Order Code RL30467
CRS Report for Congress
Received through the CRS Web
IMF and World Bank Activities in Russia and
Asia: Some Conflicting Perspectives
March 15, 2000
Jonathan E. Sanford
Specialist in International Political Economy
John P. Hardt
Senior Specialist in Post Soviet Economics
Dick K. Nanto
Specialist in Industry and Trade
Information Resource Specialist
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress
This report describes the programs the International Monetary Fund (IMF) and World Bank
have funded in Russia and Asia in recent years in response to economic crises in these
countries. It presents the Bank and Fund’s own assessments of their activities. It also relates
the views of some prominent critics. The report will not be updated.
IMF and World Bank Activities in Russia and Asia: Some
Between 1997 and 1999, the International Monetary Fund and World Bank
funded major programs to help Russia and the Asian countries counter their economic
crises and to promote basic economic reform. During this period, the World Bank
lent Russia some $11.8 billion; it also lent to Korea, Thailand, and Indonesia to help
them respond to the Asian financial crisis. In 1997 and 1998, the IMF lent $37.45
billion (SDR 27.5 billion) to the same three Asian countries. Meanwhile, the IMF lent
$18.2 billion (SDR 13.2 billion) to Russia, of which $7.7 billion (SDR 5.8 billion)
had been disbursed by the time the IMF loan program was cancelled.
The Bank and Fund generated a wealth of material analyzing and explaining their
efforts. They claim that their programs in Asia and Russia were quite successful
overall. They acknowledge that they encountered unprecedented challenges and they
had to learn and adapt their programs in response to changing conditions. They admit
that the results sometimes fell short of their original expectations. Nevertheless, the
Bank and Fund reject any suggestion that the depth and severity of the Asian and
Russian crises were caused by terms and conditions of their programs. Any
shortcomings are attributable, they say, to the fact that governments sometimes failed
to fulfill their agreements or took steps which made the crises in their countries more
intense and difficult than would have otherwise been the case.
Many analysts have been critical of the way the international agencies dealt with
the Russian and Asian crises. This report focuses on the views of Joseph Stiglitz,
Jeffrey Sachs, and, to a lesser extent, Nicholas Stern and Bruno Pinto. They argue
that the IMF put too little emphasis on programs to reform the basic economic
institutions and the economic framework in its borrower countries. They claim the
international financial institutions (IFIs) have made conditions worse in many of the
countries they have sought to help. Often, they argue, the IFIs’ original perceptions
and predictions are wrong, when they first address an economic crisis, and they
prescribe the wrong economic medicine. They maintain that the IFIs should be more
accountable for their mistakes. IFI spokesmen respond that most of the comments
by the critics are unfunded or based on only a partial understanding of the Russian and
Asian contexts. The Bank and Fund maintain that they have incorporated many of the
lessons they learned in Russia and Asian into their current programs in these and other
On March 8, 2000, by the International Financial Institutions Advisory
Commission released its report discussing future policy towards the IMF and the
multilateral banks. The present CRS study was prepared prior to the issuance of that
report and does not discuss the Commission’s findings.
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Crises from the Perspective of the IFIs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The World Bank in Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The IMF in Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The IMF and the Asian Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The World Bank and the Asian Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Views of Some Prominent Critics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Critiques of the IFI Programs in Russia . . . . . . . . . . . . . . . . . . . . . . . . . .
Critiques of IFI Programs in Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Did the IMF Worsen the Crisis? . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Closing Weak Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . .
Poor Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IMF Accountability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IMF Not Attuned to Needs of Poor Nations . . . . . . . . . . . . . . . . . . .
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Relevant CRS Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Articles and Other Published Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
List of Tables
Table 1. World Bank Lending to Three Asian Countries, FY1997-99 . . . . . . . 11
IMF and World Bank Activities in Russia and
Asia: Some Conflicting Perspectives
There has been considerable discussion in the past few years about possible
changes in the “architecture” of the international financial system. In this context, the
term “architecture” refers to the policies and programs of the international financial
institutions (IFIs), the relative division of labor among them, the prevailing norms for
exchange rate systems and country economic policies, and the way the IFIs relate to
the private sector. Many analysts believe that the ways the World Bank and
International Monetary Fund (IMF) responded to the recent economic crises in Russia
and Asia cast considerable light on these issues. Some argue that the Bank and
Fund’s programs in Russia and Asia were deeply flawed. They find evidence
justifying major changes in the international agencies’ future operations and policies.
