IMF Response to Crisis Highlights New Directions In Managing International Monetary System

• Pages: 50-52

Page 50

The centerpiece of each program is not a set of austerity measures to restore macroeconomic balance, but forceful, far-reaching structural reforms to strengthen financial systems, increase transparency, open markets, and, in so doing, restore market confidence. To this end, nonviable financial institutions are being closed down, and other institutions are being required to come up with restructuring plans and to comply with internationally accepted best practices. Other institutional changes are under way to strengthen financial sector regulation and supervision,Page 51 increase transparency in the corporate and government sectors, create a more level playing field for private sector activity, and increase competition. Taken together, these reforms will require a vast change in domestic business practices, corporate culture, and government behavior, which will take time. But the process is already in motion, and already some dramatic steps have been taken.

Will It Work?

Some have argued that these programs are still too tough, either in calling for higher interest rates, tightening government budget positions, or closing down financial institutions. But by the time these countries approached the IMF, the value of their currencies was plummeting, and in the case of Thailand and Korea, reserves were perilously low. Thus, the first order of business was, and still is, to restore confidence in the currency.

Here, I would like to dispel the notion that the deep currency depreciations seen in Asia in recent months have occurred by IMF design. On the contrary, in our view, these currencies have depreciated far more than is warranted or desirable. Moreover, without IMF support as part of an international effort to stabilize these economies, it is likely that these currencies would have lost still more of their value.

To reverse this process, countries have to make it more attractive to hold domestic currency, and that means temporarily raising interest rates, even if this complicates the situation of weak banks and corporations. This is a key lesson of the "tequila crisis" in Latin America 1994-95, as well as from the more recent experience of Brazil, Hong Kong SAR, and the Czech Republic-all of which have fended off attacks on their currencies over the past few months with a timely and forceful tightening of interest rates, along with other supporting policy measures. Once confidence...