Why the IMF Programs in Asia are Failing

The entire world has a big stake in the successful resolution of the Asian financial crisis. If Asia enters a downward spiral of economic collapse and financial default, the consequences will be severe not only for the billions of people of Asia but for the rest of the world as well. Just last week, the credit rating agencies threatened to downgrade leading European banks because of their exposure to Asia. Growth forecasts for Europe and the United States in 1998 are already being scaled back, though still only modestly. The stock markets in the U.S. and Europe could easily suffer a sharp contraction if the Asian crisis intensifies.

For these reasons, we should care strongly about the quality and design of the "rescue" programs launched by the International Monetary Fund in Indonesia, Korea, and Thailand. While it is admittedly too early to declare victory or failure of these IMF programs, the initial results are discouraging. In all three countries, the currencies have continued to plummet even after the IMF offered tens of billions of dollars in rescue funds. Stock exchanges in these countries have similarly continued to fall. As of late December, all three countries had their credit ratings downgraded to "junk bond" status.

How can we account for this poor start to the IMF packages? The main problem is a failure of the IMF to diagnose the situation accurately. Asia is suffering from an acute financial panic, in which the once-euphoric international investors who poured money into Asia are now fleeing the region at a dramatic pace. They are fleeing partly because of newly-discovered weaknesses in Asia, but mostly because the other investors are fleeing. Nobody wants to be the last one caught with money in Asia if everybody else is withdrawing their investments. Since Asia’s banks borrowed short-term funds from abroad for long-term domestic investments, there are not enough short-term assets around to allow all investors to get their money out of Asia if all of the investors simultaneously decide to flee the region, as is now happening.

To continue reading, please log in or enter your email address.

Registration is quick and easy and requires only your email address. If you already have an account with us, please log in. Or subscribe now for unlimited access.

required

Log in

http://prosyn.org/meSw3Hh;
  1. Television sets showing a news report on Xi Jinping's speech Anthony Wallace/Getty Images

    Empowering China’s New Miracle Workers

    China’s success in the next five years will depend largely on how well the government manages the tensions underlying its complex agenda. In particular, China’s leaders will need to balance a muscular Communist Party, setting standards and protecting the public interest, with an empowered market, driving the economy into the future.

  2. United States Supreme Court Hisham Ibrahim/Getty Images

    The Sovereignty that Really Matters

    The preference of some countries to isolate themselves within their borders is anachronistic and self-defeating, but it would be a serious mistake for others, fearing contagion, to respond by imposing strict isolation. Even in states that have succumbed to reductionist discourses, much of the population has not.

  3.  The price of Euro and US dollars Daniel Leal Olivas/Getty Images

    Resurrecting Creditor Adjustment

    When the Bretton Woods Agreement was hashed out in 1944, it was agreed that countries with current-account deficits should be able to limit temporarily purchases of goods from countries running surpluses. In the ensuing 73 years, the so-called "scarce-currency clause" has been largely forgotten; but it may be time to bring it back.

  4. Leaders of the Russian Revolution in Red Square Keystone France/Getty Images

    Trump’s Republican Collaborators

    Republican leaders have a choice: they can either continue to collaborate with President Donald Trump, thereby courting disaster, or they can renounce him, finally putting their country’s democracy ahead of loyalty to their party tribe. They are hardly the first politicians to face such a decision.

  5. Angela Merkel, Theresa May and Emmanuel Macron John Thys/Getty Images

    How Money Could Unblock the Brexit Talks

    With talks on the UK's withdrawal from the EU stalled, negotiators should shift to the temporary “transition” Prime Minister Theresa May officially requested last month. Above all, the negotiators should focus immediately on the British budget contributions that will be required to make an orderly transition possible.

  6. Ksenia Sobchak Mladlen Antonov/Getty Images

    Is Vladimir Putin Losing His Grip?

    In recent decades, as President Vladimir Putin has entrenched his authority, Russia has seemed to be moving backward socially and economically. But while the Kremlin knows that it must reverse this trajectory, genuine reform would be incompatible with the kleptocratic character of Putin’s regime.

  7. Right-wing parties hold conference Thomas Lohnes/Getty Images

    Rage Against the Elites

    • With the advantage of hindsight, four recent books bring to bear diverse perspectives on the West’s current populist moment. 
    • Taken together, they help us to understand what that moment is and how it arrived, while reminding us that history is contingent, not inevitable


    Global Bookmark

    Distinguished thinkers review the world’s most important new books on politics, economics, and international affairs.

  8. Treasury Secretary Steven Mnuchin Bill Clark/Getty Images

    Don’t Bank on Bankruptcy for Banks

    As a part of their efforts to roll back the 2010 Dodd-Frank Act, congressional Republicans have approved a measure that would have courts, rather than regulators, oversee megabank bankruptcies. It is now up to the Trump administration to decide if it wants to set the stage for a repeat of the Lehman Brothers collapse in 2008.