|From FINANCE AND
DEVELOPMENT June 1998, Volume 35, Number 2
The Asian Crisis and the Changing Role of the IMF
Since it began operations in 1946, the IMF has steadily evolved in response to
changes in the world economy. What steps is it taking to meet the new challenges posed by
the Asian crisis?
THE ASIAN CRISIS has focused unprecedented attention on the IMF. While the ensuing
debate is a healthy part of the process by which the institution is held accountable, the
spotlight on the IMF has also revealed a number of misconceptions about its evolving role
in the international monetary system. In particular, it is often stated that the IMF was
established to manage the system of fixed exchange rates set up at the end of World War
II, and that since the breakdown of that system in 1973, the institution has been
searching for a rationale.
It is true, of course, that the IMF has evolved and adapted since it began operating in
1946. Nonetheless, its current activities are closely consistent with its initial
purposestestimony to the foresight of the founders of the international economic
system set up after World War II, a system that has helped produce more growth and more
prosperity for more people than in any previous fifty-year period (see box).
Purposes of the IMF
|The goal of
the representatives of the 44 countries who met at the United Nations Monetary and
Financial Conferencein Bretton Woods, New Hampshire in 1944 was to rebuild the
international economic system, whose collapse had contributed to the Great Depression and
the outbreak of war. To this end they proposed setting up the International Monetary Fund,
the World Bank, and what much later became the World Trade Organization.
primary purposes of the IMF, set out in Article I of its Articles of Agreement, have
remained essentially unchanged over the past fifty years:
- To promote international monetary cooperation through a permanent institution which
provides the machinery for consultation and collaboration on international monetary
- To facilitate the expansion and balanced growth of international trade, and to
contribute thereby to the promotion and maintenance of high levels of employment and real
- To promote exchange stability, to maintain orderly exchange arrangements among members,
and to avoid competitive exchange depreciation.
- To assist in the establishment of a multilateral system of payments in respect of
current transactions...and in the elimination of foreign exchange restrictions which
hamper the growth of world trade.
- To give confidence to members by making the general resources of the Fund temporarily
available to them under adequate safeguards, thus providing them with the opportunity to
correct maladjustments in their balance of payments without resorting to measures
destructive of national or international prosperity.
- In accordance with the above, to shorten the duration and lessen the degree of
disequilibrium in the international balances of payments of members.
The IMF, with its 182 member countries, is the premier forum for international economic
cooperation and consultation. Issues relating to the organization and functioning of the
international system are generally discussed and, when decisions are needed, decided on in
the IMFby the Executive Board, the Interim Committee of the IMF's Board of
Governors, and by the Board of Governors.
Almost every major international economic issue or problem of recent years has been
discussed in the IMF and usually acted upon (often together with other institutions,
especially our Bretton Woods nonidentical twin, the World Bank): the Mexican and Asian
crises; technical and financial assistance to the economies in transition, including
Russia; the debt problems of the poorest countries (in close cooperation with the World
Bank); the attempt to improve international banking standards; economic assistance to
countries emerging from chaos in the aftermath of wars and natural disasters; the ongoing
effort, initiated following the Mexican crisis, to improve the quality and public
provision of data; the unfortunately long-running problems of the Japanese economy this
decade; the activities of hedge funds and their role in the Asian crisis. The list goes on
and will go on.
Much of what the IMF does consists of surveillancereporting by the staff
to the Executive Board and, through it, to member governments on developments and problems
in the international economy and in individual economies. The staff's surveillance of the
international economy is published, after discussion by the Board, in the semiannual World
Economic Outlook and in the annual International Capital Markets report. In
addition, the staff reports regularly to the Board on world economic and market
developments, and provides briefings on the international economy for meetings of the
Group of Seven industrial countries (the G-7), and other "Gs" and organizations.
About once a year, the IMF staff prepares an Article IV report for each country,
an in-depth analysis of the country's economic policies and performance. In its discussion
of the report the Board conveys its viewsencouraging or criticalto the
policymakers of the country. Through this process, policymakers encourage their colleagues
in other countries to improve policies.
Although Article IV reports are not published, so as to preserve the frankness of
discussions, since 1997, with a country's consent, the summing-ups of the Board's
discussions of the report have been released to the public. So far, press information
notices (PINs) containing the summing-up and other economic information have been
published for about half the Article IV discussions held since the decision was taken to
release PINs, and these are available on the IMF's web site. In addition, countries may
publish the concluding statement of the Article IV mission, in which the IMF team that
visited the country summarizes its views, generally foreshadowing the conclusions of the
staff report to the Executive Board. Gradually, an increasing proportion of the IMF's
membership is moving to make public the conclusions of their Article IV consultations.
In recent years, especially in the wake of the Mexican crisis, the IMF has strengthened
and broadened its surveillance, paying particular attention to, among other factors, the
quality and timeliness of the data it receives from member countries, the strength of
their domestic financial systems, and the sustainability of private capital inflows. By
providing warnings of impending problems, IMF surveillance should help prevent crises.
