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Stanley Fischer

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 World Bank.
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 that?

stanley fischerI 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.


jeffrey garten

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?

jeffrey gartenWell, 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.


william greider

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 cops" ...

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.

william greiderA 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 States Treasury?

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 as well.

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.


david j. rothkopf

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 University.
... 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.

david rothkopfBecause 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 thing ...

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.
jeffrey d. sachs

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 crisis ...

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.

jeffrey d. sachsWhat 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.

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