Others insist that the Bank and Fund performed creditably in Russia and Asia. They
maintain that the record demonstrates the efficacy of the agencies’ work. They also
say the record illustrates the problems that international agencies often face when they
deal with governments that are reluctant to implement needed reforms.
This report discusses the roles the International Monetary Fund and the World
Bank have played during the recent economic and financial crises in Russia and East
Asia. It does not purport to be a comprehensive discussion of the issues. Rather, it
provides the reader with some conflicting views regarding the efficacy and success of
IFI programs in these regions. First, based solely on IFI documents, it presents the
Bank and Fund’s description and assessment of their programs in Russia and their
responses to the Asia financial crisis. Second, it presents some critiques of the IFIs
by several prominent analysts. Joseph Stiglitz was, until recently, Chief Economist
at the World Bank, a former Chairman of President Clinton’s Council of Economic
Advisors and Professor of Economics at Stanford University. Jeffrey Sachs is
Professor of Economics and Director of the Institute for International Development
at Harvard University. Nicholas Stern is the new Chief Economist at the World
Bank. Brian Pinto is a senior economist at the same international agency. The
selection of critics was influenced by Congressional inquiries. The individuals
included in this report have not only criticized the performance of the IFIs, but also
suggested remedial actions to improve their performance.
A number of CRS studies already address the Russian and Asian crises and the
operations or functions of the international financial institutions (IFIs). The present
report is a supplement to those reports. A list of relevant CRS products and a
chronological list of articles by the IFIs and these critics is provided at the end of this
Prepared by Jonathan E. Sanford, Specialist in International Political Economy.
The first section of this report summarize the World Bank and IMF’s own
assessments of their activities – including a description of their programs and post
hoc evaluations regarding what worked and what did not. Between 1997 and 1999,
the international agencies funded major programs to help Russia and the Asian
countries counter their economic crises and to promote basic economic reform. They
also generated a wealth of material analyzing and explaining their efforts. The Bank
and Fund claim that, overall, their programs in Asia and Russia were quite successful.
They acknowledge that they encountered unprecedented challenges and they had to
learn and adapt their programs in response to changing conditions. They admit that
the results sometimes fell short of their original expectations. Nevertheless, they
reject any suggestion that the depth and severity of the Asian and Russian crises were
caused by terms and conditions of their programs. Any shortcomings are attributable,
they say, to the fact that governments sometimes failed to fulfill their agreements or
took steps which made the crises in their countries more intense and difficult than
otherwise would have been the case.
Stiglitz and Sachs have been sharply critical of the way the international agencies
dealt with the Russian and Asian crises. Stiglitz argues that the IMF’s programs in
Russia and Asia were based on obsolete economic concepts. They put too much
emphasis, he says, on the old “Washington Consensus,” a package of policy measures
adopted in 1991 for Russia and followed by Russian reformers. This emphasized the
need for strong macroeconomic measures and policies aimed at promoting
liberalization, exchange rate stabilization, and privatization. The IMF should have
put more emphasis, he argues, on programs that seek to change the way that
enterprises and economic institutions operate.
This approach has come to be called the “Post-Washington Consensus.” It
underscores the need for change in the basic institutional infrastructure. In particular,
it says that countries need to adopt market-oriented reforms in their banking,
budgeting, and administrative systems. The goal should be the development of an
incentive system based on profit-seeking and competition to replace the old norms
that hampered growth and innovation. Unless there is fundamental change in the
incentive system, the Post-Washington Consensus insists, the reform programs
embodied in the earlier Consensus –liberalization, stabilization, privatization – will be
ineffective or perhaps even counterproductive.
