He is First Deputy Managing Director of the International Monetary Fund. Prior
to taking this position in 1994, he was the Killian Professor and the Head of
the Department of Economics at MIT. He also served as Chief Economist at the
Let me tick off some of the criticisms. The first is ... that once the
crisis began, the policies that the [IMF] and the U.S. Treasury emphasized were
disastrous for the populations in these countries. What's your reaction to
I think it's wrong. Two reasons. First, the most controversial part of these
policies has been the support by the Fund for countries to try to prevent their
exchange rates depreciating excessively by raising interest rates. The
criticism has focused most heavily on having high interest rates at the start
of these programs. The alternative was to keep interest rates low and let the
exchange rates depreciate more. But, in each of those countries, exchange rates
depreciated to half their value very, very quickly. When your currency loses
half its value on the external side, you're going to get a domestic inflation
unless you reverse it. Furthermore, in all of those countries, they were
heavily indebted in dollars, so that everybody who borrowed in dollars had to
pay twice as much in terms of the domestic currency as they were expected to
pay before. There had been a huge number of bankruptcies on that account.
So [it] isn't as if there was one easy strategy that the interest stay low and
everything will be fine. It was a trade off. How much do [you] allow the
currency to devalue? How high do you raise interest rates? I think the right
trade off was made for one important reason--it worked. Actually, for more than
one important reason--it worked. Those currencies did stabilize, they did
strengthen, and interest rates are now very low as we said they could be as
soon as it stabilized.
... if there been a massive devaluation that would have meant a permanent
burden in terms of the amount of dollars they had to pay abroad relative to the
local value of the currency. Whereas, what happened is that they fought the
devaluation and the currency regained value, they rolled down about 20-25%
instead of over 50%. So that meant the high interest rates were a temporary
problem; allowing the devaluation would have been a permanent problem. So that
was the right strategy. I still believe it was the right strategy. I know how
strongly critics feel about it, but I think that they are wrong on this one.
The second point to make and it's a point that has to be made very carefully is
that this has been a terrible crisis for all the countries concerned. But it
is surprising that depths of the social distress that it has had created is
less then the critics have asserted throughout. The poverty rates in Indonesia
and Thailand have risen relatively little from say 11-14%, something like that,
in both countries. It is nothing to be proud about, but it is not the
devastation on the scale that many thought was happening at the time. I can
explain why. The bulk of the poverty is rural and the rural sector has not
been as badly affected as the other sectors in this crisis.
Similarly in Korea, where the crisis has been very deep--and the unemployment
rate in Korea has risen sharply--is well below European unemployment rates, even
at this stage. So I don't want to minimize the social crisis that has been
created. It is not of a scale that has been suggested by those who have been so
vociferously critical of these programs ...
What about the criticisms that the actions of the Fund made the crisis worse
in its beginning? The declaration, for example, in Indonesia that a certain
number of banks needed to close. In fact, it created a bank run and many of the
policies were like feeding the fire ...
There were a variety of charges along those grounds and let me try to deal with
them. On the Indonesian banks, the issue is those banks are very well known to
be highly corrupt. They had to be closed if confidence in the banking system
was to be restored. The closure of the banks did lead to a movement of deposits
out of what were thought to be other corrupt banks and unsafe banks into state
banks. With good management, that could have been handled. It was handled in
Thailand. It was handled in Korea, because the same phenomena happened there.
But it wasn't managed that well. The closure of the banks without the good
follow up as to how to control that did create a problem there, but it was not
an inevitable problem.
In the other countries, the charge is that by saying at the beginning these
countries were in deep crisis, the Fund worsened the situation--that simply has
no basis. On the days the program started in both Korea and Thailand, each
country had essentially used up all its foreign currency reserves. They were
just out of reserves. The country doesn't start from a situation where, to the
surprise to everybody, it's used up all foreign exchange without being
understood to be in a deep crisis. In those two cases, there is simply no basis
for the charge that what the Fund did exacerbated the crisis. What the
countries did, unfortunately, in delaying coming to Fund and resisting coming
to the Fund was to use up all their foreign exchange and make their own crisis
worse, and that it then began to turn around.
There is [another] very interesting element on the political economy of
these things, which is that in each of those three countries, the economic
situation began to change as the government changed. In Korea, fortunately,
there was an election coming up three weeks after the start of the crisis. A
new president came in. He said he wanted to carry out this program ... As soon
as he took office, together with a few other things that happened. Confidence
began to change.
