A Critical Analysis of IMF(Final)

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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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


Critiques


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Introduction: Financial Crisis in

Korea Huge bad debts

Sharp Korean won depreciation

Financial structure


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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


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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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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Indonesia Introduction: Financial Crisis in Indonesia


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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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

Documents

A Critical Analysis of IMF(Final)