Sachs maintains that the IMF failed to take adequate steps to promote successful
reform in Russia. Specifically, he says, it failed to prevent crony privatization,
corruption, capital flight, and poor donor oversight and it failed to promote growth
in the Russian economy. However, Sachs did not call for a change in the Washington
Consensus nor did he agree that he may have been mistaken in his support for the socalled “shock therapy” policy earlier in the decade. Shock therapy involves the
adoption of macroeconomic policies that seek to achieve rapid stabilization and
adjustment of a country’s economy.
In Asia, Sachs argues, the IMF made the situation worse in the countries it
sought to assist. He says it made the economic crisis in these countries more severe
and most of its predictions and initial remedies were wrong. He maintains that the
IMF has not been held accountable for its poor performance in Asia. Also, Sachs
affirms, the IMF’s programs in Asia were influenced too much by the preference of
the United States and other major countries. Developing countries have too little
influence, he maintains, over the shape of IMF policy even though they comprise
much of the world’s population and a substantial majority of the IMF membership.
It is difficult to discern, from the Bank and Fund’s analyses of the Russian and
Asian crises and their descriptions of their activities in response to those crises, what
the two agencies may have learned from their experiences. The Bank and Fund both
say their institutions were not at fault and that greater attention should be placed in
the future on structural concerns and the strength and stability of national economic
institutions. However, their reviews are quite different when they seek to answer the
questions: What did we learn? What needs to be changed?
The International Monetary Fund appears to accept the necessity of developing
an institutional infrastructure. The current IMF Russian program has a section of
structural change jointly crafted with the World Bank. Moreover, the IMF delayed
the allocation of the current funding to Russia on grounds that Russia was not making
the required structural changes. The IMF has not acknowledged, however, that this
was a change of policy nor did they accept responsibility for any past policy mistakes
that may have led to poor Russian performance.
The World Bank chief economists Joseph Stiglitz and his successor Nicholas
Stern2 have both been articulate proponents of the Post-Washington Consensus,
stressing changes in the institutional infrastructure. Stiglitz continues criticize IMF
policy from his position at the World Bank and to articulate the more detailed
structural changes he believes are necessary for effective reform. His World Bank
colleague, Brian Pinto, has been more specific about the detailed changes needed in
the non-payment system impeding sustained growth in Russia.
It is uncertain how the two agencies envision their future interrelationship.
During the Asian crisis, the IMF took the lead in negotiating strategies with the
borrower countries. Structural reform was the centerpiece of these strategies, yet the
World Bank and the Asian Development Bank were responsible for the design and
implementation of the projects which sought to effect those structural reforms. The
IFIs have not indicated whether they believe the IMF should continue to play the
predominant role in future crises, with the multilateral development banks serving
mainly to implement parts of the IMF-approved plan. An alternative case might be
made, in the light of recent experience, that the MDBs might play a larger role –
perhaps even a leading role – in the formulation of plans to deal with future crises in
It is worth mentioning that most of the critiques of IFI activity in Russia and Asia
have focused on the IMF. The multilateral development banks have come in for
relatively little criticism and prescriptions for policy change. Many of the comments
about the IMF are criticism of the performance of the recipient countries, on the
Joseph Stiglitz. “More Instruments and Broader Goals: Moving Toward the Post-Washington
Consensus.” Helsinki, UNU World Institute for Development Economics Research. WIDER Annual
Lectures 2. January 1998. Nicholas Stern, The Transition in Eastern Europe and the Former
Soviet Union: Some Strategic Lessons from the Experience of 25 Countries over Six Years, EBRD
Working Paper #18, April 1997
assumption that the IMF could have promoted better performance if it had managed
its operations differently.
It is interesting to note that some of the sharpest criticisms of IMF performance
have come from analysts based in sister international agencies. This is unusual. Their
principal concerns relate to the development of institutional infrastructure. They
believe the IMF should have been more attentive to this aspect of its programs in
Russia and Asia. Nevertheless, institutional development seems to be more a
developmental than a monetary issue. As such, it would seem to fall within the
purview of the multilateral development banks. The MDBs could have moved earlier,
before the Russian and Asian crises, to address questions of institutional development.
