Economic Report President

eyond its competence. The IMF’s approach to crisis management hasalways evolved over time in response to the changing problems facedby the world economy. For example, after 1973 the IMF turned itsattention from the balance of payments problems of the industrialcountries, which by then had abandoned fixed exchange rates, to theproblems of developing countries, many of which were newly independent.Similarly, it adopted new approaches in response to the internationaldebt crisis of the 1980s and adapted its policies to aid the transitionof the former Soviet bloc countries to market economies after1990. It is appropriate and desirable that an international agencyadapt and evolve in response to developments in the world economicsystem.The Prescription of Tight Monetary PoliciesA second criticism relates to the IMF’s monetary policy conditions, inparticular its insistence on high interest rates to limit currency depreciation.Critics contend that high interest rates stifle growth and leadto the bankruptcy of otherwise viable firms. The logic of the IMF’s highinterest rate strategy was to contain the extent of currency depreciation.Like high interest rates, a plummeting currency in countrieswith large net external liabilities also stifles growth, by increasing thedebt burden of banks and other firms whose debts are denominated inforeign currencies. The result is financial distress, bankruptcy, andeconomic contraction. Arguably, the failure of Malaysia and Indonesiato raise interest rates sufficiently following the run on the Thai bahtmay have been responsible for the destabilizing depreciations of theircurrencies that followed. Moreover, the surge in Indonesia’s inflationrate reminds us that a loose monetary policy can rapidly igniteinflation expectations.Restrictive Fiscal PoliciesA third criticism is that the fiscal policy requirements in the IMFplans were unnecessarily strict. At the onset of the crisis, the Asiancountries under attack were running small budget deficits or even fiscalsurpluses and had achieved relatively low ratios of public debt toGDP. A loosening of fiscal policies as soon as the crisis broke wouldmost likely have raised doubts about policymakers’ commitment toreduce outstanding current account imbalances, jeopardizing the credibilityof their plans. Also, even though fiscal deficits and public debtwere typically low before the crisis, the crisis itself changed that picture:the projected fiscal costs of financial bailouts in several Asiancountries were estimated in the range of 20 to 30 percent of GDP.Extra public liabilities of this magnitude translates into a permanentincrease in the domestic interest bill paid by Asian governments of 2 to4 percent of GDP per year. The IMF’s fiscal plans, which were negotiatedon a country-by-country basis, were targeted to raise the neces-247