Similarly, in Thailand, the government that got into the trouble was the
government with which we signed program. When they were thrown out and the new
government came in November, five months later, things began to turn. Now in
Indonesia, of course, the replacement of Surhato was not done in a nice, clean,
democratic way, as in the other two countries. But it is also true that the new
government was the one that began to stabilize the situation. So the political
economy aspect of this is very difficult. We can't say, "Well, we are only
going to sign up with a new government." But it happened that once the
government changed things worked much better.
The final criticism ... this is from Business Week, which a few
months ago said ... that "we live in a deflationary world, that austerity
policies forced upon countries in return for loans turns bad debt problems into
economic debacles." This seems to be a different kind of criticism and gets to
the deflation that is being seen worldwide.
This is a matter of how much money have you got to lend a country. I don't
doubt that if the industrialized world had decided to give Korea a $100 billion
and give Thailand huge amounts and given Indonesia that it would have been
possible to encourage spending, so that they could have continued spending in
the way that they have been up to that point. But there wasn't that much money
to go around. And when all your creditors are pulling out, and that was what
was happening the private sector, was simply massive amounts pulling money out,
you cannot at that moment turn around and say this is a time to go on a
spending spree, unless somebody's going to give you the money to spend.
We tried to provide a large amount of financing. But while exchanges were
depreciating so fast, you couldn't say, "This is the time to spend, this is the
time to have low interest rates." You would have just got into a worse and
worse spiral. You had first to stabilize; then try to revive the economy. That
has been done. In every one of the countries, within six months, the policies
changed nature. The interest rates very low, except in Indonesia, which still
has an inflation problem. The fiscal deficits are now very large, and there is a
fiscal expansion on the way in those countries. That is possible because the
macro economy has stabilized. Until that happened this was not possible. So I
don't think those other policies desirable as they were could have been done.
People criticize those who say that things are turning around in these
countries, and that they are looking only at the macro economy, financial
indicators and not at the real economies, not at the lives of the people who
are living in these places.
What I say is the financial variables stabilized first, and there is not
question that they stabilized at a time when output was still declining and
things were getting worse. But we are beyond that point now and growth is
evident in Korea. They do expect, they keep raising their own estimate 3% or 4%
growth this year; we are not that optimistic yet. But there is no doubt at the
moment about there being growth in Korea. Unemployment typically lags growth,
so unemployment will continue to rise ... then it will come down after the
growth has been there for awhile.
Similarly, there should be growth in Thailand. That is not to deny that a lot
of people have been hurt in this process and that there is substantial social
distress in those countries, which with our colleagues in the World Bank,
[we're] trying to put in place social safety net measures--unemployment
insurance in Indonesia and Thailand, a variety of public employment
works--we're trying to mitigate those things. I don't deny, nor can anyone deny,
that this crisis has brought substantial misery. But it is turning around, and
we shouldn't deny that either.
He is Dean of the Yale School of Management and author of The Big Ten: The
Big Emerging Markets and How They Will Change Our Lives. As an investment
banker, he was involved in sovereign and corporate debt restructurings in Latin
America and Asia during the 1980s. He was Undersecretary fo Commerce for International
Trade in the Clinton administration.
What about the criticisms of the prescriptions that the IMF and, to some
extent, the U.S. Treasury came in with once the crisis had started rolling?
Well, if you don't diagnose the problem well enough, then the prescription is
likely to be wrong. The IMF and the Treasury were doing the best they could
given the situation. In retrospect, it is not real clear what they could have
done differently or whether if they had done something differently, it would
have worked better. But they certainly came in there and demanded a level of
immediate austerity, which threw these countries into a tailspin.
I believe personally--now, a lot of people disagree with me--that they asked
these countries to do too much at one time. It wasn't just to get their
monetary policy and their trade policy in order, or their fiscal policy in
order, but they immediately started to ask for wholesale restructuring of the
economies themselves. While all of that had to be done, if you do it all at
once, the social cost, the cost in terms of unemployment and, you know, the
sheer human misery that is created--it was too much. But reasonable people can
disagree on that, and it will need a few more years to see if these countries
recover and recover in a very strong way. Then, maybe in the end, the pain was
the right way to go.
He is a Washington-based journalist who has worked in newspapers, magazines and
television for over 35 years. His most recent book is One World, Ready or
Not, The Manic Logic of Global Capitalism.
