ASIAN FINANCIAL CRISIS

Origins
The seeds of the 1997-98 Asian financial crisis were sown during the previous decade when these countries were experiencing unprecedented economic growth. Common elements o Exports had long been the engine of economic growth in these countries. o A combination of inexpensive and relatively well educated labour, export oriented economies, falling barriers to international trade, and in some cases such as Malaysia, heavy inward investment by foreign companies, had combined during the previous quarter of a century to transform many Asian states into export powerhouses. o 1990-1996: Value of exports Malaysia: Grown by 18% per year Thailand: 16% per year Singapore: 15% per year Indonesia: 12% per year. The nature of these exports had also shifted in recent years from basic materials and products such as textiles to complex and increasingly high technology products, such as automobiles, semi-conductors, and consumer electronics.

An Investment Boom Wealth created by export led growth helped to fuel an investment boom in commercial and residential property, industrial assets, and infra-structure. The value of commercial and residential real estate in cities such as Hong Kong and Bangkok started to soar. o In turn, this fed a building boom the likes of which had never been seen before in Asia. o Office and apartment building were going up all over the region. Heavy borrowing from banks financed much of this construction, but so long as the value of property continued to rise, the banks were more than happy to lend. o As for industrial assets, the continued success of Asian exporters encouraged them to make ever bolder investments in industrial capacity. An added factor behind the investment boom in most SE Asian economies was the government. o In many cases the government had embarked upon huge infra-structure projects.

Malaysia New government administrative centre was constructed in Putrajaya for M$20 billion Government funded the development of a massive high technology communications corridor, and the huge Bakun dam, which at a cost of M$13.6 billion was to be the most expensive power generation scheme in the country. Also, the government had encouraged strategic investments in the semi-conductor and automobile industries, "in accordance with the Korean model". o One result of this was the national automobile manufacturer, Perusahaan Otomobil Nasional Bhd, which was established in 1984. o Protected by a 200% import tariff and with few other competitors, the Proton, as the car was dubbed, sold well in its captive market. o By 1989 Perusahaan Otomobil Nasional Bhd was selling 72,000 cars out of a total market of 117,000. o By 1995 it had a 62% share of a market which had grown to 225,000 cars annually.

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Indonesia President Suharato has long supported investments in a network of an estimated 300 businesses that are owned by his family and friends in a system known as "crony capitalism". o Many of these businesses have been granted lucrative monopolies by the President. o 1990: one the Presidents youngest son, Mr Hutomo, was granted a monopoly on the sale of cloves, which are mixed with tobacco in the cigarettes preferred by 9 out of 10 smokers in Indonesia. o 1995: Suharto announced that he had decided to build a national car, and that the car would be built by a company owned by Mr Hutomo, in association with Kia motors of South Korea. To support the venture, a consortium of Indonesian banks was "ordered" by the Government to offer almost $700 million in start-up loans to the company. In sum, by the mid-1990s SE Asia was in the grips of an unprecedented investment boom, much of it financed with borrowed money. o 1990 -1995: Gross domestic investment grew by 16.3% per annum in Indonesia, 16% per annum in Malaysia, 15.3% in Thailand, and 7.2% per annum in South Korea. By comparison, investment grew by 4.1% per annum over the same period in the US, and 0.8% per annum in all high income economies. o 1996: Rate of investment accelerated, spending on investment accounted for a remarkable 43% of GDP in Malaysia

Excess Capacity

As might be expected, as the volume of investments ballooned during the 1990s, often at the bequest of national governments, so the quality of many of these investments declined significantly. o All too often, the investments were made on the basis of projections about future demand conditions that were unrealistic. o The result was the emergence of significant excess capacity. E.g. A building boom in Thailand resulted in the emergence of excess capacity in residential and commercial property. o By early 1997 it was estimated that there were 365,000 apartment units unoccupied in Bangkok. o With another 100,000 units scheduled to be completed in 1997, it was clear that years of excess demand in the Thai property market had been replaced by excess supply.

The Debt Bomb

By early 1997 massive investments in industrial assets and property had created a situation of excess capacity and plunging prices, while leaving the companies that had made the investments groaning under huge debt burdens that they were now finding difficult to service. To make matters worse, much of the borrowing to fund these investments had been in US dollars, as opposed to local currencies. o At the time this had seemed like a smart move. Throughout the region local currencies were pegged to the dollar, and interest rates on dollar borrowings were generally lower than rates on borrowings in domestic currency. Thus, it often made economic sense to borrow in dollars if the option was available.