This would seem a natural issue for them to bring to the table when they meet to
coordinate plans and programs with the IMF.
The IMF’s evident preference for macroeconomic programs focusing on
liberalization, stabilization, and privatization would seem consistent with its
organizational focus. If institutional issues are not being sufficiently addressed in IMF
programs, then perhaps more attention ought to be paid to the mechanisms through
which the IMF and the multilateral banks coordinate their operations. Perhaps the
leading role that the IMF traditionally plays in framing country programs does not
leave sufficient room for other agencies to press consideration of developmental
issues such as institutional reform.. Alternatively, the IFIs may have been too attuned
to the formulation and implementation of their own programs. In this regard, further
improvements might be needed in the ways they coordinate their policy goals and
operational plans in individual countries.
The Crises from the Perspective of the IFIs3
The World Bank in Russia
Through calendar year 1999, the World Bank approved 44 projects for Russia
totaling $11.82 billion. In addition, it is implementing three projects for $83 million
approved by the Global Environmental Fund (GEF). All of the World Bank’s projects
in Russia are being financed through its near-market rate loan facility, the
International Bank for Reconstruction and Development (IBRD).
The World Bank remarks4 that Russia has been a difficult place to do
development lending. Economic and political instability and an uncertain policy
environment complicate the Bank’s efforts to identify good projects and to implement
them effectively. The Bank says it has been seeking to build a long-term relationship
Prepared by Jonathan E. Sanford, Specialist in International Political Economy.
The present discussion is based on several World Bank documents, all available from the World
Bank web site at [www.worldbank.org]. For the appropriate menu, select “Regions and Countries”
and then “Russian Federation.” These include “Russian Federation: Country Assistance Strategy–
Public Information notice (CPIN)”, December 22, 1999; “Russian Federation: Country Assistance
Strategy (CAS)–Progress Report, December 1999; “IFC Operations” and the Bank’s country brief
titled “Russian Federation”, August 1999.
with Russia. This suggests that the Bank believes it may need to overlook aspects of
the current situation that might otherwise give it pause in other countries.
The Bank’s strategy in Russia has several main emphases:
encourage reductions in the institutional barriers to growth,
particularly in areas such as governance, institutional reform,
improved effectiveness of public institutions, and better public sector
reduce poverty and limit the suffering associated with the current
process of transition by encouraging economic growth and
strengthening the social safety net.
maintain or improve the effectiveness of the Bank’s existing portfolio
The Bank says the environment in Russia has been uncertain regarding the future
prospects of Bank-funded projects and the realization of the Bank’s country strategy.
The economic fundamentals remain unstable, corruption and ineffective public
institutions hinder implementation, and political instability and changes in leadership
have made it difficult for the Bank to pursue its long-term strategy. In particular, the
Bank reports, the Duma’s rejection of fiscal and institutional changes raises questions
about the government’s ability to achieve the goals of its reform program.
In the interim, the Bank says it should pursue a more limited agenda which does
not appear to require major allocations of resources. This agenda includes:
continuing efforts to provide advice on policy reform, public
resource management, and technical assistance to help strengthen the
emphasizing programs that address social issues and respond to the
country’s emergency needs.
implementing the existing portfolio of Bank-funded projects, in order
to assure their effectiveness in the face of current difficulties.
reviewing the policy-based loan programs5 for Russia that the Bank
has already approved, with the possible suspension of future
disbursements if Russian compliance with the agreed terms of the
loans does not improve.
The World Bank has substantially reduced its levels of lending to Russia. In
calendar year 1997, it lent Russia $3,444 million. In calendar 1998, it lent an
additional $1,900 million. In calendar 1999, by contrast, the Bank approved two
technical reform projects totaling $60 million. Most of the Bank’s loans to Russia in
recent years ($3,700 million of the total approved in 1997 and 1998, for instance)
have been policy-based loans. A substantial portion of the funds associated with these
loans has not been disbursed as yet because of compliance problems.