Who does the IMF represent? You have this phrase that they're the "bankruptcy
The IMF, in theory, is responsive to all of the economies of the world, and
especially, of course, the wealthier economies like ours, which fund it. The
U.S. is the biggest funder. In reality, it really has worked for the last 25
years as a kind of bankruptcy cop for investors from the wealthiest countries,
the U.S. and Europe and to a lesser extent Japan.
A country gets into trouble, whether it's deficits or inflation or debt or a
currency that's devalued, and the IMF comes in with its program and says we'll
lend you money if you'll do the following things. Very much like a bankruptcy
judge who says to the debtor who's filed for Chapter 11, "You can keep your
business open" or "We're not going to take away your house, but you've got to
do the following things." Those rules are to get the money back for the
creditors. That's exactly what the IMF does. Except it then lends a big batch
of money and enforces these rules by doling the money out a bit at a time.
So that it becomes this, I think, quite lopsided and perverse relationship
where the IMF officials fly in every couple of weeks, or if not more often, and
check the books and check the country and say, "You're not doing this right.
Close those banks. Close these companies." Very kind of imperial relationship
really [between] Western capital, including the U.S., and these poor developing
countries. Believe me, that's the way it's seen in a lot of these countries.
What is the relationship between the IMF, the United States and the United
Well, the Treasury and the White House always, of course, deny this, but the
reality that everybody understands in this field of global finance, is that the
IMF takes instruction from the U.S. Treasury secretary. That is because we were
the founder of the institution 50 years ago with Bretton Woods and because we
are the principle financier, not the only one that funds it. Because this
relationship accompanied the Cold War for so many years. Others deferred to the
U.S. view of things ...
... nothing the IMF does of any importance happens without Robert Rubin
checking off and saying, "Yes, I accept that or I don't," or whatever. Of
course, that often ends up at the White House as a decision of the president,
because the U.S. government, especially Bill Clinton, but his predecessors as
well, are so committed to this laissez faire orthodoxy for the world, the
Washington consensus and the notion that we all win if we just keep taking
rules off of the table and let the market solve these things. Because we, as a
country, are the promoters for that idea, the IMF almost never strays from it
I can't read minds at the IMF, but it's conceivable that some people there
really do want to do it a bit differently, but that nothing will change until
the U.S. government says, okay. That's part of the impasse worldwide. A good
many other governments have now started public discussions of, "How should we
reform this system?" They have a variety of ideas, some modest, some grand. The
U.S. has basically given the back of the hand to all of them.
He is the former Deputy Undersecretary of the Commerce Department under the
Clinton administration and is now president of an international advisory firm. He is
also an adjunct professor of international and public affairs at Columbia
... Isn't it true that the IMF and the U.S. Treasury have insisted on policies
that aren't politically sustainable in lots of these countries?
... I think that there were certainly many instances where the reforms
advocated by the IMF, where the reforms pushed for by many in the financial
community, where the policy position known by the term the "Washington
consensus" was very insensitive to the needs of the people in these countries,
and thus it became politically unsustainable.
Because if what you're doing is saying, "Strong currency at any cost," then
what you're going to find yourself in is a situation where sometimes you're
forced to raise interest rates so high that you bring a recession onto a
country. You know in a lot of these countries--look at Brazil--the gap between
the top fifth and the bottom fifth is as extreme as anywhere in the world. If
you liberalize there's an incentive for the elites in these societies to
globalize, plug in, benefit themselves, buy a new BMW, read the Financial
Times every morning but, on the other hand, encourage labor rates to stay
low because one of the comparative advantages that they've got in these
countries is having low-cost labor.
... And I think it behooves the financial community to realize that unless they
come up with policies that are socially just, that deal with issues of social
equity, then they will not be coming up with approaches that are sustainable
and they will get into this swing back and forth, and they will ultimately hurt
themselves economically. So there are very pragmatic reasons to do the right
Do you see any signs that the financial community is beginning to wake up to
what you just said?
Absolutely. I mean, there's a debate going on. The Washington consensus has
been put on a shelf. There is a new thought that something that is more
politically sustainable is needed. People have read leading thinkers on these
subjects, whether it's at the World Bank or Jeff Sachs at Harvard or Paul
Krugman or others who have said, "Hey, wait a minute. Let's reconsider this.
There are national interests to address in some of these countries." The result
of that has been [a] calibration, and inevitably it will produce a Washington
consensus, too, or better yet some consensus that is not so closely associated
with the capital of the First World. It has a little bit more components of
reflecting the needs of people in each one of these markets.