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However, if the governments in the region could not maintain the dollar peg and their currencies started to depreciate against the dollar, this would increase the size of the debt burden that local companies would have to service, when measured in the local currency. Currency depreciation, in other words, would raise borrowing costs and could result in companies defaulting on their debt payments.

In this regard, a final complicating factor was that by the mid-1990s although exports were still expanding across the region, so were imports. o The investments in infrastructure, industrial capacity, and commercial real estate were sucking in foreign goods at unprecedented rates. To build infra-structure, factories, and office buildings, SE Asian countries were purchasing capital equipment and materials from America, Europe, and Japan. o Boeing and Airbus were crowing about the number of commercial jet aircraft they were selling to Asian airlines. o Motorola, Nokia, and Ericsson were falling over themselves to sell wireless telecommunications equipment to Asian nations Reflecting growing imports, many SE Asian states saw the current account of their Balance of Payments shift strongly into the red during the mid-1990s. o By 1995 Indonesia was running a current account deficit that was equivalent to 3.5% of its Gross Domestic Product (GDP), Malaysias was 5.9%, and Thailands was 8.1%. o With deficits like these, it was becoming increasingly difficult for the governments of these countries to maintain the peg of their currencies against the US dollar. o If that peg could not be held, the local currency value of dollar dominated debt would increase, raising the spectre of large scale default on debt service payments. o The scene was now set for a potentially rapid economic meltdown.

Meltdown in Thailand
The Asian meltdown began on February 5th, 1997 in Thailand. That was the date that Somprasong Land, a Thai property developer, announced that it had failed to make a scheduled $3.1 million interest payment on an $80 billion eurobond loan, effectively entering into defaulting. In February 1997, trading in the shares of Finance One was suspended while the government tried to arrange for the troubled company to be acquired by a small Thai bank, in a deal sponsored by the Thai central bank. o It didnt work, and when trading resumed in Finance One shares in may they fell 70% in a single day. o By this time it was clear that bad loans in the Thai property market were swelling daily, and had risen to over $30 billion. o Finance One was bankrupt and it was feared that others would follow. In May 1997 short sellers were swarming over the Thai baht. o In an attempt to defend the peg, the Thai government used its foreign exchange reserves (which were denominated in US dollars) to purchase Thai baht. o It cost the Thai government $5 billion to defend the baht, which reduced its "officially reported" foreign exchange reserves to a two-year low of $33 billion. o In addition, the Thai government raised key interest rates from 10% to 12.5% to make holding Baht more attractive, but since this also raised corporate borrowing costs it only served to exacerbate the debt crisis. On July 2nd, 1997, the Thai government bowed to the inevitable and announced that they would allow the baht to float freely against the dollar. o The baht immediately lost 18% of its value, and started a slide that would bring the exchange rate down to $1=Bt55 by January 1988. Page | 3

As the baht declined, so the Thai debt bomb exploded. Put simply, a 50% decline in the value of the baht against the dollar doubled the amount of baht required to serve the dollar denominated debt commitments taken on by Thai financial institutions and businesses. o This made more bankruptcies such as Finance One all further pushed down the battered Thai stock market. The Thailand Set stock market index ultimately declined from 787 in January 1997 to a low of 337 in December of that year, and this on top of a 45% decline in 1996. On July 28th the Thai government took the next logical step, and called in the International Monetary Fund (IMF). o With its foreign exchange reserves depleted, Thailand lacked the foreign currency needed to finance its international trade and service debt commitments, and was in desperate need of the capital the IMF could provide. Moreover, it desperately needed to restore international confidence in its currency, and needed the credibility associated with gaining access to IMF funds. Without IMF loans, it was likely that the baht would increase its free-fall against the US dollar, and the whole country might go into default. o IMF loans, however, come with tight strings attached. The IMF agreed to provide the Thai government with $17.2 billion in loans, but the conditions were restrictive. The IMF required the Thai government to increase taxes, cut public spending, privatize several state owned businesses, and raise interest rates all steps designed to cool Thailands overheated economy. Furthermore, the IMF required Thailand to close illiquid financial institutions. In December 1997 the government shut some 56 financial institutions, laying off 16,000 people in the process, and further deepening the recession that now gripped the country. o o

