Russia," said economist Mark Weisbrot, research director at the Preamble Centre, a Washington-based research and advocacy group.

Weisbrot blamed the Asian and Brazilian crises largely on the liberalisation of capital flows and on an international economic order which has championed the freedom of international investors at the
expense of local populations.

The IMF report glossed over such issues and the agency's executive directors, in a summary of their discussion of the document, merely said some among them thought there was merit in using controls on capital flows - but only in the short term, as a means of easing into the international financial mainstream.

Directors also recommended greater private sector involvement in preventing and resolving financial crises as a means of containing the 'moral-hazard' effect of bailouts - which can encourage reckless investors to repeat their mistakes by giving them the assurance that the public sector will cover their losses.
On design and implementation of Fund emergency efforts, the board urged Fund staffers to "encourage the authorities" in borrowing countries to make clear to the world their "ownership" of the programmes from the outset. The Fund must also "secure early agreement with the authorities
and other international financial institutions on a comprehensive strategy of structural reform," they added. This called to mind the sporadic exchange of fire between IMF higher-ups and Joseph Stiglitz, the World Bank's chief economist and senior vice president, who has railed against the IMF's deflationary policy prescriptions as "bad psychology and worse economics."

Directors, as though addressing that remark as well as the IMF's troubles with restoring investor confidence, also recommended that the Fund "communicate and explain to markets and the general public ... the full content of the programme, while avoiding eliciting unrealistic
expectations."