Policy-based loans are loans that require the borrower to effect specified changes in economic
policy or operational procedures before the proceeds of the loan may be disbursed.
The IMF in Russia
In 1997 and 1998, the International Monetary Fund agreed to loan Russia SDR
13.2 billion ($18.2 billion.) Of this amount, SDR 7.4 billion ($10.46 billion) had not
yet been disbursed when the IMF cancelled its Russian loan program in 1998. The
IMF says that the goals of its program in Russia have been achieved or exceeded.
Any failures or shortcomings in its program were not the fault of the IMF, the Fund’s
spokesmen argue, but were caused by insufficient or inadequate Russian compliance
with the terms of its IMF-approved economic reform program.
Michel Camdessus, the Managing Director of the IMF, reported to the IMF
Executive Board in December 19996 that important progress had been made in Russia
in the implementation of its macroeconomic program. Program expectations had been
exceeded, he said, regarding economic growth, the containment of inflation, the fiscal
balance, and international reserves. He said there had also been some progress
realized on the structural side. He noted that a number of the structural benchmarks
set for the end of September 1999 had not yet been met, but he implied that he
believed these would be met in the near future.
In a newspaper commentary7 published in September 1999, Camdessus explained
the IMF’s relationship with Russia. He said that “engagement is better than isolation”
when it comes to major countries experiencing serious economic difficulties. He said
there is “reason to hope that economic reform will succeed in Russia” and other
countries making the transition from communism.
However, he also said the
“transition from the black hole of the Soviet command economy will take years, and
progress will not be linear” and “any achievements will fade into impossibilities if we
walk away from Russia.” The loss of confidence and inward turning that would come
from our abandonment of the Russian people, he said, “are in the interests neither of
Russia or the rest of the world.”
The previous month, John Odling-Smee, Director of the office responsible for
IMF operations in Russia, wrote an article8 explaining the Fund’s decision to resume
lending to Russia in July 1999. Russia has made major progress since 1992, he said,
moving from a centrally- planned to a market-oriented economy. It has been a reform
effort whose scale and ambition have few parallels and whose outcome is of vital
importance to the people of Russia and the rest of the world. The Fund’s resumption
in lending is justified, he maintains. Important progress has been made and the IMF
needs to support Russia’s most recent economic policies.
In terms of what is at stake, Odling-Smee says, the relationship between the IMF
and Russia is of vital importance. It has been marked by successes and
“IMF’s Camdessus Reviews Status of Russian Programs,” IMF News Brief No. 99/81, December
7, 1999. Copy obtained from the IMF web site, [www.imf.org].
Michel Camdessus, “Russia: Long Climb Out of a Black Hole,” The Washington Post, September
13, 1999. Copy obtained from the IMF web site. Select “country information” and then “Russian
John Odling-Smee. “Russia’s current economic policies are deserving of IMF support.” IMF Survey
28:17 (August 30, 1999), pp. 273-4. Available from the IMF web site.
disappointments. The IMF understands the complexity of the transition process, he
argues, where the economic and political dimensions are intertwined. Most observers
have made the same errors that the IMF is being accused by its critics of having made.
“If the economic programs the IMF has supported in recent years had been fully
implemented, Odling-Smee says, “the Russian economy would look very different
today.” Maintenance of a continual dialogue between the Russian Government and
the IMF is crucial – and the prospects for economic reform are greatest – in those
areas where departure from agreed-upon policies can halt IMF lending. In the future,
he says, the IMF membership will require greater implementation of programs before
funds are disbursed.
Looking at specific issues, Odling-Smee found there is no evidence to support
the charge that IMF funds had been stolen or diverted to improper uses. (Other IMF
officials have noted, however, that the Russian authorities lied to them about the
FIMACO case.) Capital flight is a major problem in Russia, Odling-Smee
acknowledged, but he said it is not caused by IMF policies. Rather, it is caused by the
lack of implementation by the Russian Government of the programs the IMF loans
sought to support.