When a crisis is averted, surveillance has succeeded and is unlikely to be
noticedand there have been many cases in which IMF warnings were given and action
was taken that averted a crisis. But surveillance may fail, either because warnings are
given and not heeded or because a problem is not anticipated.
Promoting international trade
The IMF promotes international trade directly by encouraging trade
liberalization, through both surveillance and its lending programs with member countries.
It has always done so, and the purposes of the IMF require it to continue to do so. It is
therefore a surprise that the Asian programs we support are criticized for requiring
borrowers to take specific trade liberalization measures. Although trade liberalization
was at one time controversial, and import-substituting industrialization a popular
prescription, the weight of experience, as well as more formal econometric evidence, have
conclusively established the benefits of trade liberalization and integration into the
Even more important, the IMF promotes international trade indirectly by
encouraging countries to liberalize foreign exchange controls on trade in goods and
services ("the establishment of a system of multilateral payments in respect of
current transactions"). These controls were pervasive at the end of World War II, but
by now 144 member countries have accepted Article VIII status with the IMF, which
certifies that they allow full convertibility of their currency for current account
The fixed exchange rate system set up at the end of World War II lasted until 1973, and
was a means of promoting exchange rate stability, not an end in itself. Once it lost its
viabilitya result of the incompatibility of fixed exchange rates, capital mobility,
and policies focused on domestic objectivesthere was no choice but to move to a more
The concern over competitive devaluations reflected in the IMF's charter and the
systemwide implications of changes in exchange rates continue to motivate IMF policy
recommendations. A major IMF concern in the Asian crisis has been that Asian countries'
currencies would become so undervalued and their current account surpluses so large as to
damage the economies of other countries, developing countries included. This is one reason
the IMF has stressed the need first to stabilize and then to strengthen exchange rates in
the Asian countries during the crisisand, for this purpose, has urged them not to
cut interest rates until their currencies stabilize and begin to appreciate.
Despite its other activitiessurveillance, information provision, and technical
assistancethe IMF is best known for its lending. The IMF operates much like a credit
union, with member countries placing deposits in the IMF, which are then available for
lending to any member who needs to borrow and meets the necessary conditions.
Why are IMF-supported programs so often unpopular? The main reason is that the IMF is
typically called in only in a crisis, which is often a result of the government's having
been unwilling to take action earlier. If the medicine needed to cure its economic illness
had been sweet, the country would have taken it long ago. Rather, the medicine will
usually be unpleasant, in essence requiring the country either to live within its means or
undertake changes with short-term political costs. The government probably knows what has
to be done, but rather than take responsibility, finds it convenient to blame the IMF when
it has to act. Similarly, when structural changes have to be made, the losses are often
immediate and the gains some way off. Despite all this, there are countries where the
IMF's support is welcomed, among them the transition economies that have seen
hyperinflation defeated and growth begin during IMF-supported programs.
The secrecy that until recently has often attended IMF-supported programs may also have
contributed to their unpopularity. A public that knows neither what is being done nor why
is less likely to support measures that are difficult in the short run but that promise
longer-run benefits. In the recent Indonesian, Korean, and Thai programs, the governments'
Letters of Intenttheir letters to the IMF's management describing their
programshave been published and also made available on the IMF web site.
Response to the Asian crisis
Before the Asian crisis broke, the IMF had warned Thailand of potential problems, but
the government took no action. The IMF's staff also warned governments about financial
sector weaknesses in several of the countries that were subsequently badly hit in the
crisis. But the IMF failed to foresee the virulence of the contagion effects produced by
the widening crisis. Some of this contagion reflected rational market behavior. The
depreciation of the Thai baht could have been expected to erode the competititiveness of
Thailand's trading partners, and this, in turn, put some downward pressure on their
currencies. Moreover, after problems surfaced in Thailand, markets began to take a closer
look at the problems in Indonesia, Korea, and other neighboring countries. What they saw,
to different degrees in different countries, were some of the same problems Thailand
faced, particularly in the financial sector. Also, as currencies continued to slide, the
debt-service costs of these countries' private sectors increased. Consequently, residents
hastened to hedge their external liabilities, intensifying exchange rate pressures. But
markets overreacted and the extent of the exchange rate adjustment exceeded any reasonable
estimate of what might have been required to correct the initial overvaluations of the
Hence, in many respects, Indonesia, Korea, and Thailand faced similar problems. They
all suffered a loss of foreign investors' confidence in their economies and a deep
depreciation of their currencies. In each country, weak financial systems, excessive
unhedged foreign borrowing by the domestic private sector, and a lack of transparency
about the ties among government, business, and banks all contributed to the crisis and
complicated efforts to defuse it.
But their situations also differed. Thailand was running an exceptionally large current
account deficit amounting to 8 percent of GDP; Korea's was worsening; and Indonesia's was
already at a more manageable level. Also, the three countries called in the IMF at
different stages of their crises, with Korea coming the closest to catastrophe before it
forcefully implemented its IMF-supported program.
