Quarter 3, 1998

THE IMF UNDER FIRE

Jane Little's article "The IMF Under Fire" (Q2, 1998) strikes me as both informative and fair. The International Monetary Fund has eased the adverse effect of the Asian crisis with official financing to partially replace the private funds that suddenly dried up or moved out. Now its own financial resources are under enough pressure as to call into question its ability to furnish funding for future crises. Congress should pass the legislation to approve the increase in the U.S. quota in the Fund and the U.S. participation in the New Arrangements to Borrow (NAB). Neither can come into force without U.S. participation.

As this is written, there is growing evidence of further spread of market distrust to other countries, especially in Latin America. This could precipitate a more global economic downturn, including the United States. Such an outcome urgently needs to be forestalled.

For the longer term, the key is to try to engage the private sector in dealing with problems of international capital imbalance. Private investment in many (though not all) emerging countries has grown so massively that it has strongly outpaced the ability of public funds to replace it when it disappears; it is likely that this mismatch will grow for some time. Finding ways to bring the private sector into the task of countering and overcoming the adverse economic effects of discontinuities in the international flow of private investment is not merely desirable, it would seem to be a necessity.

William B. Dale
Former Deputy Managing Director
International Monetary Fund
Bethesda, MD

I found Jane Little's analysis to be remarkably well-balanced. In the midst of the Asian financial crises, it is sometimes forgotten that not only did the International Monetary Fund fail to appreciate some of the issues ahead of time, but so too did financial markets and economists. With rapid economic development, Asian countries were changing policies to suit the needs of a more advanced economy. Almost no observers recognized some of the consequences. Chief among these was that, with the liberalization of the capital account, monies could flow into and out of Asian countries much more rapidly than in earlier days. With greater convertibility of their currencies, any increase in domestic bank credit became a potential capital outflow. The (leaky) separation of domestic money from other monies that had earlier existed virtually ceased. In consequence, the International Monetary Fund had to respond with more alacrity and less preparatory time than it had in earlier crises. Moreover, it could not act without addressing domestic financial issues: to have lent without doing so would simply have enabled a greater capital outflow.

Jane Little is quite correct in noting that there are thorny issues to be addressed in sorting out the banking systems. The extent of nonperforming loans in their banking systems is a major difficulty confronting all the crisis countries. The existence of a significant fraction of nonperforming loans in a bank's portfolio means that the bank has higher costs than it would with stronger balance sheets. Banks are forced to roll over the principal, and increase credit to cover nonpaid interest, so long as the loans remain on their books. This means higher interest rates for "sound" borrowers, and it also diverts resources from potentially profitable new investments (with opportunities resulting, among other things, from the exchange rate adjustment) to propping up the banking system. Until the problems of nonperforming loans are addressed, the prospects are for continued recession.

Mexico acted with alacrity to remove the nonperforming loans from the banks' portfolios, and hence was able to recover rapidly. The first lesson for the Asian countries, and any others where similar problems arise, is that recovery cannot begin until banking problems are addressed. A second lesson is that, unless incentives for bankers to lend prudentially are enhanced, and supervision overhauled, the situation is likely to repeat in future years.

Anne O. Krueger
Professor
Stanford University
Stanford, CA

Ms. Little's article did nothing to restore my trust in the International Monetary Fund. It has deserved all the criticism it has gotten.

The International Monetary Fund has been a disaster in Indonesia, Russia, and Thailand where it has caused more harm than good. In effect, it is similar to our welfare system prior to the reforms set forth by Congress.

Handouts without responsibility or accountability don't, and won't, ever work. Arnaud DeBorchgrave's article in the August 17-23 issue of the Washington Times clearly shows where so-called Russian aid from the International Monetary Fund has gone. Unless and until the International Monetary Fund can audit on a quarterly basis where, when, and what every dollar was used for, it is folly to keep throwing good money down the sewer.

I agree that some very well-managed fund should be in place to help out in emergencies, such as our Federal Emergency Management Agency. But Congress should be as tight as an oil tanker in handing out money to any nation.

James A. Foley
Waltham, MA