The IMF and the Asian Crisis
The Fund says that the Asian financial crisis of 1997-9 was unusual. It said, in
a 1998 report,9 that the crisis was “structural” in origin. Unlike most countries that
come to the IMF suffering from balance of payments and currency crises, the Asian
countries had had relatively strong macroeconomic fundamentals beforehand and
(except for Thailand) no real balance of payments problems. The crisis was
proceeded by a surge of capital inflows which the Asian countries handled poorly.
Their banking and finance systems were fragile, weakened by imprudent practices and
inadequate regulatory systems, and, the IMF reported, foreign lenders often provided
money “without due regard” for the structural weaknesses of the countries’ financial
systems. The “combination of a weak banking system and an open capital account”
in these countries was, the IMF concluded, “an accident waiting to happen.”
In August 1997, the IMF agreed to lend Thailand SDR 2.9 billion ($3.9 billion.)
The following December, it agreed to lend SDR 15.5 billion ($20.9 billion) to Korea.
The IMF had more difficulty with its program for Indonesia. In November 1997, the
IMF approved a loan of SDR 7.338 billion ($9.9 billion); of this amount, SDR 4.7
billion ($6.57 billion) had been drawn by August 1998. The IMF then cancelled the
original loan to Indonesia and replaced it with an SDR 5.4 billion ($7.6 billion) loan
from its Extended Fund Facility, which is repayable over a longer period of time.
IMF. International Capital Markets, 1998. Chapter III. “Emerging Markets in the New
International Financial System: Implications of the Asian Crisis,” pp. 59-81, especially 78-9.
Available from IMF web site . The report examined the crisis in detail. It also identified a number
of areas where further action might be helpful. These include: better bankruptcy laws, better
coordination by countries of their financial regulation and exchange rate policies, improvements in
countries’ regulatory environment and reporting procedures, limits on foreign borrowing by banks
and nonbank entities, and reductions in the financial “safety net” so that more of the risk from
private international financial transactions is borne by the parties involved.
In 1999, the IMF released an assessment10 of its response to the Asian crisis.
The report says that the immediate problem in Asia was a liquidity crisis which led to
a rapid decline in currency values. The larger problem, however, was the weakness
of their financial institutions and negligent regulatory environments that exacerbated
the problem. Large financing packages were also arranged to restore market
confidence. Tight monetary and interest rate policies were prescribed to staunch the
outflow of capital and stabilize currency values. Budget cuts were prescribed to help
support the external adjustment process and to allow room in national budgets for
non-inflationary expenditures aimed at restructuring the banking system. However,
the study reports, the centerpiece of the IMF strategy in Asia was a broad long-term
program of fundamental reform of the countries’ economic and policy institutions.
These sought to address the root causes of the crisis, improve market confidence, and
set the stage for a resumption of growth.
When the Asian programs were being formulated, the study reports, the
underlying causes of the economic crisis were less evident than they are now, with the
benefit of hindsight. The IMF’s initial programs in Thailand, Korea, and Indonesia
did not succeed in restoring confidence or lessening the outflow of capital. The report
finds that the task was complicated by the limited state of the countries’ reserves, by
market volatility, and by the array of structural problems. It was also hampered by
hesitant program implementation, political uncertainties, and other factors that cast
doubt on the authorities’ commitment to the program. Other complications included
revelations of market-sensitive information, uncertainty about the financial packages,
and the difficulty making needed arrangements for government guarantees.
The IMF believed initially that the Asian crisis would have only a modest impact
on the countries’ rate of growth. The interest and credit policies of the IMF programs
sought to prevent a destructive inflation/depreciation spiral from occurring, rather
than seeking to stabilize exchange rates at any particular level. The IMF study says
that monetary policy in Korea and Thailand tightened as planned and, by the following
summer, interest rates had returned to their prior levels and half the depreciation in
exchange rates had been reversed. “This is not to deny, of course,” the study
observes, “that monetary tightening had a cost for the real economy, but the
alternative would have been more costly.”
