Magazine article Multinational Monitor

Crisis of Credibility: The Declining Power of the International Monetary Fund

Magazine article Multinational Monitor

Crisis of Credibility: The Declining Power of the International Monetary Fund

Article excerpt

BANGKOK -- What a difference two decades make! In 1985, the International Monetary Fund (IMF) and the World Bank stood at the pinnacle of their power. Taking advantage of the Third World debt crisis of the early 1980s, both institutions were in the midst of instituting radical free market reforms via "structural adjustment programs"--a cookie-cutter package of economic policies including deregulation, privatization, cuts in government spending and emphasis on exports--in more than 70 developing countries.

Ten years later, in 1995, the IMF stood unchallenged as the centerpiece of the global financial system and was launching its ambitious drive to make capital account liberalization--a requirement that countries remove all restrictions on inflows and outflows of capital--one of the articles of association of the Fund.

But by 2005, the credibility of the IMF was in shreds.

THE UNRAVELING OF THE IMF

Distant, feared and arrogant, the IMF met what amounted to its Stalingrad in Asia in the late 1990s. East Asian economies were then widely heralded as the leaders of the global economy in the twenty-first century, economies whose average rate of growth would remain at 6 to 8 percent far into the future. When these economies crashed in the summer of 1997, the impact on the reigning ideology of globalization was massive. Perhaps the most shocking aspect of the crisis for people in the developing world was the social impact: over a million people in Thailand and some 21 million people in Indonesia found themselves impoverished in just a few weeks.

Suddenly, the IMF was widely discredited, seen as the architect of the capital account liberalization that created the crisis, and of the severe contraction that followed. The IMF was responsible too in large part for the worsening of that contraction, as it demanded countries plunged into depression restrain government spending--exactly the opposite of sound advice for an economy in contraction.

Throughout the developing world, the January 1998 picture of Michel Camdessus, then the IMF managing director, arms folded, standing over Indonesian President Suharto signing an IMF agreement mandating harsh conditions of stabilization became an icon of Third World subjugation to a much hated suzerain.

So unpopular was the IMF that in Thailand, Thaksin Shinawatra and his Thai Rak Thai political party ran against it and the administration that had sponsored its policies in 2001, winning a lopsided victory for them and with it, inauguration of anti-IMF expansionary policies that revived the Thai economy.

In Malaysia, Prime Minister Mohamad Mahathir defied the IMF by imposing capital controls, a move that raised a howl from speculative investors but one that ultimately won the grudging admission of the IMF itself as having stabilized an economy in serious crisis.

Indeed, an IMF assessment eventually admitted--though in euphemistic terms--that its whole approach to the Asian financial crisis of fiscal tightening to stabilize exchange rates and restore investor confidence along the way was mistaken: "The thrust of fiscal policy ... turned out to be substantially different ... because ... the original assumptions for economic growth, capital flows, and exchange rates ... were proved drastically wrong."

The Fund's close association with the interests of the United States--it is often viewed as a vassal of the U.S. Treasury Department--further discredited the Fund.

One of the episodes during the Asian financial crisis that exposed the IMF as being essentially a tool of the United States was the battle over Japan's proposal for an "Asian Monetary Fund." Tokyo proposed the fund, with a possible capitalization of $100 billion, in August 1997, when Southeast Asian currencies were in a free fall. The idea was to create a multi-purpose fund that would assist Asian economies in defending their currencies against speculators, provide emergency balance of payments financing and make available long-term funding for economic adjustment purposes. …

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