[asia-apec 512] Re: Globalization Springs Leaks -- London Guardian

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From: aeckes <eckes at oak.cats.ohiou.edu> (by way of Mark Ritchie <mritchie at iatp.org>)
Subject: Globalization Springs Leaks -- London Guardian
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                                         Document 1 of 12.


                              Copyright 1998 Guardian Newspapers Limited  =
=20
                                       The Guardian (London)=20

                                           July 3, 1998=20

SECTION: The Guardian Home Page; Pg. 17=20

LENGTH: 1441 words=20

HEADLINE: Analysis: The IMF: One size does not fit all;=20
A leak in the global economy has turned into a flood. Larry Elliott and
Alex Brummer audit the plumbers=20

BYLINE: LARRY ELLIOTT AND ALEX BRUMMER=20

BODY:=20
    FROM the offices of the International Monetary Fund in downtown
Washington DC, the ambush of the Thai baht by currency
speculators a year ago this week looked like one of those brief but violent
tropical storms. That great edifice, globalisation, had
sprung a leak, but the problem was minor, mere running repairs.=20

Twelve months later, things look rather different. No longer is it a case
of damp in the attic; whole rooms are deep in rising flood
waters.=20

Amid all the soul-searching, the IMF - one of the main architects of the
new world order - has come under rigorous scrutiny. A
crisis that started in Thailand has affected Malaysia, Indonesia, South
Korea, Japan, India, Russia, South Africa, New Zealand and
Australia. Nobody knows for sure which country will be next in the firing
line.=20

The IMF has come under fire from economists of right, left and centre.
Nobel laureate Milton Friedman led the charge from the
right. He accused the IMF of being interventionist; its meddling with the
invisible hand of the free market prevent economies from
correcting themselves.=20

>From the economics mainstream came the charge that the IMF made a series of
bad decisions. Reacting to its closure of
Indonesian banks last autumn the Harvard economist Jeffrey Sachs said:
'Instead of dousing the fire, the IMF in effect screamed
fire in the theatre'(1).=20

>From the left, two lines of attack. First, the IMF got it wrong about
globalisation and, second, that it is in cahoots with the US
Treasury to force Asian countries to adopt one-size-fits-all American
capitalism. The big currency devaluations have made Asian
assets cheap, while moves to secure complete liberalisation of capital will
make it child's play for American companies to pick up
viable companies at bargain basement prices.=20

Faced with these criticisms, the Fund fought back. In the Financial Times
earlier this year, the IMF's managing director, Michel
Camdessus was asked why it had imposed its same old belt-tightening
adjustment programmes on Thailand, Indonesia and Korea -
programmes that were quite inappropriate to their present needs(2).=20

'Mr Camdessus became indignant. The new agreements represented a marked
departure from the IMF's traditional approach.
They were built not on a set of austerity measures, but rather on
far-reaching structural reforms to strengthen financial systems,
increase transparency, open markets and restore market confidence'. These
are not universally held views, even within the IMF.
Joseph Stilglitz, chief economist of the World Bank, has given voice to the
misgivings of the dissidents. At the start of this year, he
made his feelings about the IMF austerity packages plain enough when he
argued that 'you don't want to push these countries into
severe recession. One ought to focus on . . . things that caused the
crisis, not on things that make it more difficult to deal with'(3).
The IMF - not used to having its behaviour challenged - snapped back.
Stiglitz would not be silenced (4). One by one, he laid into
the sacred cows of the IMF. First, the cavalier way in which the emphasis
on macro -economic stability ignored growth and jobs.
Then there was the Camdessus argument that the need to restore confidence
to the currency necessitated high interest rates. 'Are
measures that weaken the economy, especially the financial system, likely
to restore confidence?' There was more. Macro
-economic policy needed to be expanded beyond 'a single-minded focus on
inflation and budget deficits; the set of policies that

underlay the Washington consensus are not sufficient for macroeconomic
stability or long -term development.' The IMF is not
used to such scorn. It has long enjoyed the reputation of a lean and
focused bureaucracy with the world's best economic and
financial staff. The Fund's view has been that the economy of one country
is very much like any other and that by applying its
rational, neo-liberal economic model, it could restore a measure of
economic stability.=20

