What caused the Asia crisis? That’s the big question, or ought to be, as the world’s economic rule makers converge on Washington this week for the spring meetings of the International Monetary Fund, World Bank, and industrialized nations’ Group of Seven. The future management of the world economy surely depends on some understanding of what made the Asian miracle implode so quickly.
While seeking another $18 billion from the United States and total resources of $285 billion to handle this and future crises, the IMF has been puzzling for months over the question of causes. In a speech last November [1997], IMF managing director Michel Camdessus wondered why what began as a local problem in Thailand last summer [1997] spilled into crisis for Malaysia, Indonesia, and South Korea–economies that had been growing at a famous clip until “contagion” sent their currencies into free fall. Mr. Camdessus noted that the currency slides in the Far East “acquired an almost self-perpetuating character” and asked “how could it happen?”
We suggest Mr. Camdessus consult the mirror on the wall. The IMF tripped this crisis by urging the Thais to devalue, then promoted contagion by urging everyone else to do likewise. Now Mr. Camdessus and Treasury secretary Robert Rubin want fresh billions to deal with the train wreck.
Recall the events that sent Asia reeling. By early last year [1997], Thailand was running into problems, borrowing abroad in dollars for projects at home that were not paying off. Clearly this put downward pressure on the baht, which was roughly tied to the dollar. But the Thais had a choice. They could curtail baht creation to defend the exchange rate, which would force a reckoning with the bad banks and finance companies. Or they could try to paper over the problem by devaluing.
The IMF began urging Bangkok to devalue the baht. In an interview last December [1997] with BusinessWeek, Mr. Camdessus recounted: “I visited Thailand four times from July 1996 to July 1997, for the exclusive purpose of telling them: `You are going to make a mess. You must get rid of this very dangerous peg to the dollar.'” Mr. Camdessus said the IMF gave the same advice to “Indonesia, Korea, and the Philippines.”
On 2 July [1997] Thailand cut loose the baht–which immediately began its downhill run. That day the IMF hailed Thailand’s “managed float,” saying “the IMF welcomes today’s important steps aimed at addressing Thailand’s present economic difficulties and adopting a comprehensive strategy to ensure macroeconomic adjustment and financial stability.”
What followed was anything but stable. To compete with Thailand, Malaysia devalued the ringgit. Indonesia–pressured by the IMF to devalue the rupiah–followed suit. In line with IMF prescription, the Philippines devalued. South Korea let slide the won. By late October [1997] what began as an IMF program for “stability” had turned into round after round of competitive devaluation. Taiwan had jumped into the act, needlessly debasing the Taiwan dollar. The Hong Kong and Singapore dollars had come under speculative attack. Brazil, linchpin of South American commerce, was fighting off attacks on the real. The world stared briefly at the possibility of a global currency crisis, in which competitive devaluations could jar normal business so far out of alignment that even relatively healthy economies might face collapse.
Fortunately, some of the most threatened economies stood fast. They let interest rates rise to whatever heights were necessary to persuade speculators it wasn’t worthwhile to bet against their currencies. Hong Kong and Singapore defended their dollars. Brazil stuck up for its real. Argentina, as in the 1995 crisis–when the IMF actually helped–stood by its currency board peg to the dollar. The threat of widespread monetary collapse ebbed.
Fund officials, and their backers at the U.S. Treasury, protest that the countries hard hit by devaluations had other problems that now need IMF help to fix. Asia by this account has been a welter of bad banking practices, reckless borrowing, poor governance, corruption, and speculative attacks by George Soros. There is some truth to all that, but none of it was exactly news and none of it was cause for what became Asia’s sudden pileup of damaged economies.
Corruption and presidential nepotism in Indonesia, for example, is a wretched problem but has been an unhappy part of the landscape for decades. The market knew about it years ago. The urgent question is why almost overnight Indonesia lost more than half its value–with the rupiah plunging to 15,000 to the dollar before rebounding to roughly 7,750, still less than half what it was before Mr. Camdessus got his wish for Asian devaluation.
Asia’s crisis has been primarily a currency crisis, not an explosion of economic fundamentals. Devaluations made it much harder to service foreign, dollar-denominated debt. That, in turn, caused lenders to run for the exits, fearing the last one out would be stuck with any defaults. And that stampede caused a series of genuine dislocations, which chopped value off what might otherwise be profitable ventures.
Even for countries like the United States, where Mr. Camdessus and his Treasury supporters–Secretary Rubin and Deputy Secretary Larry Summers–take a back seat to the Fed in charting monetary policy, this is no minor matter. Asia’s crisis has by the IMF’s own estimates lopped some 1 percent off global economic growth this year [1998], cutting it to 3.1 percent for 1998 from 4.1 percent in 1997. That’s trillions of dollars’ worth of wealth lost. The brunt falls not on rich lenders, or on the officials at the IMF and treasury departments, but on ordinary folks in places like South Korea and Indonesia–who have seen their jobs, savings, and hopes wiped out in one swift swat.
Debate on IMF funding is finally taking shape in Congress–where last fall [1997] what killed the bill was less a genuine understanding of the IMF’s mistakes than an unrelated abortion amendment. House majority leader Dick Armey, in a recent memo to his colleagues, focused on the moral hazard that has been growing with each new IMF bailout. Fund bailouts invite lenders to go on taking excessive risks–because the market expects the IMF will cushion the downside. This expectation leads naturally to fresh crises. Mr. Armey noted that the IMF, instead of acting as lender of last resort to basically sound enterprises, has begun “bailing out the bankrupt” and added, “I am far from convinced we should provide any new resources for the IMF.”
In a letter this week, former vice presidential contender Jack Kemp congratulates Mr. Armey on his stand and enlarges on the IMF’s currency problem. Writes Mr. Kemp: “By all indications, it was the IMF that nudged Southeast Asia over the cliff by enticing them to float their currencies last year [1997].” Adds Mr. Kemp, “The Mexican experience of four years ago should have taught us that these currencies do not float when they come under pressure. In Mexico, what the IMF anticipated would be a 10 percent devaluation turned into a 50 percent free fall of the peso.”
To the IMF, this issue seems to remain a source of mystery, requiring much study and much money in the IMF till, lest it happen again. Somehow, fund experts just don’t seem able to work out why their careful formulas for devaluation don’t work as planned. Folks who actually have to wrestle with the real world are starting to see the crux of the problem. For example, in a visit to this newspaper’s offices Monday, Brazilian finance minister Pedro Malan talked about the dangers of abrupt devaluation. He has fought to keep his country’s currency on a steady track because “nobody believes it is possible–especially with the current conditions–to have controlled devaluation.”
Well, nobody but Messrs. Camdessus, Rubin, and Summers. As long as the IMF prowls the central banks of the planet, fanning moral hazard and urging currency debasement, there will be plenty of self-made problems to employ the IMF. There’s a case for world markets needing a lender of last resort–one of the few roles that IMF officials say the fund actually does not aim to play. But putting more money into today’s IMF is not likely to solve any crisis. It is more likely to cause new ones.