Press Conference IMF Finds Design of Policy Recommendations "Broadly Appropriate" in Asian Crisis Review

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BOORMAN: In essence, this study says that the IMF's policy recommendations, which Indonesia, Korea, and Thailand have followed to varying degrees, were broadly appropriate in the circumstances, given what was known at the time the programs were formulated and as they have been revised. The paper draws a few basic conclusions: - Higher interest rates were needed at the outset of these programs to prevent the currencies from going into a worse downward spiral than in fact occurred. - Tighter budgets appeared to be justified at the outset based on the IMF's-and others'-initial assessment of the prospective depth of the recession. But a loosening in those fiscal policies was seen to be needed as the crisis unfolded. There is surely a question, however, as to whether this loosening of policy should have been implemented somewhat sooner.

- The emphasis on structural policies-financial sector reform, corporate restructuring, and the other key elements-was appropriate.

This crisis differed from so many other cases involving the IMF in that it did not arise from profligate government spending and monetary financing of that spending. The crisis mainly reflected financial fragility in a world where volatile financial markets can move with devastating speed. If emerging problems-as was evident in Thailand, for example-are not dealt with in a timely manner, the room for maneuver shrinks dramatically. Once the period for timely action has passed, the challenge for the countries concerned-and indeed for the IMF and the international community-has to be to find policies that quickly halt the crisis and then promote lasting economic growth.

Stemming a crisis of confidence that is manifested in the collapse in the value of a currency, with the attendant risk of hyperinflation, leaves a government little choice but to take tough monetary policy actions. AllPage 21 three countries increased interest rates somewhat to make holding the domestic currency more attractive, but in the view of the report, they did not act soon enough or boldly enough to head off a full-blown crisis.

All the countries are now, however, seeing the benefit of tightened monetary policy, as the restoration of currency stability allows interest rates to decline. In Korea and Thailand, those interest rates have now declined to precrisis levels. The report concludes that if we were making these decisions again, we would, if anything, call for prompter and more aggressive action along similar lines.

On the fiscal side, a degree of budget tightening was envisaged at the outset of each program, in part to pay for some of the substantial and inevitable costs of reforming the financial sector. This tightening was planned at a time when the IMF, like most other observers, envisioned a comparatively mild slowdown in growth.

The tightening was put into reverse once it became apparent that the recessions these countries faced were going to be deeper than expected and that expansive budget policies would be needed to help cushion the economies as the recessions developed. The message here is twofold. First, there was good reason from the standpoint of halting the slide in confidence to guard against fiscal slippage initially; and second, the extent of the actual tightening of budgets should not be overstated.

But the budget targets in the programs were predicated on a view of macroeconomic prospects that turned out, in hindsight, to be mistaken, and the easing of policy could have come more promptly as circumstances changed.

The paper also discusses why original projections were overoptimistic, and here the message is a bit tricky and nuanced.Yes, there were optimistic projections, but they were predicated on the programs' working as planned. This, in turn, depended on forceful implementation and a quick return of investor confidence.

These projections did not...