Findings and recommendations

• Pages: 220-221

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Crises

In Indonesia, the IMF identified banking sector vulnerabilities but underestimated their severity and the potential dangers for macroeconomic stability. The financial and economic crisis also quickly became intensely political, which greatly complicated crisis management. Policy reversals, which undermined market confidence, exacerbated the crisis, but the IMF's response was inadequate in some respects.

In Korea, the IMF failed to pick up vulnerabilities in the economy before the onset of the crisis and then proceeded with a program that the market strongly suspected was underfinanced.When major industrial country governments, however, took concerted action to address what was, in effect, a liquidity crisis, the chief obstacle to the crisis's resolution was removed. The report credits the IMF with playing a useful role as a crisis coordinator but also notes it underestimated the impact of negative balance-sheet effects and initially advised fiscal tightening that, as the IMF's own evaluation conceded, was unnecessary.

In Brazil, IMF surveillance successfully identified the macroeconomic vulnerabilities at the core of the crisis but progressively downplayed the scale of the overvaluation and was unable to persuade the authorities to take early corrective action. In hindsight, the IMF was unduly concerned with the systemic efforts of an early exit from Brazil's crawling peg exchange regime. It did, however, play a useful role in facilitating the transition to an inflation-targeting regime and in helping Brazil develop a more disciplined fiscal policy regime.

Findings

IMF surveillance had varying success in identifying key vulnerabilities that led to these crises.Where it did identify weaknesses, it did not appreciate the full danger (Indonesia) or had little success in persuading the authorities to take timely corrective action (Brazil). It was most effective in anticipating macroeconomic vulnerabilities (Brazil) and had considerably less success in foreseeing financial and corporate sector weaknesses (Indonesia and Korea) that were outside its traditional areas of expertise.

Program design. In all three crises, program projections were sharply out of step with eventual outcomes (too optimistic in Indonesia and Korea; too pessimistic in Brazil), with the result that policy advice and actions were, with hindsight, inappropriate.

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Transparent and adequate...