"Miracle" workers

International | Asia's extremity another excuse for government remedy

Issue: "Rebel with a cause," Jan. 30, 1998

In the flurry of effort to rescue Asian economies ravaged by currency devaluations, the line of ambulance chasers gets longer every week. Financier and currency speculator ad libitum George Soros arrived on the scene with his own bailout plan shortly after the International Monetary Fund and the World Bank announced their multibillion-dollar remedies. Deputy Treasury Secretary Larry Summers and Defense Secretary William Cohen simultaneously toured separate countries in the region earlier this month to communicate official U.S. worries and emphasize the strategic importance of East Asia's once-roaring financial markets. Even as international efforts redouble to prevent widespread deflation or even depression, insiders are questioning if they have the right vehicles for change.

"It is easier to criticize in hindsight than foresight," a World Bank official told WORLD, "but I blame our own people. I blame them for not detecting this. We are the ones who called them 'miracle economies.'"

A 1993 World Bank study titled "The East Asian Miracle" hailed the "high-performing economies" of Hong Kong, Indonesia, Japan, Malaysia, the Republic of Korea, Singapore, Taiwan, and Thailand. Its praise for the countries' "reliable" banking practices was still being hawked when World Bank and IMF officials gathered for their annual meeting last September in Hong Kong. But the downturn had already begun. East Asian stock markets became a seller's domain after Thailand devalued its currency, the baht, in July. Within weeks these same officials would be meeting to figure out how to rescue these "miracle economies," which, vastly overextending their short-term credit obligations, found their currency values in freefall and investors pulling out.

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Experts say the crisis is worst where state intervention into financial services-as opposed to regulation-along with corruption and cronyism have persisted in spite of existing democratic institutions. Those kinds of abuses were evident but overlooked.

"I fault the euphoria that overtook not only the World Bank and IMF but also Wall Street and the commercial banks," said the World Bank official, who spoke to WORLD on condition of anonymity because of the ongoing negotiations for government-backed loans to the affected countries.

IMF officials, the World Bank source said, have annual consultations with finance leaders in each of the countries now caught in a crisis. "They stayed in nice hotel rooms where the finance minister or governor of the central bank comes to meet them and give a handsome report. They took the figures at face value."

A confidential report released earlier this month to IMF's executive board in Washington acknowledged that even the agency's remedies are flawed. IMF demands in October that Indonesia raise interest rates as part of its recovery program may have contributed to the recent collapse of Indonesia's banking system. That directive conflicted with simultaneous IMF instructions that the government shut down 16 large, insolvent banks, according to a report in the Los Angeles Times, and seized up the already compromised system.

Both the World Bank and the IMF began with separate purposes in the aftermath of the Depression and World War II. They were formed to shore up shaky currencies and fund capital improvements through low-interest loans backed by member nations. Those purposes have gradually converged as the gold standard was abandoned worldwide in 1971 and market economies became global. "Our functions are separate but complementary," is how World Bank spokesman Graham Barrett describes the World Bank-IMF relationship. But the end result is essentially the same. Both agencies engage in extending low-interest loans, which amount to subsidies. The IMF's primary goal is to preserve currency rates and balance of payments in beleaguered markets. The World Bank funds capital improvements.

Even as the World Bank was advertising the "Asian miracles," it was loaning more low-interest money to the region than anywhere else. East Asia was the top beneficiary of World Bank loans in 1996. Foreign-aid analyst Bryan Johnson says that is why the current IMF- and World Bank-sponsored bailout packages will only lead to more dependency.

"History has not shown that they are able to effect change in these countries, and this encourages chances that there will be future bailouts in Asian markets," Mr. Johnson told WORLD. In separate papers written for the Heritage Foundation, where he is a policy analyst, Mr. Johnson charges that the IMF is "outdated, ineffective, and unnecessary," and he sums up the World Bank's effort to promote economic growth as "50 years of failure."

Mr. Johnson says the IMF should have closed its doors when the gold standard was relinquished in 1971. "Instead it reinvented itself like most bureaucracies do," he said.


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