The IMF in Asia: part of the problem or part of the solution?

• Pages: 227-228

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Five years after the onset of the Asian crisis, IMF External Relations Director Thomas Dawson addressed Singapore's Institute of Policy Studies and the Singapore Management University Forum on July 10 on what the IMF has learned from that experience and how it has translated that into reforms. Following are edited excerpts of his remarks; the full text is available on the IMF's website (www.imf.org).

I'm happy to get away from the United States for a few days and get a break from all the talk of crony capitalism, lack of transparency, collapsing asset values, and large current account deficits.What a difference five years makes! It is the United States that is now going through a time of soul-searching and adjustment, while East Asia appears to be back on track.

But let me turn to our theme today. Is the IMF part of the problem in Asia or part of the solution?

The Asian crisis tested the IMF as never before.

Many questioned our advice to the crisis countries on the appropriate fiscal policy and monetary policy to follow, and the latter remains a topic of intense debate to this day. Some of the conditions attached to the IMF-supported programs were criticized as being so extensive that they strained countries' capacity to implement reforms and tested the bounds of the IMF's expertise. In short, almost every aspect of our core operations came in for scrutiny and criticism.

Roots of the Asian crisis

The Asian crisis was the result of the interaction of several factors. According to some, one factor was the zeal shown by the U.S. Treasury and the IMF in encouraging countries to open up to short-term foreign capital in the mid-1990s and whose subsequent hasty exodus was devastating.

This popular characterization of a greater push toward capital account liberalization is broadly correct but inaccurate in many important details. The IMF did not encourage countries to liberalize short-term flows through the banking sector, which turned out to be the Achilles' heel during the Asian crisis. And many countries liberalize for their own reasons in response to external prodding. As a result of the criticism received during and after the crisis, however, the IMF is now more vocal in pointing out the risks of rapid capitalPage 228 account liberalization. Six weeks ago, for instance, we advised Sri Lanka against opening up its capital account until its...