|CURSE OR CURE?|
January 19, 1998
Since the collapse of Asia's economies, the International Monetary Fund's practices have been the topic of much debate. Some experts have criticized the I.M.F. for not preventing the economic crisis, while others have charged that its remedies have made the crisis more severe. Following a background report, Margaret Warner and guests discuss the I.M.F.'s handling of the Asian economic crisis and the debate surrounding its policies.
MARGARET WARNER: The I.M.F. has asked the U.S. for an additional $18 billion to bolster the fund's lending power. Congress must approve such a request. We examine the I.M.F.'s role and approach now beginning with Robert Hormats, vice president of Goldman Sachs International and a former economic official in the Ford, Carter, and Reagan administrations, and Larry Kudlow, senior vice president and chief economist at American Skandia, a financial investment firm. He was the budget official in the Reagan administration. Mr. Kudlow, starting with you, should the I.M.F. be bailing out these banks in Asia, and these whole economies in Asia?
|Mr. Kudlow: "In recent years the I.M.F. has been a force for bad; it's cure is worse than a disease."|
LAWRENCE KUDLOW, Economist: I believe the I.M.F. should not be bailing them out. You know, I think there was a time after World War II when the I.M.F. was a force for good and they made short-term loans to stabilize currencies. That was a positive function. But in recent years the I.M.F. has been a force for bad; it's cure is worse than a disease. And I think, essentially, these bailouts enable the very system of state-directed, crony capitalism--Japan and Korea, et cetera--the very system that we are trying to change--is being supported and enabled by the I.M.F.. And let me add, I think there's a new doctrine being introduced here, and that is, private profits are okay. You privatize the profits, but the losses are subsidized or even socialized. And I think for American taxpayers and taxpayers in other nations, this is a heads you win, tails I lose proposition.
MARGARET WARNER: Explain that a little bit--
LAWRENCE KUDLOW: And that is not a good idea.
MARGARET WARNER: All right. Explain that a little more. Whose private profits and whose losses?
LAWRENCE KUDLOW: Well, when the system's going okay, when loans made by banks, by investors, by mutual funds, by companies, when those loans are going fine and they show a good return, nobody steps in. So the private firms who make the loans retain the profits.
MARGARET WARNER: And you're talking about western firms here?
LAWRENCE KUDLOW: Well, indeed, the bulk of it is, in fact, western firms, sure. United States firms are the leaders in many cases, though not all. Now we have a second principle the I.M.F. has introduced. Under the ruse of liquidity problems or re-negotiating or rescheduling debt payments, in effect, I.M.F. loans go to Asian governments and central banks, and that eases or creates a welfare safety net cushions underneath the risks that should be borne by the leaders. In effect, their losses are being either subsidized or socialized. They're not taking the kind of haircut they should be taking. I think this subverts the free market discipline and the free market competition, which is the principal intellectual force in the global economy today ,and the only force that's going to promote true world growth and recovery.
MARGARET WARNER: Bob Hormats, are these bailouts essentially socialism for western financial institutions?
|The I.M.F.'s handling of economic crisis.|
ROBERT HORMATS, Economist: No, not at all. I have a very different view from Larry Kudlow on this. First of all, the I.M.F. certainly has made its share of mistakes. And I am not here to defend all aspects of all of its programs. But I think basically the I.M.F. does a number of things and does them in a very important way. First, it does help countries whose currencies are collapsing and whose economies are collapsing. It is brought into very difficult circumstances and by helping these countries forge stabilization programs, themselves, the countries really develop these programs with the I.M.F., and helping to provide funds for these countries, they cushion a very difficult decline in currencies or decline in economies and help countries over a very difficult period. Second, they also help these countries to put together programs that will in the longer run improve the structure of their economies, which is really what they're doing in Asia. The primary elements of I.M.F. programs today in most of Asia are to help countries to improve supervision of the banking system, to strengthen the banking system, to increase investment from abroad in these economies, to help deal with industrial structure. Many of these countries have industrial structures that need modernization and strengthening, so the bulk of these programs are aimed at opening up economies, at free market policies, less government regulation. And that's very important in strengthening these economies over the longer run. Without that, if there were a real further collapse in these economies or currencies, it would hurt the U.S. badly. It would hurt our trade. It would cause social instability; it could cause security problems in countries that are very important to us. It is a good investment in the future. It may look expensive now but the cost of not doing it would be much greater economically, politically in terms of our national security.
MARGARET WARNER: Larry Kudlow, what about that argument? You said we shouldn't be bailing them out, but what about the consequences?
