A CRITICAL ANALYSIS OF THE IMF: CASE STUDY OF THE Kai-Yang Fan

A CRITICAL ANALYSIS OF THE IMF:
CASE STUDY OF THE
ASIAN FINANCIAL CRISIS
Kai-Yang Fan
Wanda Montero
Arisha Waas
William Yuan
Objectives



Introduction to IMF
Case Studies
 Thailand
 South Korea
 Philippines
 Indonesia
 Malaysia
Conclusion
Introduction to IMF


Established on Dec 27, 1945 as one of the two
Bretton Woods System
Original goal was to eliminate exchange rate
restrictions and promote economic stability
Introduction to IMF cont’d



Decades after WW II, the world experienced
tremendous growth in real incomes
The role of IMF has thus evolved to suit the
changes
“promote international monetary cooperation,
exchange stability, and orderly exchange
arrangements; to foster economic growth and
high levels of employment; and to provide
temporary financial assistance to countries to
help ease balance of payments adjustment”
Asian Financial Crisis

Started on July 2, 1997 with the devaluation of
the Thai baht

Affected Asian countries, especially South Korea,
the Philippines, Indonesia, and Malaysia

There was a collapse in currency values after a
period of turmoil in foreign exchange markets
Devaluation during the Crisis
Role of IMF

Very controversial, causing the locals to call the
crisis “the IMF crisis”

Criticized for encouraging the developing
economies of Asia down the path of "fast track
capitalism"

Offered to step in the case of each nation and
offer it a multi-billion dollar "rescue package" to
enable these nations to avoid default
IMF vs. Financial Crisis in
Thailand
Introduction: Financial Crisis in Thailand
 IMF Support and Conditions
 Critiques
 What went wrong?

Introduction: Thailand’s
Financial Crisis
Two sources of vulnerability coexisted:
1.
Exchange rate
Banks borrowed in foreign exchange and lent in local
currencies
=> exposure to losses in the event of a depreciation
2.
Mismatch of Maturities
Banks borrowed in short-term maturities and lent with
longer payback periods
=> exposure to the risk of a run (creditor’s refusal to
roll over loans)
IMF Support and Conditions





Float of the currency
Medium-term loans in the amount of 17.2 billion US$ to
shore up the foreign reserve position, and maintain gross
international reserves of $23 billion in 1997, and $24 ½
billion in 1998.
Spending Cut
Increase in the VAT rate from 7-10%, effective August 16,
1997, expecting to yield nearly 1 ¼ percent of GDP in
additional revenues on a full-year basis.
Banking system reform
Critiques
"These countries didn't get into trouble because of
profligate monetary policy, The IMF probably
made the problems worse."
Alan Blinder
Some important imbalances in fact existed but they would have
required a more modest adjustment…
“The punishment was much larger than the crime”.
Largely consensual
Panic in the financial sector partially explained and definitely
amplified by institutional weaknesses and bad (incoherent)
policies, including non-domestic ones (IMF, lack of accurate
international surveillance)
What went wrong?

Why demand balanced budgets from countries that are
already in recession due to lack of demand?
Thailand after IMF intervention ended with insufficient
demand, high interest rates, when the need was of increase
in investments, in education and/or infrastructure, both
essential to economic growth. The lack of demand worsened
the recession deepening the economic slowdown.

What about rising interest rate?
Thailand firms at that time presented high levels of
indebtedness, thus imposing a high interest rates helped to
the collapse of many firms.
IMF vs. Financial Crisis in Korea
Introduction: Financial Crisis in Korea
 IMF Support and Conditions
 Critiques

Introduction: Financial Crisis in
Korea
Huge bad debts
 Sharp Korean won depreciation
 Financial structure

IMF Support and Conditions
Korea received $21 billion loan from IMF
 Conditions of IMF Stand-By Arrangement

 Tighten
Monetary and Fiscal Policies
 Cancel trade barrier
 Reform the bank system
Critiques

Jeffery Sachs’ criticism
 “There
is no fundamental reason for Asian’s
financial calamity except financial panic itself.”

IMF has double standards of the policies.
 Local
banks and international banks are in the
different criterion
IMF vs. Financial Crisis in the
Philippines
Philippine's Economic Conditions
 IMF Support and Conditions
 Critiques
 Philippines’ Strategy

Philippine's Economic
Conditions 1

High inflation and overinvestment
Philippine's Economic
Conditions 2

Prolonged use of IMF Funds
IMF Support and Conditions
EFF 1997 $699 million and SBA 1998
$1371 million
 Fiscal Policy: 25% mandatory reserve,
temporary suspension of 14.4 billion peso
of new programs and projects, tax reform
 Monetary & Exchange rate policy:
increase foreign reserve to $920 million,
adjust interest rate to contain inflation

Critiques
IMF policies were contractionary in nature
 Philippines deviated from the IMF goal,
sought more aggressive reform

Philippines’ Strategy

Focused on regional trade and business
process outsourcing
IMF vs. Financial Crisis in
Indonesia
Introduction: Financial Crisis in Indonesia
 IMF Support and Conditions
 Critiques

Introduction: Indonesia’s
Financial Crisis

Large amount of short-term foreign debt
owed by the private corporate sector

Attack on the Indonesian rupiah
Role of IMF

Financial support of up to about US$10
billion, equivalent to 490% of Indonesia’s
quota, over the next 3 years

Initial programs:
 Financial sector restructuring
 Structural reforms
 Fiscal measures
Critiques

Forced government of Indonesia to
guarantee private debts owed to foreign
creditors

Severe fiscal austerity caused millions of
Indonesians lost their job
IMF vs. Financial Crisis in
Malaysia
Introduction: Financial Crisis in Malaysia
 How Malaysia Overcome the Crisis
 Result

Introduction: Malaysia’s
Financial Crisis

Attack of the Malaysian ringgit

Sell off on the stock and currency markets
How Malaysia Overcome the
Crisis

Moved the ringgit from a free float to a
fixed exchange rate regime

Imposed capital control

Formed various agencies
Result

Growth at a slower but more sustainable
pace

In 2005 - US$14.06 billion surplus

Without IMF, Malaysia suffered less
severe economic problems
Conclusion




The financial crisis in Asia was not a
consequence of economic downturn
Martin Wolf:
 “Partial integration into a world financial
system unable to evaluate risk either
intelligently or consistently."
IMF should not be given so much power
IMF should build the confidence in the country
`