By Khor, Martin
Multinational Monitor , Vol. 20, No. 10
Whlle much of asia struggles through severe ecomic crisis, international financial institutions, development agencies and development experts are engaged in their own struggle over who and what policies should shoulder the blame for Asia's economic catastrophe.
Although many prominent academics, such as Harvard's Jeffrey Sachs and MIT's Paul Krugman, have criticized International Monetary Fund (IMF) recessionary policies, most United Nations reports have focused primarily on the social aspects of the crisis, or describe the economic issues. Thus, with the exception of dissident noises from the World Bank's chief economist, Joseph Stiglitz, most of the institutional economic analysis receiving wide publicity has come from the International Monetary Fund.
In September, however, the United Nations Conference on Trade and Development (UNCTAD) joined the debate in a powerful way with release of its Trade and Development Report 1998.
The UNCTAD report examines the causes of the crisis, locating these in the very system of global finance. It criticizes the IMF-led international response to the crisis. And it provides several proposals for the appropriate management and prevention of such crises.
Among the suggestions are the establishment of a mechanism allowing countries on the brink of crisis to declare a "debt standstill," during which creditors are obliged to give time for a restructuring of debt repayments, similar to the Chapter 11 procedures in the United States bankruptcy law.
Another proposal is that developing countries make use of capital controls as part of their "armory" in preventing or helping resolve financial crises.
BLAMING THE IMF
UNCTAD argues that the East Asian experience is only one of a series of financial crises (for example, in the Southern Cone of Latin America in the late 1970s and early 1980s, Latin America in the 1980s, European countries in 1992, Mexico in 1994) of the past two decades.
These crises are caused by the intrinsic and volatile nature of the global financial system, which moved to its current state after the closure of the fixed exchange rate system in the early 1970s.
The Asian crisis, says UNCTAD, began with financial liberalization (meaning countries lifted restrictions on the inflow and outflow of capital), causing a build-up of vulnerability of the countries to external forces. When large inflows of short-term capital took place, it led to an asset price bubble (with real estate and other investments soaring in value) that broke when speculative currency attacks caused sharp depreciations as foreign investors fled. These depreciations then spread via "contagion" to other countries, as international investors suddenly became fearful of losing their investments in other nations.
Once the countries fell into crisis, the IMF's response (monetary and fiscal tightening and high interest rates) made it worse.
In one of the deepest critiques of the IMF approach, UNCTAD says: "The situation was characterized by a stock disequilibrium rather than a flow imbalance that could be corrected by expenditure reduction." In other words, mere reduction in government spending or cutbacks on imports would not be sufficient to solve the problem.
"At the new exchange rates, the stock of outstanding foreign debt became too large to be supported by expected income flows," the report explains. "The value of firms, and asset prices more generally, thus declined. Since these assets had been the collateral for much of the increased lending, the quality of bank loans automatically deteriorated."
The IMF response - that countries should raise interest rates to stay attractive to foreign investors - made things still worse, the report argues. "Rather than ease the burden of refinancing on domestic firms by granting additional credit, the recommended policy response was to raise interest rates. …