But could the disruption, which at one point threatened to drag the western financial markets down, have been avoided? The search for a scapegoat has rapidly led to the International Monetary Fund (IMF), which was mainly behind the rescue packages and stabilisation measures.
The US government is the biggest shareholder in the IMF, with some 18 per cent of equity and voting power, and its Congress is using a request for extra IMF funding as an excuse for a wholesale re-examination of its role. The three wise men of American politics and economics, former secretary of state George Shultz, former treasury secretary William Simon and the veteran banker Walter Wriston, have gone so far as to suggest that in the world of globalised capital markets the IMF has no relevance. In their view the loans it has made to stabilise the economies of the Asia-Pacific region are simply a means of bailing out poorly run corporations and their lenders, which should be expected to pay the price for their foolish expansion policies. Even the IMF's sister organisation, the World Bank, has been critical of the IMF with its chief economist Joseph Stiglitz suggesting that the severity of the austerity programmes imposed on some east Asian economies, notably Thailand, may have worsened the problem.
Given the mounting criticism, reform of the international financial institutions is now seen as inevitable. At a series of official meetings in the coming months, culminating in the Birmingham heads of government summit chaired by UK prime minister Tony Blair in May, there will be a concerted effort to restore confidence in the IMF by reforming its processes and providing it and the World Bank with new tools. There is a fierce determination among financial officials, most notably those in the US and UK, to ensure the perceived mistakes made in dealing with the events in Asia are not repeated.
Much of the initial focus will be on prevention. The IMF and the World Bank have been widely criticised for not seeing the problem on the horizon. In fact they did see the problem but could not find an effective way of conveying it to the leadership in the countries concerned, or a broader financial audience. In Thailand, Indonesia and Malaysia the IMF recognised that the fixed exchange rate systems were not sustainable and passed this message on to the governments directly. But its warnings went unheeded largely because of the closed nature of the societies and the unwillingness of the IMF to go public and risk being dragged into the political debate.
One of the reforms the Fund will be seeking is the right to publicise its concerns about particular economies. This will mean more transparency and will put greater disclosure requirements on national economic managers, who will be expected to provide better data on their country's financial position. In Korea it was discovered that much of the nation's foreign currency reserves had been committed as collateral against loans to private sector enterprises -- meaning in effect that they were a mirage. By establishing a code of good practice, which requires IMF members to disclose fully all the financial information available, including forward positions in the foreign exchange markets, the IMF and the financial and corporate sectors as a whole will have a better opportunity to monitor a deterioration in a country's financial position.
However, this would require the shareholders to endorse an extension of the IMF's role to cover capital markets.
Another problem is that neither the IMF nor the World Bank have a body of expertise in private banking. Given that many of the problems in Asian and other emerging markets stem from banking systems which are at best carelessly run and at worst corrupt, these institutions must have the ability to force reforms in both a country's credit system and its macroeconomy. This means recruiting private sector banking experts.
One of the particular problems seen in the Asian crisis - and the Mexican problem in l994-5 - is the tendency of global banks to panic during a crisis and withdraw short-term lending at the first rollover date. This exacerbates the problem by adding credit difficulties to immediate cash problems. One way of combatting this, proposed by the financier George Soros, is a new credit guarantee agency which would provide guarantees to private-sector lenders. These powers already exist at the World Bank, but have only been used in limited circumstances. Financial leaders are expected to examine how they can be deployed more effectively during a crisis to ensure that bank loans to feasible projects are cushioned from economic shocks.
The IMF and World Bank now accept that some reform is necessary in view of the mistakes made during the recent crisis. In Thailand there was too much austerity; in Indonesia attempts to reform the banking system before a stabilisation package had been agreed increased the pressure on the economy; in Korea shrinking the budget deficit had no relevance to reducing private sector debt.
As the rescues have unfolded there has been far more adjustment than has traditionally been the case. The goal will now be to build greater flexibility into the Fund's operations, increase the level of transparency, and provide adequate funding to meet future Asian-style catastrophes.
Alex Brummer
Source: Airline Business