IMF consequences

Global Finance, Dec 1997/Jan 1998 by Kahn, Sharon

Of course there is much wrong with Asia's economic framework. But the austerity measures that have become the International Monetary Fund's stock answer to economic woes will do more harm than good-at least if implemented at the breakneck speed required by the agency.

Unlike Mexico, Asia incurred its debts through private borrowers rather than free-spending, inflationary government policy. In fact, Asian governments routinely ran budget surpluses until they flattened treasury coffers in ill-conceived attempts to protect their overvalued currencies. And unlike Mexico, Asia is famous for its private savings rate.

Measures meant to contain hardly existing inflation and depress barely discernible government overspending are simply misguided. Instead of asking governments to implement interest rate hikes and raise taxes, the IMF should find ways to turn Asia's private sector savings into consumption. With Europe and the United States reluctant to buy enough Asian exports to keep the factory lights burning, Asians need to look inward.

Further, a worse-case political scenario could involve Asians turning on their own governments if austerity measures prove too painful. In several countries, at least, Asians have allowed often corrupt or authoritarian governments to remain in place because economic growth has bettered their lives (or offered hopes of better lives). Take this away, and an already disgruntled populace could well turn to the streets to demand political reform. This scenario takes on a particularly ominous aura if the economic virus spreads to China.

This is not to suggest that IMF reforms, such as transparency, sound accounting practices, and the closure of the most reckless banks, are not admirable. But caps on growth rates and immediate repayment of outstanding debts could lead to unpleasant circumstances indeed. Stretch the IMF timetable to foster gradual reforms. If foreign investors have to wait a bit longer for their payoffs, so be it. After all, dollar and yen loans were made by supposed grownups-foreigners who bought into an Asian situation whose fundamentals have not really changed. Let's rebuild confidence in a part of the world that seemed nearly irresistible to investors not so long ago.