Created at the 1944 Bretton Woods Conference in New Hampshire the IMF's
remit was at first a narrow one. It was the world's
central bank, lender of the last resort to member countries. Most of its
clients were advanced industrial countries such as Britain
and the system worked reasonably well, fixed exchange rates making it
relatively easy to police. All that changed in 1972 when
President Nixon uncoupled the dollar from gold.=20

The new world was rather different, primarily because the end of fixed
rates brought new opportunities for speculators to take on
the weak links in the financial system. The fabled 'Gnomes of Zurich' who
undid the Wilson government in 1967 were now joined
by fellow spirits in financial markets from New York to Tokyo, with
relatively large capital sums at their disposal. Forced British
and American borrowings from the Fund in the late 1970s hurt; the richer
industrial countries would at all costs avoid similar
humiliation. The IMF would still supervise their economies, but capital
shortages would be met by borrowing from the increasingly
free and open private sector capital markets.=20

But just as there was talk that the IMF might have outlived its usefulness,
the Mexican crisis broke. In 1982 the Mexican
government reneged on its debts with private sector banks precipitating a
crisis across Latin America, which threatened the
Western banking system. The IMF stepped in as lender of the last resort and
found itself a new role. No longer banker to the
industrial countries it discovered a global clientele among the developing
countries. Instead of making short-term bridging loans it
was in for the long haul.=20

When the Berlin Wall came down and the former Soviet Union and its
satellites aspired to capitalism the Fund acquired almost
two dozen new clients. Despite its doctrine of fiscal austerity, it added
hundreds of new economists to its staff, doubled the size of
its Washington HQ and increased its budget to $ 507 million in the 1997-8
financial year.=20

But if it had grown in size its lending programmes and approach to member
countries remained the same. Its operations were
surrounded in secrecy, its advice to governments private, its focus fiscal
deficits, monetary policy and inflation - fundamental
macro-economic reform.=20

Even before the Fund started throwing its weight around in Asia, it was not
short of critics. Robert Wade and Frank Veneroso
argued that Asian economies were different from those the IMF usually deals
with. They had high levels of saving re-cycled as
loans to corporations; companies are closely linked with governments(5).=20

'Because of this difference, IMF 'austerity' and 'financial liberalisation'
will have higher costs and smaller benefits in Asia than
elsewhere. The slowdown of the IMF's packages for Thailand, Indonesia and
Korea to revive confidence reflects both their
imposition of impossibly far-reaching institutional liberalisation and
their inappropriateness for Asian financial structures.' The Fund
believes that, in the end, it will be vindicated. It points out - rightly -
that the lack of a body like it deepened the global crash of the
1930s. Critics argue, however, that one result of the 1930s was the
formation of a Keyenesian international system fortified with
capital controls.=20

The Fund's recent actions have even given die-hard free-traders reason to
question what it thinks it is doing. According to Jagdish
Bhagwati 'it is a lot of ideological humbug to say that without free
portfolio capital mobility, somehow the world cannot function

and growth rates will collapse'.=20

Sources: (1) Jeffrey Sachs: the IMF and Asian Flu, American Prospect March
-April 1998; (2) FT: February 9, 1998; (3) Wall
Street Journal, January 8 1998: (4) Joseph Stiglitz: Moving Towards the
Post-Washington Consensus: Helsinki Lecture: January
1998; (5) Robert Wade and Frank Veneroso: The East Asia Crash and the Wall
Street-IMF complex; New Left Review number
228.=20

Graphics: Steve Villiers.=20

Larry Elliott is our economics editor. Alex Brummer is our financial editor.=
=20

The Doctor's Prescription=20

Balance the Budget=20

Liberalise the financial sector and allow more banks to be created=20

Cut public spending=20

Remove all barriers to imports=20

Remove all restrictions on the movement of capital=20

Privatise state-owned enterprises=20

Remove all caps and controls on prices or (where markets are unavoidably
dominated by state monopolies for example in energy)
increase prices to reflect costs of production=20

Control the supply of money by imposing high real interest rates and
restrict credit creation=20



LANGUAGE: ENGLISH=20

LOAD-DATE: July 6, 1998=20




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Copyright =A9 1998 LEXIS=AE-NEXIS=AE, a division of Reed Elsevier Inc. All=
 rights
reserved.=20