In Indonesia, by contrast, monetary policy was not tightened as planned and the
recovery stumbled. The IMF study reports that the Indonesian authorities lost control
of money and credit, the banking system collapsed, the money supply expanded, and
the underlying real interest rates remained negative while nominal interest and
exchange rates bore major market risk premiums.
Fiscal policy in the three countries was also based on an assumption that the
slowdown in growth would be modest. The IMF analysts say that, if the fiscal
policies prescribed in the original programs had been implemented as planned,
See: Timothy Lane, et al. IMF-Supported Programs in Indonesia, Korea, and Thailand: A
Preliminary Assessment. IMF Occasional Paper 178. International Monetary Fund, 1999, 82p. See
also another study that focuses specifically on the financial sector. Tomás J.T. Baliño, et al.
Financial Sector Crisis and Restructuring: Lessons from Asia. International Monetary Fund, 1999,
80p. Both are available from the IMF web site.
economic growth in the three countries would have declined quite substantially.
However, they report, fiscal policy in the countries relaxed in 1998 as the recession
deepened and current account surpluses emerged. Governments made room in their
budgets, even to the point of deficit financing, in order to assure funding for social
safety-net programs and to accommodate spending for programs (the “automatic
stabilizers”) designed to stimulate spending and slow the contraction of the economy.
Unfortunately, the study indicates, Korea and Indonesia were unable to increase their
spending rapidly enough to have the desired stimulative effect.
The study indicates that the Fund failed to anticipate the severity of the downturn
in the borrower countries. The steps taken by the IMF-approved programs were both
too severe and also insufficient to meet the requirements of the crisis. This hurt the
credibility of the programs and limited their effectiveness. Still, at the time, the
analysts report, few people foresaw the severity of the economic downturn in the
Asian countries. In hindsight, they say, it is clear that the IMF should have supported
fiscal policies that were less restrictive and monetary policies that sought to
accommodate faster growth. It was not so clear at the time, however, the analysts
report, that these would be the appropriate measures.
The IMF study says that the programs it supported in Asia did not have enough
funding to be successful in an environment where the crucial effort to restore
confidence had failed. The decision to float the countries’ exchange rates led to a
period of continuous market depreciation. However, IMF analysts maintain, there
was no practical alternative – especially in Korea and Thailand – after the
governments’ efforts to defend specific exchange rates had exhausted their reserves.
The IMF analysts believe the Asian countries might have avoided any need for
floating their currencies if their foreign exchange reserves had been larger and they
had enjoyed more market confidence. Still, they report, the Asian countries would
have had to adopt interest rates that were “punishingly” tight if they wanted to keep
the value of their currencies at specified rates. Furthermore, there was no guarantee
that this strategy would have enabled them to weather the pressure for devaluation.
As it was, the analysts conclude in their 1999 report, the reluctance of the
governments to tighten monetary policy in the early stages of the crisis made the later
task of stabilizing the value of their national currencies much more difficult.
Stanley Fischer, Deputy Managing Director of the IMF, argues11 that in recent
years the IMF has been playing increasingly the role of lender of last resort. It has
also been the crisis leader, negotiating with the countries in crisis and mobilizing
international support for financing packages backed by many countries and
multilateral agencies. The international financial system needs fundamental reform,
he says. Many factors may shape a country’s choice of exchange rate regimes. Both
countries with flexible and countries with fixed rate systems have run into trouble.
“Nevertheless,” he observes, “it is striking that the major external crises of the last
two years – in Thailand, Korea, Indonesia, and Russia – have affected countries with
more or less pegged exchange rates.” Fischer argues that economic behavior in those
Stanley Fischer. “On the Need for an International Lender of Last Resort.” Paper prepared for
delivery to a joint session of the American Economic Association and American Finance
Association, New York, January 3, 1999. Available from the IMF web site.
countries was profoundly affected by the assumption that their pegged exchange rates
would remain stable. This presumption encouraged practices, he says, especially in
the banking system, that contribute to the severity of the economic crisis that is likely
to follow when they are forced to devalue their currencies.
