CAMBRIDGE: The IMF’s search for a new managing director will be attracting all the attention over the coming weeks and months, but the policies it follows are what matter most. A catfight is now underway about which institution has been right over the past few years, the IMF with its tough treatments or the World Bank and its alternative cures.
This debate has raged underground ever since Mexico’s collapse in 1995. Are IMF policies too tough, even perverse, pushing economies into bankruptcy? Are they to blame for the disastrous social fallout of the financial crises of recent years? That latter view was promoted across Asia, where governments, including that of Japan, called for an Asian IMF with alternative (softer) policies. They gained extraordinary and unexpected support from Joseph Stiglitz, the World Bank’s chief economist and senior vice president, who recently advised that China should practice competitive devaluation and beggar-thy neighbor policies.
For beleaguered governments, Stiglitz’s proposed cures were rose petals, fragrances and scented candles along with soothing sounds. Hard budget cuts and sky-high interest rates could be avoided. Stiglitz’s pronouncements offered formidable support to those who opposed IMF rigor, indeed, and at the very least they confused the public and policymakers alike. But this was music to a Japan trying to pursue its own agenda in Asia as well as to Dr. Mahatir, Malaysia’s ruler, who is on an anti-establishment kick.
In the firing line, orthodoxy was defended by IMF chief surgeon Stanley Fischer, the first deputy director and an economist with as formidable an academic reputation as Stiglitz. That debate has gone on, right to a recent conference in Singapore which gave the Mahatir/Stiglitz team a resounding victory capped by a standing ovation from a crowd of top Asian top businessmen. Once again, Japanese officials made their case for an Asian IMF, an alternative strategy without the pain of IMF austerity and the unaccustomed transparency.