He is the Galen L. Stone Professor of International Trade at Harvard University
and the Director of the Center for International Development. He has served as
an economic advisor to governments in Latin American, Eastern Europe, Russia,
Asia and Africa.
In a lot of your writings, you essentially accuse the IMF and the U.S.
Treasury, of a kind of economic malpractice in how they dealt with the Asian
As of mid-1997, east Asia was vulnerable to panic. But it didn't mean that a
panic, financially, was actually going to come. Vulnerability meant there was a
lot of short-term debt, much lower level of assets. So that, if the creditors
decided to panic, these countries would be in a lot of trouble.
What was the name of the game for good doctoring at that point? It was to calm
the nerves and prevent panic. But the IMF came in, as is their wont. I think
the U.S. rhetorically added to this. The IMF took one look around Thailand and
said, "This place is much worse than anybody thinks. We're going to clean it
up. Fifty-eight finance companies, we want you to close right now. We want you
to put up interest rates. We want you to cut fiscal policy."
All of a sudden, people who thought that there were troubles, but not
catastrophe, started to look around, said, "Gee, I'm getting the heck out of
this place. I don't know what's going to happen in Thailand in 1998. But I know
in the second half of 1997, there's not enough to pay us all off. And I want to
be the first one out."
So the runs started in Thailand after the IMF intervened in such a dramatic
way. Then the IMF came to Indonesia. On November 1st, 1997, the IMF demanded
that 16 commercial banks suddenly close their doors to operations. [They]
announced that depositors would lose money, and didn't say anything about
protecting deposits in other banks, as well.
Well, what happened was quite obvious. The Indonesians started to take their
money out of all the rest of the banks, as well. Then, when the foreign
creditors saw that the Indonesian banking system was imploding, they started to
yank the money out of Indonesia.
So, I think the IMF helped to detonate the Indonesian crisis, which turned out
to be the worst of all of them, because when your banking system completely
implodes, that drives down all the rest of the economy. Even good firms can't
get the working capital they need, to buy the inputs that they need, to produce
the goods that they need, to sell on world markets.
Then the crisis went to Korea, and the same kinds of provocative steps were
taken. Sudden bank closures. Dramatic heights of interest rates. A lot of
heated rhetoric. That, in my view, all added to the sense of outright panic, in
a region that just three or four months ago, had been viewed very positively,
with a lot of equanimity, if not more. So how did we get this dramatic change
of mood in such a short time? Unfortunately, the international community
contributed to that dramatic turn-around, and the damage that resulted from
that has been profound.
But the IMF would say in its defense ... that the steps they took were to
reassure the markets. How could they misread the situation?
The IMF simply didn't figure on how its own inputs and its own style of
operation, its own recommendations, could shift the mood so dramatically. I
think they made a bad mistake. They have a way of doing things, which fits,
perhaps, when the IMF is negotiating with a government that's pretty
profligate, has really messed up. When there's not so much private money
around, but just a government that may have borrowed too much from the World
Bank, for example. But they're not used to having the same discussion when
there's $175 billion of private money, listening in, saying, "What's really
going on in this discussion?"
So my sense is that the IMF does not have a proper modus operandi for the
current conditions in the world. They misjudge rhetorically. They misjudge
tactically. They misunderstand the dangers of financial panic, and the results
are terrible. Now, they say in their own defense that the economic contraction
was worse than they anticipated. They say that their programs did not restore
market confidence as much as they hoped. But then, they say in their reports,
but nobody else did much better in their estimates.
With all due respect, I seriously beg to differ. There were some of us, I don't
know if it's many or few ... who were absolutely pointing out, "If you do this,
you will make panic. You will make a loss of market confidence. And the outcome
will be tremendously worse than you think."
The other thing the IMF says, is, "Well, it's all coming out all right in the
end. You see, the Korean won is stable. The Thai baht is stable. Our policies
worked." What they do is, they shift the attention away from the real facts and
from the real world that people live in. Sure, the currency is stable. But at
what cost? An economic collapse? A massive social crisis? Isn't that what
they're trying to prevent? Isn't the reason that they're concerned about the
exchange rate, because they think that will be a good thing for the rest of the
economy? I believe that they have lost sight of their major goals. They think
in financial terms, but they're not understanding that the effects of their
actions are having such a disastrous effect on the real economy, on the jobs,
the production, the exports, and the living standards of the people.