The East Asian financial crisis that started in July 1997 turned out to be the most serious economic crisis since the 1930s. The famous economist Joseph Stiglitz in his book Globalization and Its Discontents argues that IMF policies imposed during this crisis worsened the situation contrary to the IMF mission “to deal with the liquidity crises created by the credit market’s occasional irrationality” (Stiglitz, 2002, p. 204). The study of IMF failure led Stiglitz to a complete rethinking of the IMF’s role, mission, agenda, and policies.
The Role of IMF Intervention in Worsening the Crisis
Stiglitz’s analysis of the crisis confirms that the IMF policies not only worsened the downturns, but partially triggered the crisis. According to him, the major cause of the crisis was excessively rapid liberalization of the financial system and capital market. It was exacerbated by some mistaken policies undertaken by the countries themselves.
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First, the author notices that the IMF did not conduct studying the regional economies, because East Asia demonstrated an increase in income and reductions in poverty over the last decades. When the crisis began, the IMF’s emphasis on the minimalist role of the government put more pressure on the Asian countries to liberalize their capital markets. However, the leaders of the countries considered liberalized capital markets as the source of economic instability in the region, because the liberalization deprived them of capital control and spurred the flow of the speculative money to the East Asian economies. Besides, they were not able to take all necessary actions to protect their economies and societies due to the conditions of the IMF policies under the threat of withdrawal of international capital from the region. These conditions included sustaining higher interest rates, cutback in governments spending, increases in taxes, and some political and economic changes that implied giving up their economic sovereignty. Thus, the IMF provided funds to support the exchange rate and enabled the countries to repay the loans to Western creditors. Moreover, when the IMF programs failed, the decrease in the exchange rate led to the outflow of capital. Rather than restoring confidence that was urgently required to provide an inflow of capital into the country, IMF charged the countries with failing to take reforms that exacerbated the problems. Therefore, Stiglitz concludes that “the IMF itself had become a part of the countries’ problem rather than part of the solution” (2002, p.97).
The author emphasizes the initial IMF mistakes – misdiagnosis of the problems that predetermined its first response to the crisis with a focus on dampening demand, while the problem in the East Asia region related to insufficient demand. In addition, the IMF’s pressure on governments to impose higher interest rates in the conditions of the deep indebtedness of local corporations created a new vulnerability.
Moreover, the author highlights the second round of IMF mistakes – focusing on the requirement for “restructuring” rather than providing liquidity to finance the needed expenditures that pushed the economies down further.
Finally, Joseph Stiglitz defines the most grievous IMF’s mistake – compromising social and political stability that was exacerbated by continuing the excessively contractionary policies.
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IMF’s Other Agenda
Stiglitz states that the IMF’s failures in achieving the stated objectives were not just accidental; they result from their understanding of the Fund mission. The major objective of the Fund is preventing the liquidity crises that are brought about by the credit market’s occasional irrationality. However, the IMF’s lack of a coherent and reasonably complete theory has led to policies that sharpen the problems the Fund was supposed to solve. For example, the IMF with its free market ideology justified its massive intervention by markets exhibiting excessive pessimism, but, in reality, it just facilitated pouring speculative money into and out of the countries that impaired the situation. In other words, the IMF kept the speculators in business. While the standard way of market economy work implies bearing all consequences of making bad loans by creditors, the lack of consistency in the IMF programs manifests clearly in providing funds for governments to bail out Western creditors. The analysis of the crisis allows Stiglitz to state that the IMF “wanted the private sector institutions to be “in” on any bailouts” (2002, p. 203). Moreover, before a bailout, the Fund required a wide participation of private creditors in it. It means implicitly handing IMF lending power over its policies to the organizations and individuals that provoked crises.
According to Stiglitz, such lack of coherence resulted from IMF pursuing the objectives other than supporting global stability declared in its original mandate, namely serving the interests of the global financial community. In other words, the IMF implicitly changed its mandate and objectives; it suggests having another agenda besides its stated agenda of enhancing global economic stability.
This IMF’s other agenda that was never officially declared is serving the interests of global financial community. The IMF pursues policies that are in the interests of creditors. Rather than contributing to the stability of global economy, capital market liberalization gives vast new markets for the Western financial sector. Understanding this non-articulated agenda is a key to the explanation of seemingly contradictory and intellectually incoherent IMF’s actions.