LAWRENCE KUDLOW: Well, let me say two things. No. 1, I the I.M.F. cure is worse than a disease. The typical cure is massive currency devaluation. The list of countries you named at the intro average 60, 70, 80 percent currency devaluations. That is going to cause a sharp inflation increase in the domestic countries, in Korea, in Thailand, and so forth. That is causing devastation with undermining real wages and destroying their savings, and we're going to have high inflation and contraction, economic contraction, at the same time. But that's Asia's problem. The United States, in my judgment, is not going to be affected. In the upcoming congressional debate, with respect to whether or not to refund the I.M.F. should put the U.S. question aside. The incoming evidence for the economic data in November and December show very clearly that our growth path remains on a healthy course. It's devastating what's going on in Asia, but I.M.F. policies have higher taxation, loose money, currency devaluation, and bailouts and subsidies for bad loans, all part of the state-directed command and control system. The I.M.F. is interfering with the therapy of the free market discipline. That's the only way to restore them to health.
MARGARET WARNER: Bob Hormats.
ROBERT HORMATS: Well, let me take the currency issue for a moment because there is--and I share the concern about countries that have sharply depreciating currencies. It does cause inflation. It also means that corporations that have borrowed a lot of money abroad find it much more difficult to repay that money since their own domestic currency is worth less, which means you have to earn a lot more domestic currency to repay a foreign debt, the I.M.F. over a period of time is aiming at helping to stabilize those currencies if you didn't have additional money from the I.M.F., the chances are those currencies would collapse far more sharply than they have already, and that would add to the so-called contamination effect because it would affect other countries in other parts of the world. That's one reason the U.S. supports I.M.F. programs. The second point about the risk, we should not forget the fact that a lot of people have invested in these countries. And there have been losses. If you bought stock in companies in these countries, if you bought bonds of these companies in various parts of the world, if your mutual fund bought--made investments in these countries, you would have lost money. Lots of money in these countries has been lost, and lots of foreign investment in these countries have been lost. So this hasn't been painless at all. And I think that there are now changes underway in these countries to improve the corporate structure, to improve the banking structure, to make it more market-oriented, and if you didn't have some assistance from the I.M.F. in support, it would be much more difficult to make the kind of changes that will make these economies more market oriented down the road.
MARGARET WARNER: Mr. Kudlow, wait a second. Let's bring in our two other guests now first: Jeffrey Sachs, he directs the Institute for International Development at Harvard and gives economic advice to Indonesia and other foreign governments; and Mary Bush is president of her own financial advisory firm. She served on the I.M.F. executive board between 1984 and 1988. Jeffrey Sachs, do you think these bailouts are working? You've been critical of the I.M.F. methods. Are they working in Asia?
|Mr. Sachs: "The I.M.F. has helped to really stir up a hornet's nest."|
JEFFREY SACHS, Harvard University: I'd like to agree with Bob Hormats, but I find myself agreeing with Larry Kudlow, that I'd like to believe that the I.M.F. programs are going to do all the wonderful things. I'm afraid that from the very beginning I more feared the entry of the I.M.F. into the region than the good that it might do, both with its money and with its advice. And I'm afraid that to date, over the past six months, the I.M.F. has helped to really stir up a hornet's nest, rather than to calm markets down. It's quite amazing that even last week when it seemed we had half the U.S. cabinet out in Jakarta and we had the managing director of the International Monetary Fund and we had a great, great, great build-up to the new Indonesia program, as soon as it was signed, the markets went down again. And the currency continues to fall. The markets simply aren't finding credible the kind of medicine that the I.M.F. is dishing out right now. And I must say I had those fears right from the beginning, even when we talked a couple of months ago, that instead of stabilizing currencies, the I.M.F. was creating an even greater sense of financial panic by its very casual manner of closing down banks when there isn't a proper regulatory system in place, leading to depositor panics, foreign creditor panic, and the currencies have absolutely continued to plummet. So the I.M.F. potentially could do the job that Bob Hormats wants it to do and I very much like it to do but it hasn't done the job yet. The program in the first six months throughout the region has contributed to further financial panic. And even now, the I.M.F. in its own internal documents is really acknowledging this. I think we need a second phase of this approach with a very, very different strategy for the reason.
MARGARET WARNER: Mary Bush, weigh in on this. Do you think it's working, or is another approach needed?
MARY BUSH, Former I.M.F. Board Member: Well, I think to try to make judgments within a period of six months, when you've had several things going on, including some of the countries that have taken on I.M.F. programs not following the commitments, but that they signed up to, it's very, very difficult to make judgments about success. That's one point. A second point is that the markets, as you know, react on the basis of information day to day, and what is required in Asia and many of the countries that have I.M.F. programs, it's really going to be a pretty long lead time before you can determine whether or not there will be success. I think that some of the things that the I.M.F. doing that are very correct are things that the I.M.F. has not really addressed very much before in its programs with borrowing countries. It's really delving into the problems in the banking systems that have been mentioned here. You've had credit extended by banks being directed by governments, being directed based on relationships, not being directed based on the health of a particular company, or an industry that was receiving loans from the banks. You've had caps put on interest rates to various industries. It's the old industrial planning motto. And the I.M.F., I think, really, you know, for the first time in history is really going at these things in a major way. When it's saying close down banks, close down financial institutions, it's closing down institutions that are not healthy, that, you know, if they operated according to market principles, simply could not continue to operate. It is also saying allow foreign investors in. It's also saying free up your markets for trade and that kind of thing. And those things are very important.
