Understanding Pathways through Financial Crises and the Impact of the IMF: An Introduction

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The International Monetary Fund is often perceived as imposing harsh policies on countries facing financial crisis. A comparison of six countries affected by the pressures of the 1990s suggests more subtle effects. In Malaysia, India, and South Africa, policymakers kept the IMF at arms length to permit a more gradual and heterodox adjustment, including capital controls in India and Malaysia. By contrast, Argentina, Turkey, and Indonesia were bound tightly into the embrace of the IMF. However, this did not push policymakers to take tough decisions. Rather, IMF loans to Argentina and Turkey permitted policymakers to postpone difficult choices as both they and the IMF sought to protect previous policies and loans. In Indonesia, by contrast, borrowing from the IMF opened up a conduit for larger political pressures that brought down the Suharto regime. KEYWORDS: International Monetary Fund, financial crisis, conditionality, capital markets, policy space, emerging economies.

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In 1997, a crash in the Thai baht triggered a financial crisis that rapidly spread across East Asia and beyond. Many countries were affected by the crisis--some immediately, others less directly--as the reversal in confidence in emerging markets spread across to other corners of the globe. It soon became apparent that the East Asian crisis had recalibrated the willingness of capital markets to invest in emerging markets. Following on from Mexico's December 1994 peso crisis, it was also clear that a new kind of financial crisis had been born.

The International Monetary Fund (IMF) was the first agency of international recourse in dealing with the new financial crises. Its officials found themselves working amid a sharp debate about the causes of financial crises and how best to manage them. (1) While some economists focused on international factors--including contagion, recession in major export markets, and capital account liberalization--others focused on domestic causes of each crisis, such as uneven deregulation of the financial sector, poor fiscal and/or monetary policy, artificially high interest rates, corruption, and misallocation of capital at the domestic level. Unsurprisingly (given the difference of views among officials, economists, and political scientists), the IMF soon found itself criticized on several counts. Critics argued that the Fund helped cause the crisis by having pushed countries to liberalize their capital accounts too fast. Equally, they accused the Fund of paying insufficient attention to the poverty effects of the stabilization measures it advised and of overstepping its jurisdiction in applying deep structural conditionality.

In the aftermath of the 1990s crises, much rethinking and analysis has taken place. Various international commissions were immediately formed to consider how to reform the Fund. (2) IMF staff have actively researched and debated the advantages and disadvantages of capital account liberalization and the possible uses of capital controls, as well as the possibilities for a more formal mechanism for restructuring sovereign debt. (3) Others have debated the appropriate and most effective role the institution might play in resolving financial crises. (4)

This special issue does not revisit the economics of the financial crises of the late 1990s. Nor does it look at the long-run political impact of the crises. Rather, it is concerned with how the IMF's engagement with a country affects the agenda of policymakers managing a particular crisis as well as the process by which decisions are made.

The impact of the IMF can be viewed in several ways. An informed outsider arriving in a moment of crisis may perceive the Fund as injecting new ideas, new solutions, and better information into the policy process. Politically, this contribution favors "technocrats" within government and can marginalize local coalitions supporting alternative government policies. …