The Domino Effect

Following the devaluation of the Thai baht, wave after wave of speculation hit other Asian currencies. One after another in a period of weeks the Malaysian ringgit, Indonesian rupiah and the Singapore dollar were all marked sharply lower. o Prior to the devaluation, the ringgit was trading at $1=2.525 ringgit. Six months later it had declined to $1=4.15 ringgit. o Singapore followed on July 17th, and the Singapore dollar (S$) quickly dropped in value from $1=S$1.495 prior to the devaluation to $1=S$2.68 a few days later. o In Indonesia, the Rupiah, was allowed to float on August 14th. For Indonesia, this was the beginning of a precipitous decline in the value of its currency, which was to fall from $1=2,4000 Rupiah in August 1997 to $1=10,000 on January 6th, 1998, a loss of 75%. With the exception of Singapore, whose economy is probably the most stable in the region, these devaluations were driven by similar factors to those that underlay the earlier devaluation of the Thai baht. A combination of excess investment, high borrowings, much of it in dollar denominated debt, and a deteriorating balance of payments position. o The leaders of these countries, however, were not always quick to acknowledge the home grown nature of their problems.

Malaysia

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As the ringgit declined against the US dollar, the Malaysias Prime Minister, Dr. Mahathir Mohammed, gave speeches asserting that the international financier, George Soros, was the arch villain in a conspiracy to impoverish Southeast Asian nations by attacking their currencies. o According to Dr. Mahathir, foreign fund managers were selling Malaysian shares because they were racists; currency traders were ignoring Malaysias sound economic fundamentals; the West was gloating over the crisis in SE Asia; rumor mongers who "should be shot" were spreading lies and a "Jewish" agenda was at work against the country. o Unfortunately for Dr. Mahathir, every time he gave free rein to his thoughts on the matter, the Malaysian currency and stock market declined even further. o He even tried to outlaw short selling on the Malaysian stock market, but this too had the opposite effect of that intended, and the policy had to be pulled shortly after it was introduced. By Autumn Malaysias government seems to have come around to the view that it needed to put its own house in order, rather than blame others for its problems. o In early September the government deferred spending on several high profile infrastructure projects including its prestigious Bakun dam project. o December 1997: Release of plans to cut state spending by 18%. o The government also stated that it will not bail out any corporations that become insolvent as a result of excess borrowing. January 1998: IMF managing director Michel Camdessus, stated that Malaysia was correct in asserting that it did not need an IMF rescue package to get it through the regional financial crisis. o "Malaysia is not facing a crisis in the same way as some of the other countries in the region, " he said, noting the authorities have taken measures to deal with the difficulties, particularly on the fiscal side. o On the other hand, he did state that the government needed to raise interest rates to slow credit growth, moderate inflationary pressures and support the weakening currency.

Indonesia Indonesia authorities also initially respond with something less than full commitment to that countrys financial crisis. Following speculative selling, the Indonesia currency, the rupiah, was uncoupled from its dollar peg and allowed to float on August 14th, 1997. o The rupiah immediately started to decline, as did the Indonesian stock market. o By October the rupiah had dropped from $1=Rp2,400 in early August to $1=Rp4,000, and the Jakarta stock market index had declined from just over 700 to under 500. At this point the now desperate Indonesian government turned to the IMF for financial assistance. o October 31st: IMF announced that in conjunction with the World Bank and the Asian Development Bank it had put together a $37 billion rescue deal for Indonesia. o In return, the Indonesian government agreed to close a number of troubled banks, to reduce public spending, balance the budget, and unravel the crony capitalism that was so widespread in Indonesia. The initial response to the IMF deal was favourable, with the rupiah strengthening to $1=Rp3,200. However, the recovery was short lived. o In November the rupiah resumed its decline in response to growing scepticism about President Suhartos willingness to take the tough steps required by the IMF. o Moreover, currency traders wondered how Indonesia was going to be able to deal with its dollar denominated private sector debt, which stood at $80 billion. With both the economy and exchange rate collapsing, there was clearly no way that private sector enterprises would be able to generate the rupiah required to purchase the dollars needed to service the debt, and so the decline feed on itself. Page | 5

