It seems like such a long time ago. But it has been just four years since financial crises struck Asia, threatening to send the global economic system into a tailspin.
By Deepak Gopinath
October 2001
Institutional Investor Magazine
It seems like such a long time ago. But it has been just four years since financial crises struck Asia, threatening to send the global economic system into a tailspin. The International Monetary Fund responded with a series of bailouts, in Thailand, Korea, Indonesia, Russia and Brazil - one spectacular failure after another.
That, anyway, is the conclusion of Paul Blustein, a veteran economics reporter at The Washington Post and the author of The Chastening: Inside the Crisis That Rocked the Global Financial System and Humbled the IMF. Blustein argues that intervention by the IMF and its masters in Washington and other Group of Seven capitals was often misguided and ineffective. “The guardians of global financial stability were often scrambling, floundering, improvising, and striking messy compromises,” Blustein writes. “The crisis of the late 1990s exposed how woefully ill-equipped the IMF is to combat the new strain of investor panics plaguing recently liberalized markets.”
That’s hardly an original observation. But Blustein does provide a fascinating insider’s account of how and why policymakers made the decisions they did. Drawing on the cooperation of many of the key players, Blustein takes the reader to secret airport meetings and listens in on late-night telephone calls.
In one chapter Blustein describes how Clinton reached Robert Rubin, then U.S. Treasury secretary, on an Alaska fishing jaunt during the height of the Russian crisis in late August 1998. Rubin asked the president to call him back in a few minutes - he had just caught a salmon. Stanley Fischer, then the fund’s No. 2 official, was forced to cut short a vacation on Mykonos because of the deteriorating situation in Russia; he spent much of the flight back to Washington under a blanket, so fellow passengers couldn’t overhear his telephone calls.
As Blustein reports, Lawrence Summers, Rubin’s deputy, confronted his Japanese counterpart, Eisuke Sakakibara, over the latter’s proposal to create an Asian Monetary Fund that would dilute the IMF’s, and the U.S.'s, influence. An irritated Summers called Sakakibara at his home on a Saturday night. “I thought you were my friend,” Summers fumed.
The author concludes that the IMF failed to understand that developing countries were suffering from a new kind of crisis, precipitated not by weak economic fundamentals - the conventional IMF view - but by sudden changes in investor sentiment accompanied by volatile shifts in capital flows. In retrospect it is clear that traditional IMF austerity only intensified the deterioration of developing countries. Bailouts designed to support borrower currencies and to stop capital flight ended in devaluation and economic ruin.
In Thailand, which triggered the crisis in mid-1997, Rubin and Summers insisted that the country publicly reveal the level of its reserves, which had sunk precariously low. That move fatally undermined market confidence in that country’s bailout.
In Indonesia the IMF reforms were meant to attack the corruption and cronyism of president Suharto’s regime - a move that reflected Rubin’s belief that political reform was necessary for lasting economic gain. But the policy contributed to Suharto’s ouster and plunged the country into political uncertainty. Meanwhile, the IMF did little to address Indonesia’s biggest problem - an unsustainable corporate debt burden.
Blustein agrees with those who argue that IMF bailouts often create moral hazard: Investors confident that they will be rescued take bigger risks than they might otherwise. “We may have the worst of both worlds,” Blustein writes. “On the one hand, the rescues often fail to achieve the desired aims of halting the withdrawal of capital, and helping countries regain their footing. On the other hand, the fact that mega-bailouts have become such an accepted part of the global financial landscape engenders moral hazard . . . setting the stage for future crises.”
How to even begin to solve the problem? Blustein advocates taxes on short-term capital flows and, more important, “bailing-in” private creditors to encourage them to restructure emerging-markets debt. With so much of the global economy either in a recession or heading in that direction, the need for such reforms is as pressing as it’s ever been.
These are reasonable judgments, cogently presented. But the book would have been stronger if Blustein had taken a stand on some of the more controversial issues facing the IMF. For example, he illustrates the U.S. dominance over the IMF, but Blustein doesn’t consider whether the IMF’s governance structure needs to be changed. Do the IMF’s policies impoverish developing countries, as antiglobalization advocates have charged? If Blustein has an answer to that question, he’s keeping it to himself.
Deepak Gopinath is a Senior Writer with Institutional Investor.
