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7/29/2019 A Critical Analysis of IMF(Final)
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7/29/2019 A Critical Analysis of IMF(Final)
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Objectives
Introduction to IMF
Case Studies
ThailandSouth Korea
Philippines
IndonesiaMalaysia
Conclusion
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Introduction to IMF
Established on Dec 27, 1945 as one of the twoBretton Woods System
Original goal was to eliminate exchange raterestrictions and promote economic stability
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Introduction to IMF contd
Decades after WW II, the world experiencedtremendous 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 andhigh levels of employment; and to providetemporary financial assistance to countries tohelp ease balance of payments adjustment
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Asian Financial Crisis
Started on July 2, 1997 with the devaluation ofthe Thai baht
Affected Asian countries, especially South Korea,the Philippines, Indonesia, and Malaysia
There was a collapse in currency values after aperiod of turmoil in foreign exchange markets
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Devaluation during the Crisis
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Role of IMF
Very controversial, causing the locals to call thecrisis the IMF crisis
Criticized for encouraging the developingeconomies of Asia down the path of "fast trackcapitalism"
Offered to step in the case of each nation andoffer it a multi-billion dollar "rescue package" toenable these nations to avoid default
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IMF vs. Financial Crisis in
Thailand Introduction: Financial Crisis in Thailand
IMF Support and Conditions
Critiques
What went wrong?
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Introduction: Thailands
Financial CrisisTwo sources of vulnerability coexisted:
1. Exchange rate
Banks borrowed in foreign exchange and lent in localcurrencies
=> exposure to losses in the event of a depreciation
2. Mismatch of Maturities
Banks borrowed in short-term maturities and lent withlonger payback periods
=> exposure to the risk of a run (creditors refusal toroll over loans)
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IMF Support and Conditions
Float of the currency
Medium-term loans in the amount of 17.2 billion US$ toshore 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 inadditional revenues on a full-year basis.
Banking system reform
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Critiques
"These countries didn't get into trouble because ofprofligate monetary policy, The IMF probably
made the problems worse."
Alan BlinderSome important imbalances in factexisted but they would haverequired a more modest adjustment
The punishment was much larger than the crime.Largely consensual
Panic in the financial sectorpartially explained anddefinitelyamplifiedby institutional weaknesses and bad (incoherent)policies, including non-domestic ones (IMF, lack of accurateinternational surveillance)
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What went wrong?
Why demand balanced budgets from countries that arealready in recession due to lack of demand?
Thailand after IMF intervention ended with insufficientdemand, high interest rates, when the need was ofincreasein investments, in education and/or infrastructure, bothessential to economic growth. The lack of demand worsenedthe recession deepening the economic slowdown.
What about rising interest rate?
Thailand firms at that time presented high levels ofindebtedness, thus imposing a high interest rates helped tothe collapse of many firms.
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IMF vs. Financial Crisis in Korea
Introduction: Financial Crisis in Korea
IMF Support and Conditions
Critiques
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Introduction: Financial Crisis in
Korea Huge bad debts
Sharp Korean won depreciation
Financial structure
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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
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Critiques
Jeffery Sachs criticism
There is no fundamental reason for Asians
financial calamity except financial panic itself.
IMF has double standards of the policies.
Local banks and international banks are in the
different criterion
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IMF vs. Financial Crisis in the
Philippines Philippine's Economic Conditions
IMF Support and Conditions
Critiques
Philippines Strategy
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Philippine's Economic
Conditions 1 High inflation and overinvestment
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Philippine's Economic
Conditions 2 Prolonged use of IMF Funds
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IMF Support and Conditions
EFF 1997 $699 million and SBA 1998$1371 million
Fiscal Policy: 25% mandatory reserve,temporary suspension of 14.4 billion pesoof new programs and projects, tax reform
Monetary & Exchange rate policy:increase foreign reserve to $920 million,adjust interest rate to contain inflation
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Critiques
IMF policies were contractionary in nature
Philippines deviated from the IMF goal,
sought more aggressive reform
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Philippines Strategy
Focused on regional trade and businessprocess outsourcing
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IMF vs. Financial Crisis in
Indonesia Introduction: Financial Crisis in Indonesia
IMF Support and Conditions
Critiques
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Introduction: Indonesias
Financial Crisis
Large amount of short-term foreign debt
owed by the private corporate sector
Attack on the Indonesian rupiah
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Role of IMF
Financial support of up to about US$10billion, equivalent to 490% of Indonesias
quota, over the next 3 years
Initial programs:
Financial sector restructuring Structural reforms
Fiscal measures
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Critiques
Forced government of Indonesia to
guarantee private debts owed to foreigncreditors
Severe fiscal austerity caused millions ofIndonesians lost their job
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IMF vs. Financial Crisis in
Malaysia Introduction: Financial Crisis in Malaysia
How Malaysia Overcome the Crisis
Result
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Introduction: Malaysias
Financial Crisis
Attack of the Malaysian ringgit
Sell off on the stock and currency markets
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How Malaysia Overcome the
Crisis
Moved the ringgit from a free float to a
fixed exchange rate regime
Imposed capital control
Formed various agencies
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Result
Growth at a slower but more sustainablepace
In 2005 - US$14.06 billion surplus
Without IMF, Malaysia suffered less
severe economic problems
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Conclusion
The financial crisis in Asia was not aconsequence of economic downturn
Martin Wolf: Partial integration into a world financial
system unable to evaluate risk eitherintelligently or consistently."
IMF should not be given so much power
IMF should build the confidence in thecountry
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