The designs of the IMF-supported programs in these countries reflect these similarities
and differences. All three programs called for a substantial rise in interest rates in an
attempt to halt the downward spiral of currency depreciation. They also advocated forceful
action to put the financial system on a sounder footing as soon as possible, strengthening
financial sector regulation and supervision, increasing transparency, and opening Asian
markets to foreign participants.
In drawing the lessons of this crisis, the IMF will have to seek both to make its
warnings more effective and to improve the quality of its economic forecasts, particularly
of crises. Many have suggested that crises could be prevented, or at least mitigated, if
the IMF went public with its fears. Two factors make this suggestion difficult to carry
out. First, the IMF's access to information and its ability to act as a confidential
advisor to governments would be lost if it made confidential information public. Second,
the IMF could, by going public, create a crisis that otherwise would not have
happeneda responsibility not lightly to be assumed. Moreover, there should be no
illusion that forecasting of this type can ever be perfect and that all potential crises
can be avoided. Some impending crises will be missed. For this reason, and because in any
case not all warnings are heeded, we shall have to continue to improve our capacity to
deal with crises even as we strive to improve surveillance to prevent them.
Evolution of the IMF
While the purposes of the IMF have not changed, it has over the years been called upon
to advise and assist an ever-wider array of countries facing an ever-greater diversity of
problems and circumstancesnot only industrial economies with temporary balance of
payments difficulties, but also low-income developing countries with protracted balance of
payments problems, transition countries struggling to establish the institutional
infrastructures of full-fledged market economies, and emerging market countries seeking to
secure the private capital inflows needed to maintain high rates of economic and human
Of course, the IMF has maintained its primary focus on sound money, prudent fiscal
policies, and open markets as preconditions for macroeconomic stability and growth. But,
increasingly, the scope of its policy concerns has broadened to include other elements
that also contribute to economic stability and growth. Thus, to different degrees in
different countries, the IMF is also pressing, generally together with the World Bank, for
sound domestic financial systems; for improvements in the quality of public expenditure,
so that spending on primary health care and education is not squeezed out by costly
military buildups and large infrastructure projects that benefit the few at the expense of
many; for increased transparency and accountability in government and corporate affairs to
avoid costly policy mistakes and the waste of national resources; for adequate and
affordable social safety nets to cushion the impact of economic adjustment and reform on
the most vulnerable members of society; and, in some countries, for deregulation and
demonopolization to create a more level playing field for private sector activity.
This broadening of the scope of IMF policy concerns has met with mixed reactions. Some
applaud the IMF for tackling the structural problems and governance issues that, in many
countries, stand in the way of macroeconomic stability and sustained growth. But others
roundly criticize the IMF, either for intruding too far in what they see as the domestic
affairs of sovereign nations or for failing to go far enough.
Finally, the diversity of its member countries and of the problems they face has led
the IMF to establish a wider array of facilities and policies through which it can provide
financial support to members. In addition to the traditional stand-by arrangement that
usually lasts 1218 months and is designed to help finance temporary or cyclical
balance of payments deficits, the Extended Fund Facility (EFF) supports three- to
four-year programs aimed at overcoming more deep-seated macroeconomic and structural
problems. The Enhanced Structural Adjustment Facility (ESAF) also finances longer-term
programs, but with extended repayment periods and at a concessional interest rate for
low-income countries. At various times in the IMF's history, new facilities have been
established to address particular problems. The most recent of these is the Supplemental
Reserve Facility (SRF), which was created in December 1997 to assist emerging market
economies facing crises of confidence while providing strong incentives for them to return
to market financing as soon as possible: it allows the IMF to make large short-term loans
at higher rates than it normally charges. The first borrower under the SRF was Korea.
What is the net effect of all these changes? Certainly, the IMF has not been completely
transformed. One important feature that remains the same is the emphasis on sound policies
at the national level and effective monetary cooperation at the international level. The
corollary of this is that the IMF is not just a source of financing or a mechanism for
crisis management, as is commonly believed, but mostly, in its daily business, a
cooperative institution for multilateral surveillance. It must also be acknowledged,
however, that from its relatively simple origins, the IMF has evolved into a complex
institution with complex tasks to fulfill. So even if the IMF continues to look at all its
member countries through the same prismthe requirements for economic stability and
growthit has to deal in a differentiated way with the full spectrum of problems and
possibilities in 182 distinctive member countries. The increased complexity of the IMF
reflects the diversity and complexity of the international economy.
There is surely much to be said for an organization that, while sticking to its basic
objectives, has shown the flexibility to adaptin terms of its approaches to
problems, and the instruments and procedures it employsto an ever-changing global
environment and thus to continue to serve the needs of its members. In the years to come,
the IMF will have to continue to adapt to new problems and to react to criticisms as new
challenges confront the world economy.
This article draws on a speech, "The IMF and the Asian
Crisis," delivered by the author at the Forum Funds lecture at the University of
California at Los Angeles on March 20, 1998. The author is grateful to Mary Elizabeth
Hansen for assistance in preparing the article.
|Stanley Fischer is First Deputy
Managing Director of the International Monetary Fund.