In December Moodys, the US credit rating agency, fed fuel to this fire when it downgraded Indonesias credit rating to junk bond status. On January 5th 1998 President Suharto seemed to confirm the scepticism of currency traders when he unveiled Indonesias 1998-99 budget. o The budget immediately came in for criticism because it made optimistic assumptions about Indonesias economic growth rate in 1998. o It projected GDP growth at 4%, inflation contained at single digit levels (in 1997 it was around 20%), and assumed a rupiah-US dollar exchange rate of $1=Rp4,000 (the rupiah closed 1997 at an exchange rate of $1=Rp5,005). o Moreover, no plans were announced to abolish the lucrative state licensing monopolies that had benefited his family and friends. o International investors and currency traders responded by selling their rupiah holdings, or selling the rupiah short, and the exchange rate plunged through the floor, hitting $1=Rp10,000 a few days later. At this point IMF officials, together with US deputy Treasury Secretary Lawrence Summers, made a second visit to Jakarta to "re-negotiate" the IMF terms of agreement. o January 15th 1998: Reached a revised agreement which committed Indonesia to a tough budget. o Pledged budget cuts, including cuts in sensitive energy subsidies, trade deregulation that would wipe out many of the business privileges enjoyed by Suhartos family and friends, and accelerated structural reform of the banking sector. The rupiah, meanwhile, which was trading at around $1=Rp8,5000 just before the announcement, dropped sharply, reaching an all time low of $1=Rp14,500 on January 22nd, 1998 before clawing its way back up to $1=Rp12,5000. The sharp drop reflected two concerns. o First, fear that Suhartos apparent unwillingness to step down in the face of an economic collapse may lead to social breakdown and political violence in Indonesia. o Second, growing realization that hundreds of Indonesian businesses were now technically insolvent and would not be able to pay back the estimated $65 billion of dollar denominated debt they owed without substantial debt restructuring and rescheduling of the debt payments. o The IMF deal, for all of its good points, had not addressed this critical issue. o

Aftermath: Implications of the Crisis

Although the economic storm that swept through Asian in 1997 has now abated, the wreckage left in its wake will undoubtedly take years to repair. By indulging in a debt binge that ultimately bought its high flying economies crashing to the ground, Asia may have lost a decade of economic progress. Beyond this, however, the crisis has raised a series of fundamental policy questions about the sustainability of the so called Asian Economic Model, the role of the IMF, and the virtues of floating and fixed exchange rates. The crisis also has important implications for international businesses. o For a decade, the Asian Pacific region has been promoted by many as the future economic engine of the world economy. o Businesses have invested billions of dollars in the region on the assumption that the rapid growth of the last decade would continue. Now it has come grinding to a halt. o What does this mean for international businesses with a stake in the region, and for those that compete against Asian companies?

The Asian Economic Model

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Back in the late 1980s and early 1990s a number of authors were penning articles about the superiority of the Asian Economic Model or Asian Capitalism. According to its advocates, the countries of the Asian Pacific region, as exemplified by Japan and South Korea, had put together the institutions of capitalism in a more effective way than either the United States or Western European nations. The so called Asian Model of state directed capitalism seemed to combine the dynamism of a market economy with the advantages of centralized government planning. o It was argued that close cooperation between government and business to formulate industrial policy led to the kind of long-term planning and investment that was not possible in the West. o Informal lending practices were credited with giving Asian firms more flexibility than allowed for by the rigorous disclosure rules imposed on similar transactions in the United States. o And Western admirers praised government policies designed to encourage exports and protect domestic producers from imports. Many warned that the Asian tendency for government directed investment and poorly regulated financial systems was a dangerous mix that could lead to over investment, excessive debt, and financial crises. Despite the occurrence of just such a crisis in Japan in 1989, advocates of the Asian Way, including many leading politicians in Asia, steadfastly ignored the risks inherent in an interventionist economic model. Instead, they continued to sing the praises of business-government cooperation and "Confucian values", right up to the explosion of the debt bomb and the collapse of their stock markets and currencies in late 1997. Now that the crash has occurred, momentum in Asia is starting to shift away from the "Asian Way" and towards the Western economic model. Pushed in part by the IMF, but also by shifting opinion among some politicians and business leaders within the region, Asias troubled economies seem to be embarking on a long overdue restructuring. o Governments are pulling back from close cooperation with businesses, financial disclosure regulations are being tightened, troubled banks and companies have been allowed to fail, and markets are being deregulated to allow for greater competition and foreign direct investment. o As a consequence, it seems to be a reasonable prediction that many Asian economies will come to resemble, more closely, the free market system championed by the United States than the Asian model exemplified by the Japan of the 1980s.

