IEO urges more focus on "what ifs" in IMF handling of financial crises

• Pages: 217-221

Page 217

In the late 1990s, a series of capital account crises rocked the global economy. The IMF found itself at the center of this turmoil and criticized as never before. The experience triggered extensive internal and external reexaminations of IMF policies and practices and intensified the attention paid by the IMF to identifying vulnerabilities and preventing and resolving crises. It also encouraged the organization to add an external perspective to its learning culture.

The resulting Independent Evaluation Office (IEO) initiated, in early 2002, a review of the IMF's handling of capital account crises in Indonesia, Korea, and Brazil. Its report, released on July 28, chronicles vulnerabilities that were in some cases identified but were in others undetected or underappreciated; it also examines weaknesses in IMF-supported programs.

Shinji Takagi, Advisor in the IEO and team leader for the capital account crises project, talks with the IMF Survey about honest efforts and costly missteps. He compliments the IMF for taking measures to enhance the effectiveness of surveillance in recent years but emphasizes that there is still more work to be done.

IMF SURVEY: The crises of the latter part of the 1990s were notable for their ferocity and the very visible and often highly criticized role of the IMF. That made them likely candidates for an IEO review, but why were only Korea, Indonesia, and Brazil chosen?

TAKAGI: We obviously talked about including Thailand and Russia.We had two overriding considerations in decidingPage 218 which crises to cover: our own resource constraints and what we were likely to learn. Russia was obviously special-it's too nuclear to fail and there won't be another Russia. And Thailand was distinctive in that it was the first of these crises and not a product of contagion, and we knew that IMF surveillance had long identified its problems and discussed these vulnerabilities with the authorities.We felt there was less to learn there also.

IEO weighs lessons from capital account crises

IMF SURVEY: The three countries have remarkably different stories to tell. But how are they similar?

TAKAGI: They all experienced massive outflows of capital and had IMF-supported programs that involved large amounts of IMF resources. But their crises were distinctive, and the differences are instructive. Brazil's vulnerabilities were largely macroeconomic, and the IMF's management and staff were very aware of them. The initial IMF-supported program tried to support the existing crawling peg exchange rate, and that didn't work. Korea had something very close to a pure liquidity crisis. The macroeconomic impact was severe, but short-lived. Once sufficient money was available, the crisis was resolved. And Indonesia, like Korea, had a balance of payments crisis and a banking crisis. But Indonesia's twin crisis was compounded by a political crisis.

IMF SURVEY: IMF surveillance is meant to alert authorities to impending difficulties. Did it do so in these instances?

TAKAGI: In Brazil, IMF surveillance was very effective. In Korea and Indonesia, it wasn't. In Asia, the IMF and most others saw sound economies that were growing fast. There was complacency, and the IMF missed the buildup of vulnerabilities in areas that were not its traditional focus of analysis. In Indonesia, the IMF identified weaknesses but thought them small compared with the bigger picture.

IMF SURVEY:When...