MARGARET WARNER: Jeffrey Sachs, do you disagree with those prescriptions, those ones that deal with the way the private businesses in these countries are operating?
JEFFREY SACHS: I think it needs a little bit of subtlety. To arrive on the scene and within four or five days say that 16 banks in Indonesia should close down and then to incite a panic, which the I.M.F. internally has now recognized, in which 2/3 of the banking sector within four weeks is subject to a panic run of depositors is just not good performance. To do the same thing in Thailand and Korea is simply not good performance. What we have now is a colossal banking crisis, far beyond the proportions that had to have occurred if the policies had been more subtle. I think the long-term direction of reform is good, but it also is no license to use a sledge hammer when a much more subtle instrument is needed. And I believe that the I.M.F. has a tendency to do this. In many, many countries it comes in with the sledge hammer. Then things work out very differently from what's expected, and then they say, well, yes, but the government didn't do what we said. In fact, in Asia, it couldn't be more clear. Every one of these countries has suffered a collapsed currency since the I.M.F. came in; every one has had a collapsed stock market since the I.M.F. has come in; and every one of them has a banking crisis far more severe than was true just six months ago.
MARGARET WARNER: Mary Bush, I want to get to one last issue and go around with all four of you. So briefly, if you can, but on Capitol Hill, many members of Congress are talking about having some conditions on any new money to the I.M.F., and they're saying, in particular, they want the U.S. Government to insist that western banks and financial institutions take some of the hits in these loans. Is there a way to structure I.M.F. programs that would do that, that would share the pain?
|The I.M.F. and Latin America.|
MARY BUSH: The I.M.F., yes, can play a very important role in that. In the debt crisis, the Latin debt crisis of the 1980's, the I.M.F. worked very closely in conjunction with banks around the world to be sure that banks won continued lending, rolled over their loans, and also restructured. Those banks do have to take a hit. That is a very important market principle. The loans were made by banks by investors, and it's important that they play a role in helping with the bailout.
MARGARET WARNER: All right. And Larry Kudlow, are you seeing that happening now, or do you think that is doable?
LAWRENCE KUDLOW: I'm not seeing it happen now. I don't think it's doable, and I disagree with my friend Mary Bush's historical rendition here, particularly with respect to Latin America. By and large, the negotiations were conducted by a private lending committee of U.S. banks who then worked with private South American banks and governments to reschedule and renegotiate the debt. And at the end of the day the U.S. Treasury came in with some collateralized debts, so-called Brady bonds. I don't think the I.M.F.'s central planners are any better than the old Russian central planners or the East European central planners or the Suharto central planners. The role of markets has to be expanded. The role of the I.M.F. has to be pulled back. First and foremost, we're not going to solve this problem until we get to the heart of it, which is a monetary and currency crisis. Six months after this crisis broke and repeated visitations by the high officials of the I.M.F. average money supply growth among the Asian tigers is running in excess of 20 percent per year--
MARGARET WARNER: Can I interrupt--
LAWRENCE KUDLOW: --at a time when no one wants to hold their money.
MARGARET WARNER: Let me interrupt you--
LAWRENCE KUDLOW: These policies have to be reformed.
MARGARET WARNER: Mr. Kudlow, let me interrupt you. Just let Bob Hormats have a last word on this one point very briefly. Do you think there's a way of reorganizing this so that western banks and investment houses are taking more of a hit?
ROBERT HORMATS: Well, people who invest in these countries, mutual funds, individuals, bond holders, stock holders, have already taken a very sizable hit, as have investors in those countries. I think the key point now is not so much to talk about who takes the hit, but to help these countries and the banks work out ways in which money can continue to flow into these countries because they need funds in order to continue their growth and to help these countries to get back into capital markets so that they can get money they need for the industrial restructuring they need and to regain reasonable levels of growth, so that they can avoid the sort of social pains that would occur if they can't obtain money on the global markets on reasonable terms. This should be our objective, a constructive objective, and I think we have to look at our national interests, how do we restore growth and opportunity in these countries as soon as we can--
MARGARET WARNER: All right.
ROBERT HORMATS: --and allow the markets in these countries to work more efficiently. That ought to be the key.
MARGARET WARNER: Thanks, Mr. Hormats and everybody.