A CRITICAL ANALYSIS OF THE IMF: CASE STUDY OF THE ASIAN FINANCIAL CRISIS

Kai-Yang Fan Wanda Montero Arisha Waas William Yuan

Objectives

Introduction to IMF Case Studies Thailand South Korea Philippines Indonesia Malaysia Conclusion

Introduction to IMF

Established on Dec 27, 1945 as one of the two Bretton Woods System Original goal was to eliminate exchange rate restrictions and promote economic stability

Introduction to IMF contd

Decades after WW II, the world experienced tremendous growth in real incomes The role of IMF has thus evolved to suit the changes promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment

Asian Financial Crisis

Started on July 2, 1997 with the devaluation of the Thai baht

Affected Asian countries, especially South Korea, the Philippines, Indonesia, and Malaysia There was a collapse in currency values after a period of turmoil in foreign exchange markets

Devaluation during the Crisis

Role of IMF

Very controversial, causing the locals to call the crisis the IMF crisis Criticized for encouraging the developing economies of Asia down the path of "fast track capitalism" Offered to step in the case of each nation and offer it a multi-billion dollar "rescue package" to enable these nations to avoid default

IMF vs. Financial Crisis in Thailand

Introduction: Financial Crisis in Thailand IMF Support and Conditions Critiques What went wrong?

Introduction: Thailands Financial Crisis

Two sources of vulnerability coexisted:
1.

Exchange rate Banks borrowed in foreign exchange and lent in local currencies => exposure to losses in the event of a depreciation Mismatch of Maturities Banks borrowed in short-term maturities and lent with longer payback periods => exposure to the risk of a run (creditors refusal to roll over loans)

2.

IMF Support and Conditions

Float of the currency Medium-term loans in the amount of 17.2 billion US$ to shore up the foreign reserve position, and maintain gross international reserves of $23 billion in 1997, and $24 billion in 1998. Spending Cut Increase in the VAT rate from 7-10%, effective August 16, 1997, expecting to yield nearly 1 percent of GDP in additional revenues on a full-year basis. Banking system reform

Critiques
"These countries didn't get into trouble because of profligate monetary policy, The IMF probably made the problems worse."
Alan Blinder Some important imbalances in fact existed but they would have required a more modest adjustment

The punishment was much larger than the crime.

Largely consensual

Panic in the financial sector partially explained and definitely amplified by institutional weaknesses and bad (incoherent) policies, including non-domestic ones (IMF, lack of accurate international surveillance)

What went wrong?

Why demand balanced budgets from countries that are already in recession due to lack of demand?
Thailand after IMF intervention ended with insufficient demand, high interest rates, when the need was of increase in investments, in education and/or infrastructure, both essential to economic growth. The lack of demand worsened the recession deepening the economic slowdown.

What about rising interest rate? Thailand firms at that time presented high levels of indebtedness, thus imposing a high interest rates helped to the collapse of many firms.

IMF vs. Financial Crisis in Korea

Introduction: Financial Crisis in Korea IMF Support and Conditions Critiques

Introduction: Financial Crisis in Korea

Huge bad debts Sharp Korean won depreciation Financial structure

IMF Support and Conditions

Korea received $21 billion loan from IMF Conditions of IMF Stand-By Arrangement

Tighten

Monetary and Fiscal Policies Cancel trade barrier Reform the bank system

Critiques

Jeffery Sachs criticism

There

is no fundamental reason for Asians financial calamity except financial panic itself. banks and international banks are in the different criterion

IMF has double standards of the policies.

Local

IMF vs. Financial Crisis in the Philippines

Philippine's Economic Conditions IMF Support and Conditions Critiques Philippines Strategy

Philippine's Economic Conditions 1

High inflation and overinvestment

Philippine's Economic Conditions 2

Prolonged use of IMF Funds

IMF Support and Conditions

EFF 1997 $699 million and SBA 1998 $1371 million Fiscal Policy: 25% mandatory reserve, temporary suspension of 14.4 billion peso of new programs and projects, tax reform Monetary & Exchange rate policy: increase foreign reserve to $920 million, adjust interest rate to contain inflation

Critiques
IMF policies were contractionary in nature Philippines deviated from the IMF goal, sought more aggressive reform

Philippines Strategy

Focused on regional trade and business process outsourcing

IMF vs. Financial Crisis in Indonesia

Introduction: Financial Crisis in Indonesia IMF Support and Conditions Critiques

Introduction: Indonesias Financial Crisis

Large amount of short-term foreign debt owed by the private corporate sector Attack on the Indonesian rupiah

Role of IMF

Financial support of up to about US$10 billion, equivalent to 490% of Indonesias quota, over the next 3 years
Initial programs: Financial sector restructuring Structural reforms Fiscal measures

Critiques

Forced government of Indonesia to guarantee private debts owed to foreign creditors Severe fiscal austerity caused millions of Indonesians lost their job

IMF vs. Financial Crisis in Malaysia

Introduction: Financial Crisis in Malaysia How Malaysia Overcome the Crisis Result

Introduction: Malaysias Financial Crisis

Attack of the Malaysian ringgit Sell off on the stock and currency markets

How Malaysia Overcome the Crisis

Moved the ringgit from a free float to a fixed exchange rate regime Imposed capital control Formed various agencies

Result

Growth at a slower but more sustainable pace In 2005 - US$14.06 billion surplus
Without IMF, Malaysia suffered less severe economic problems

Conclusion

The financial crisis in Asia was not a consequence of economic downturn Martin Wolf: Partial integration into a world financial system unable to evaluate risk either intelligently or consistently." IMF should not be given so much power IMF should build the confidence in the country