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NO. 17 — May 1, 1998

 

Feature Article

THE ASIAN CRISIS AND THE IMF: AFTER THE DELUGE, THE DEBATE by Eric Altbach

Summary

The International Monetary Fund has been the coordinator of the global response to the continuing financial instability that has plagued much of developing Asia since July 1997. The fund currently oversees financial rescue packages worth more than $100 billion in total for Thailand, Indonesia and South Korea. IMF officials have logged countless frequent-flier miles traveling back and forth to East Asia, drafting, negotiating and supervising implementation of the reform programs required for access to the multilateral financial organization's resources. The fund's staff of 2,200 arguably is busier, exerts more influence and comes under greater scrutiny than at virtually any other time in the agency's history. All this, however, has been accompanied by a firestorm of criticism from many different sources and perspectives.

In Tokyo and other Asian capitals, a debate about the scope and the character of IMF-imposed economic reform programs is raging. Japan even proposed creation of an alternative to the fund for Asia: the Asian Monetary Fund. The short-lived AMF initiative had appeal for many Asians who view the wide-ranging structural changes demanded by the IMF as nothing less than usurpation of national sovereignty. In the academic community, some economists have blasted the IMF for its slavish reliance on austerity, claiming that this approach may have the effect of turning short-term liquidity problems into full-blown depressions. Still other naysayers have questioned the advisability of the bailouts, arguing that socializing the risks of private loans and investments only encourages reckless behavior in financial markets. In the United States, which, as the IMF's largest stakeholder, has the most powerful voice in the lending institution, congressional critics have threatened to derail a White House-backed bill to appropriate an additional $18 billion for the IMF.

Does the debate mean that the IMF is doomed? Or, does the increasingly ambitious character of its reform packages indicate that the IMF is advancing to greater influence? Even Secretary of the Treasury Robert Rubin has speculated that a fundamental reexamination of the architecture of the international financial system may be needed. However, despite the harsh criticism and recent official discussions about the need for a new mechanism to monitor and stabilize international monetary affairs, the IMF is likely to be at the center of any such arrangement.

The IMF will survive the current controversy for another reason: it remains useful to the United States and other world powers by acting as an intermediary during politically sensitive negotiations with both debtor countries and international banks. By helping to depoliticize and multilateralize the international response to debt and currency crises, the IMF provides benefits for the United States and other key international economic players — even if the success of its broader economic reform programs remains the subject of heated debate. aaa

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Weekly Review

JAPAN'S FISCAL STIMULUS PLAN PLAYS TO MIXED REVIEWS by Jon Choy

Marshaling his political will, Prime Minister Ryutaro Hashimoto signed off April 24 on a record-setting series of fiscal, regulatory and other measures aimed at jolting the economy back to life and helping Asian neighbors overcome their economic problems. Mr. Hashimoto and the ruling Liberal Democratic Party crafted the ¥16 trillion-plus ($133.3 billion at ¥120=$1.00) package to silence a growing chorus of domestic and foreign voices calling for bold action. They may not have completely succeeded on this score. While there does seem to be agreement that the initiative will lift economic growth in FY 1998, the consensus is that the stimulus package does not promote long-term expansion because it omits major regulatory and structural reforms. Mr. Hashimoto may have bought himself and his party some breathing room before this summer's elections for the upper chamber of the Diet, but many observers fear that Japan — and the rest of Asia — may pay a higher price down the road for the program's shortfalls.

 

JAPAN'S TRADE SURPLUS SOARED OVER THE WINTER by Douglas Ostrom

The already huge gap between Japan's exports and its imports continues to balloon. In the three-month period that ended March 31, the customs-clearance trade statistics registered a surplus of ¥2.9 trillion ($24.2 billion at ¥120=$1.00), fully double the year-earlier figure of ¥1.5 trillion ($12.1 billion). Japan finished FY 1997 with a surplus of ¥11.4 trillion ($95 billion), up a whopping 79.7 percent from FY 1996's result but far from a record. Both the overall surplus and the imbalances with individual East Asian trading partners are likely to undermine Tokyo's argument that Japan is carrying its weight in helping to resolve the economic turmoil in the region. Although Japan's surplus with Asian nations as a group declined 21 percent to ¥920 billion ($7.7 billion) in the January-March quarter compared with a year earlier, the composition of that change may not satisfy either East Asian capitals or Washington.

 

PARTIES TANGLE OVER POLITICAL ETHICS BUT CRACK DOWN ON BUREAUCRATS by Barbara Wanner

The ruling Liberal Democratic Party and its two parliamentary allies, the Social Democratic Party of Japan and the New Sakigake Party, seemed to have few problems agreeing April 14 on a draft bill that would ban central government employees from accepting gifts, entertainment or other favors from the companies they regulate. When the discussion turned to complementary legislation that would impose similar prohibitions on Diet members and locally elected officials, however, the LDP and its legislative partners did not see eye-to-eye. Triparty negotiations broke down April 20 on a new political ethics law that would prohibit politicians from receiving cash or favors directly in exchange for helping companies gain regulatory approvals or win government contracts.

 

AID FOR ASIA INCLUDED IN STIMULUS PLAN by Eric Altbach

P In addition to its domestic pump-priming components, Japan's latest — and largest — fiscal stimulus package contains steps to assist neighbors struggling to recover from the Asian economic crisis. Government insiders value the initiatives at an eye-popping ¥700 billion ($5.8 billion at ¥120=$1.00). They include programs providing trade financing, encouraging new Japanese investment in the region and supporting economic restructuring. Tokyo also pledged humanitarian, medical and food aid, including 600,000 metric tons of rice for Indonesia (see Notes). How much of the aid plan's reported ¥700 billion ($5.8 billion) price tag represents new help versus repackaged commitments remains unclear, though.

 

NOTES:

Japan's decision to send 600,000 metric tons of rice to Indonesia — announced in conjunction with the April 24 economic stimulus package — responds to a major humanitarian need. The United Nations World Food Program recently estimated that Indonesia will be short roughly 3.5 million metric tons of rice over the April 1998-March 1999 period due to El Nino-caused drought problems. Unquestionably, though, helping its struggling Asian neighbor also benefits Japan. Although the Food Agency, part of the Ministry of Agriculture, Forestry and Fisheries, will buy 100,000 metric tons of rice on the world market, it plans to ship to Indonesia 500,000 metric tons from the government's rice stocks. That volume will make a big dent in Japan's costly overhang of surplus rice.

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