This being the tenth-year anniversary of the Asian financial crisis, we are seeing a spate of retrospectives. The latest comes from Taka Ito, a highly respected Japanese economist. Ito comes down as hard on the IMF as a polite and diplomatic Japanese can allow himself. He leans towards the view that the Asian crises were essentially liquidity crises--requiring large infusions of external resources rather than extensive structural reforms. The IMF failed to provide the former, but had plenty of requirements of the latter kind. By contrast, Ito notes, the IMF condoned different approaches in post-Asian crisis cases--but those may have been precisely wrong as well:
The key element of the IMF programs for Russia, Brazil, Turkey, and Argentina,the fixed exchange rate (nominal or real), collapsed within several months after their respective first program in 1998 to 2001. Russia and Argentina fell into effective default on their external liabilities. An irony is that the IMF imposed tight fiscal policy and long lists of conditionality to countries [in East Asia] that probably did not need these conditions, while it allowed the post-Asian-crisis countries to continue a fixed exchange rate, which failed only a few months later.
The picture below shows the remarkable recovery in Asian growth rates after the crisis.
Didn't the IMF issue a mea culpa in the aftermath of the Asian crisis? Let me see if I can dig up some references.
Posted by: Nurhisham Hussein | May 28, 2007 at 10:47 AM
Isn't the post-crisis mean growth rate smaller than the pre-crisis mean growth rate in this graph ?
Posted by: gdaudin | May 28, 2007 at 01:12 PM
There's two ways of looking at that - (1) the crisis affected the growth path of the economies affected i.e. despite the crisis being largely financial, the 'real' economy was affected as well (there goes the recessions-are-good-for-you argument, at least for developing economies); and (2) the emergence of China as a manufacturing base diverted investment and production away from the crisis economies.
There's evidence for both factors at work here. See Cerra and Saxena (2003) IMF Working Paper 03/48 for the former.
Posted by: Nurhisham Hussein | May 28, 2007 at 06:55 PM
It has been clear time and time again that fixed exchange rate regimes require a significant commitment (financial and political) in the face of turbulence. This is usually not worth it unless it exists to prevent a significant pre-existing condition (high inflation) like in Brazil. But as time passes, the training wheels need to come off for any significant economy. A central bank needs to learn to manage the economy if the country wants to attract foreign capital.
As a counter-example, Venezuela will do fine with its fixed exchange rate exactly because of its draconian capital controls. But since it is an oil economy, this will not do much to curtail private investment, but will prevent any sudden-stop or liquidity crises. This is, of course, ignoring the "resource curse" effects there.
How many open economies of any significance can maintain such a rigid monetary system in the face of a crisis? At the very least, the choice of which currency to fixed your exchange rate to, or which monetary policy to "import", should be a careful consideration. Argentina did badly by ignoring Brazil's devaluation given their significant economic ties.
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I am not surprised that the program loan offerings of the IMF did not yield long term results, as Taka Ito claims.
For more that 25 years, our government is still tied with the loan conditions imposed; and I must say, most of these conditions do not anymore fit with the current economic situation.
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