Implications for Business The Asian financial crisis throws the risks associated with doing business in developing countries into sharp focus. For most of the 1990s, multinational companies have viewed Asia as a future economic powerhouse, and invested accordingly. o The region is home to 60% of the worlds people and a number of dynamic economies that have been growing by nearly 10% per year for most of the past decade. o This euphoric view was rudely shattered by the events of late 1997. On the negative side on the equation, the Asian crisis will undoubtedly have some painful effects on companies with major activities and investments in the regions troubled economies. o For example, when the Malaysian government cancelled its $5 billion Bakun hydroelectric dam project this hurt ABB, the large European based engineering firm that was a prime contractor on the project.

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ABB took a $100 million charge and the Asian slowdown helped to trigger job cuts totaling 10,000 in many of its European facilities. o Similarly, Boeing expressed concern that the Asian crisis may result in as many as 60 orders for large jet aircraft being postponed or cancelled. To make matters worse, many Asian companies will now be looking to export their way out of recessionary conditions in their home markets. o This may lead to a flood of low priced exports from troubled Asia economies to other countries. o United States and European steel companies, for example, have to brace themselves to deal with the adverse impact on demand and prices in their home market of an increased in the supply of low cost steel from South Korea. o The fall in the value of the Korean won against the dollar has given Korean steel companies a competitive edge in global markets that they lacked just six months ago. However, firms that source components from Asia have seen a steep drop in the price of those inputs, which has a beneficial impact on profit margins. o For example, Dell Computer, the large US based manufacturer of personal computers, has seen a 50% drop in the price of certain components such as memory chips that it buys from Asian manufacturers. o Similarly, even though ABB took a hit when it lost the Bakun Dam project, the company argues that this will be more than off-set over the next few years by increases in exports from its own factories based in that region. Furthermore, several firms are reportedly taking advantage of the changing circumstances in Asia to increase their rate of investment in the region. o Plunging stock markets across the region have left many Asian companies trading at prices that are less than their break-up value, while the IMFs rescue packages have required Korea, Indonesia, and Thailand to relax restrictions on inward foreign direct investment. o As a result of these factors, it is reasonable to expect firms from outside of these countries to start buying the assets of troubled companies while they can be purchased for cents on the dollar. o December 1997: Citicorp was reported to be examining the books of Thailands seventh largest bank, First Bangkok City Bank, with a view to making an acquisition. Finally, it is worth emphasizing that despite its dramatic impact, the long run effects of the crisis may be good not bad. o To the extent that the crisis gives Asian countries an incentive to reform their economic systems, and to initiate some much need restructuring, they may emerge from the experience not weaker, but stronger institutions and a greater ability to attain sustainable economic growth. o

The International Monetary Fund

The IMF created a series of bailouts for the most-affected economies to enable affected nations to avoid default. Tied the packages to reforms that were intended to make the restored Asian currency, banking, and financial systems more like those of the United States and Europe. Committed over $110 billion in short term loans to three countries; South Korea, Indonesia, and Thailand. o To put this in perspective, the largest loan prior to this was the $48 billion package that the IMF gave to Mexico in 1995 following the collapse of the Mexican peso. IMF's support was conditional on a series of drastic economic reforms influenced by neoliberal economic principles called a "structural adjustment package" (SAP).

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The SAPs called on crisis-struck nations to reduce government spending and deficits, allow insolvent banks and financial institutions to fail, and aggressively raise interest rates. o The reasoning was that these steps would restore confidence in the nations' fiscal solvency, penalize insolvent companies, and protect currency values. Above all, it was stipulated that IMF-funded capital had to be administered rationally in the future, with no favoured parties receiving funds by preference. o In some affected countries the restrictions on foreign ownership were greatly reduced. o There were to be adequate government controls set up to supervise all financial activities, ones that were to be independent, in theory, of private interest. Insolvent institutions had to be closed, and insolvency itself had to be clearly defined. o In short, exactly the same kinds of financial institutions found in the United States and Europe had to be created in Asia, as a condition for IMF support. In addition, financial systems were to become "transparent", that is, provide the kind of reliable financial information used in the West to make sound financial decisions.

