THE LAST STAND

November 24, 1998
		The IMF put together a $41.5 billion deal to help Brazil defend its economy against the spreading global economic crisis. Asia's and Russia's economies have already been crippled. Will the IMF plan work this time? Return to this forum's introduction.

Will the IMF plan cause a recession in Brazil? Is Brazil's economic problems due to graft? Can the IMF restrict the way bailout funds are distributed? How many years will it take for Brazil to recover? Does this plan deal with the "moral hazard" associated with international bailouts? Viewer Comments     November 13, 1998: A detailed look at the IMF/Brazil deal. October 27, 1998: A look at Russia's collapsing economy. October 20, 1998: The global economic crisis is hurting U.S. companies. October 15, 1998: The Federal Reserve cuts interest rates to fend of an economic downturn. October 9, 1998: A discussion of the global economic crisis. Browse the NewsHour's coverage of economic issues.

Charlie Barb of Mercer Island, WA, asks: We have heard of the graft common in the Asian economies and I have heard of a bloated government bureaucracy in Brazil. Are these economic failures really the result of out-moded dysfunctional economic systems failing under the strain imposed by a new global economic reality? If so, can these readjustments be papered over? Steven Radelet of the Harvard Institute for International Development responds: Corruption and 'crony capitalism' have been the focus of much attention in Asia, and have provided an easy -- sometimes too easy -- explanation for the crisis. Yes, graft is a problem in these countries. But it has been a problem for many years, and it is a characteristic common to most emerging economies (whether currently in crisis or not). Thus, although corruption is clearly a problem that needs to be dealt with, it provides at best only a partial explanation for the crisis. All to often, the press and foreign governments characterized corruption as a moral failing of the Asian people, somehow wishing that if it would just go away, all would be well. But it isn't so simple. We in the United States had our own crony capitalists in earlier stages of development -- we called them the robber barons -- and we saw many financial panics and bank crises in the late 19th and early 20th centuries. We began to overcome these problems, slowly and painstakingly, through the development of a series of institutions that regulate and supervise financial markets, such as the Federal Reserve system, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, bankruptcy laws, and a relatively well-functioning judicial system. Even now, more than 60 years after the last major bank runs in the U.S. during the Great Depression, the system is far from perfect, as we saw with the Savings and Loan crisis (our own recent version of crony capitalism!). The challenge of developing strong and viable financial institutions is a very difficult hurdle for emerging markets, and the pressures from the international financial system make the challenge all the greater. Weak financial structures in the Asian economies, combined with weak and underdeveloped international financial institutions (e.g., the lack of an international debt workout mechanism) made the Asian economies vulnerable to a financial panic. The IMF's initial approach to financial restructuring in Asia -- rapid bank closures without first putting deposit insurance in place, an immediate toughening of prudential regulations, and very little long-term strategic planning -- simply deepened the immediate financial panic and undermined even many good banks in Asia. A longer-term, more comprehensive approach to institutional development is needed that takes account of the weaknesses in international as well as domestic financial markets, especially in the context of a more globalized financial system. Globalization stirs powerful forces for development that are ultimately beneficial to emerging markets, but care must be taken to open financial systems more slowly in pace with the domestic capacity for appropriate regulation and oversight. Mary Bush, former IMF executive board member, responds: Bloated government bureaucracies are a strain on economies ( and ultimately on individuals and businesses) whether or not a country has opened its economic borders to the global economy. Time and time again, it has been shown that excessive government spending and bloated bureaucracies cannot be sustained over long periods of time. They detract from resources that should be available to private citizens to start and finance businesses and usually also tax away the hard earned money of a country's citizens. One of the great benefits of the "global economic reality" is that graft and corruption show their heads much quicker than they would in a closed economy. Problems can only be "papered over" for short periods of time by politicians who have an interest in maintaining the status quo. With today's "global economic realities" I don't think that the citizens of these countries or the international community will long tolerate attempts to "paper over" the problems, corruption of graft.

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