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The worst treatment was reserved
for transition and East Asian economies. The latter had
continuously boomed for 15 years to be called ‘Asian Tigers.’
However, they too lately suffered from high fiscal deficit,
adverse balance of payment, high inflation, ballooning real
estate investment and questionable loans funded by
high-interest, short-term external debt. These economies had low
productivity but high consumption levels. In 1997, there was
negative external balance of about 90 billion dollars due to the
withdrawal of short-term funds and flight of capital. Currency
values fell sharply by 40 per cent and more. Exports fell and
the prices rose. Businesses closed, leading to high
unemployment. An attempt to sustain the value of currency led to
a heavy rush on the reserves. On request, the IMF organised
external assistance of about $80 billion with strict conditions.
Interest rates were raised, sharply going up to 40 per cent.
Public expenditure was cut down, affecting social services.
Privatisation of public enterprises was sought.
The author
observes that while credit squeeze made high-debt enterprises
bankrupt. Small enterprises failed for want of capital. Fast
privatisation meant cheap acquisition of assets by foreigners.
External assistance largely went to ease pressure on the banking
system, i.e., the return of external debt. Capital adequacy
norms were raised and banks were further squeezed of liquidity.
Speculators gained in currency arbitrage and capital flew. The
fall in the value of currency did not increase exports because
there was nothing to export.
Stiglitz wanted a
holding operation and sequenced reforms, use of external
assistance to create liquidity, recall of external balances,
moratorium on repayment of external debt, and withholding of
bankruptcies as these were caused by macro policies and not due
to productivity losses. Privatisation should have followed the
creation of regulators, better disclosure norms and competition.
The same applied to banks. The demand should have been
maintained, and the fall in currency value should have been used
to increase exports. He did not succeed.
He discounts the
theory of capitalist conspiracy and blames it largely on
arrogance, the lack of transparency and will to learn, a blind
faith in theory and structural deficiencies of the IMF. Unlike
the World Bank, IMF economists do not have deep understanding of
individual economies. The IMF looks at the larger picture only
and overemphasises budgetary and external balances. Its advisory
and control mechanism is deeply influenced by the US Treasury as
its largest shareholder.
The IMF was the
brainchild of Keynes, a firm believer in state intervention to
maintain full employment. He had seen economies suffering from
temporary imbalances resorting to competitive devaluation to
increase export, thereby causing international depression in the
30s. The IMF was designed to help maintain internal liquidity
and demand in these economies by taking care of the temporary
external imbalance. It is ironic that in economic crises of East
Asia and Communist countries, the IMF played a role just the
opposite of what Keynes would have wanted.
Fundamentalism is
now discounted. The IMF recognises the success of India and
China in controlled change. The need for structural change in
the IMF to give greater weight to economies like India and China
is recognised. However, one must also be aware that talk of
proper sequencing and controlled change gives an opportunity to
vested interests to slow down the reform process. India is the
prime example. Stiglitz’s intervention has been timely. The
book is a master’s work written in an easy style and priced
reasonably.
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