Criticism Encouraged fast track capitalism led up to the crisis Many commentators in retrospect criticized the IMF for encouraging the developing economies of Asia down the path of "fast track capitalism", meaning liberalization of the financial sector (elimination of restrictions on capital flows), maintenance of high domestic interest rates to attract portfolio investment and bank capital, and pegging of the national currency to the dollar to reassure foreign investors against currency risk. Foreign capital entered in the form of short-term loans to banks and enterprises, but this speculative investment capital never found its way into the real economy of domestic manufacturing or agriculturelow-yield sectors that would provide a decent rate of return only after a long gestation period. o Instead, the capital was invested into high-yield sectors with a quick turnaround time, such as the stock market, consumer financing and, in particular, real estate. o Commercial banks and finance companies soon found they were horribly overinvested in these high-yield and high-risk sectors. o Meanwhile, real estate and foreign portfolio investors and banks that had loaned to domestic entities discovered that their customers were carrying a load of non-performing loans (i.e. loans that produced no income). With a worsening balance of trade, the countries' capacities to repay the debts incurred by the private sector became very cloudy. o The worsening balance of trade struck fear in the hearts of investors, who recognized the pattern as similar to that which happened in Mexico in 1994. By early 1997 many investors and speculators concluded it was time to get out before a currency devaluation ruined their investments. o The ensuing devaluation resulted in a catastrophic combination of skyrocketing import bills, spiraling costs of servicing the foreign debt of the private sector, heightened interest rates spiking economic activity, and a chain reaction of bankruptcies. o The Southeast Asian miracle had come to a screeching stop. Problem-solution mismatch when responding to the crisis One criticism is that tight macro-economic policies are inappropriate for countries that are suffering not from excessive government spending and inflation, but from a private sector debt crisis with deflationary undertones.

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As country after country fell into crisis, many local businesses and governments that had taken out loans in US dollars, which suddenly became much more expensive relative to the local currency which formed their earned income, found themselves unable to pay their creditors. The effects of the SAPs were mixed and their impact controversial. Critics, however, noted the contradicting (reducing money supply) nature of these policies, arguing that in a recession, the traditional Keynesian response was to increase government spending, prop up major companies, and lower interest rates. o The reasoning was that by stimulating the economy and staving off recession, governments could restore confidence while preventing economic loss. o They pointed out that the U.S. government had pursued expansionary policies, such as lowering interest rates, increasing government spending, and cutting taxes, when the United States itself entered a recession in 2001, and arguably the same in the fiscal and monetary policies during the 20082009 Global Financial Crisis.

Moral hazard during the crisis

Another criticism of the IMF is that its rescue efforts are exacerbating a problem know to economists as moral hazard. o Moral hazard arises when people behave recklessly because they know they will be saved if things go wrong. In the case of Asia, critics point out that many Japanese and Western banks were far too willing to lend large amounts of capital to over-leveraged Asian companies during the boom years of the 1990s. o These critics argue that the banks should now be forced to pay the price for their rash lending policies, even if that means some banks must shut down. o Only by taking such drastic action, so the argument goes, will banks learn the error of their ways and not engage in rash lending in the future. o By providing support to these countries, the IMF is reducing the probability of debt default, and in effect bailing out the very banks whose loans gave rise to this situation in the first place. The problem with this argument is that it ignores two critical points. First, if some Japanese or Western banks with heavy exposure to the troubled Asian economies were forced to write off their loans due to widespread debt default, this would have an impact that would be difficult to contain. o The failure of large Japanese banks, for example, could trigger a meltdown in the Japanese financial markets. o In turn, this would almost inevitably lead to a serious decline in stock markets around the world. o That is the very risk that the IMF was trying to avoid in the first place by stepping in with financial support. Second, it is incorrect to imply that some banks have not had to pay the price for rash lending policies. o In fact, the IMF has insisted on the closure of banks in Korea, Thailand and Indonesia. o Moreover, foreign banks with short term-loans outstanding to Korean enterprises have been essentially forced by circumstances to reschedule those loans at interest rates that do not compensate for the extension of the loan maturity.

Lacks accountability inherent flaw The final criticism of the IMF is that is has become too powerful for an institution that lacks any real mechanism for accountability.

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By the end of 1997, the IMF was engaged in loan programs in 75 developing countries that collectively contain 1.4 billion people. o The IMF was determining macro-economic policies in those countries, yet according to critics such as noted Harvard economist Jeffery Sachs, with a staff of under 1,000 the IMF lacks the in-depth expertise required to do a good job. o Evidence of this can be found in the fact that the IMF was singing the praises of the Thai and South Korean governments only months before both countries lurched into crisis. Then the IMF put together a draconian program for Korea without having deep knowledge of the country. Sachs solution to this problem is to reform the IMF, so that it makes greater use of outside experts, and so that its operations are open to great outside review and scrutiny. o

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