In 1998, Kunio Saito, director of the IMF office responsible for Asian programs,
summarized on one page the nature of the Asian crisis and the IMF’s response to it.12
The crisis was caused, he said, by excessive investment financed by excessive short
term borrowing, economic overheating, delays in policy adjustment, and other
structural factors such as a prolonged dollar peg. It was characterized by a sudden
loss of confidence in exchange markets and the banking system, unprecedently large
pressures on markets, and rapid and excessive contagion to other countries. In
response, he said, the IMF mobilized unprecedently large financing packages and
processed them within a 2-to-3 week period. It also supported major stabilization
and reform programs that required countries to adopt sound macroeconomic policies,
to restructure the financial sector, to improve corporate governance, and to adopt
other reform measures.
The World Bank and the Asian Crisis
The World Bank and IMF have worked closely in response to the challenges
posed by the Asian financial crisis, Sven Sandström, Managing Director of the World
Bank, told a conference in 1998,13 though they have tackled the problem in different
ways. The Bank has focused on structural and sectoral issues, he said, while the Fund
has focused on macroeconomic aggregates. The Bank has focused on long-term
issues, though he said the short-term clearly matters. Finally, he said, the Bank has
focused on a broad array of developmental issues facing the Asian countries, not just
on economic and financial issues. The Asian crisis threatened to undercut the
remarkable record of economic growth that Asia had achieved in recent decades and
to throw back into poverty huge numbers of people who had recently escaped that
condition. The Bank’s core mandate is poverty reduction, Sandström argued.
Therefore, it needed to be actively involved in the international effort to restore
confidence and growth in order to prevent a serious resurgence of poverty in the
The World Bank says the Asian crisis brought to the fore some of the structural
and institutional challenges posed by globalization. It also revealed unexpected
weaknesses in the financial and corporate sectors in the Asian countries that required
correction. The Bank says, in its 1999 annual report,14 that its operations in the crisis
countries have focused in four areas: (1) reshaping the microeconomic environment
Seminar on ASEAN Financial Policy and Macroeconomic Management. “The Asian Financial
Crisis and the IMF.” Summary of Presentation by Kunio Saito, March 24, 1998. Available from
IMF web site .
Sven Sandström. “The East Asia Crisis and the Role of the World Bank.” Statement to the
Bretton Woods Committee, February 13, 1998. He is the second ranking official at the World Bank.
Available from the Bank web site.
World Bank. Annual Report, 1999. Washington, D.C., 1999. “East Asia and the Pacific,” pp.
42-53. Text also available from World Bank web site.
in these countries and restructuring their financial and corporate institutions, (2)
improving the accountability, transparency, and effectiveness of their official
institutions and minimizing corruption, (3) supporting social sectors programs and the
emergency safety-net, and (4) safeguarding the environment.
Table 1. World Bank Lending to Three Asian Countries, FY1997-99
(millions of U.S. dollars)
During the past three years, the World Bank has reshaped and expanded its
volume of assistance to the countries in Asia suffering most acutely from the financial
crisis. During its fiscal year15 1997, the Bank’s total loan commitments for the three
Asian countries totaled $1,403 million. (See Table 1.) Korea had ceased being a
borrower in 1994, and it had subsequently joined the Organization for Economic
Cooperation and Development (OECD), a body composed of advanced industrial
countries and their peers. In Thailand, two-thirds of the Bank’s loans in 1997 went
to fund improvements in the country’s electric power distribution system, while the
remainder supported improvements in the Thai system of higher education in the areas
of science and engineering. In Indonesia, except for a $105 million loan to improve
railway efficiency, all the loans approved in 1997 were for educational programs or
for regional or village-level development projects.
The focus of the Bank’s programs in these three countries was fundamentally
different during the next two years. In 1998, Korea received a $2 billion structural
adjustment loan (SAL) and a $3 billion project loan to help restructure its economy.
It received a second $2 billion SAL in 1999, plus a $48 million loan to facilitate
Korea’s plans to restructure its financial and corporate sectors.
The two SALs put money in the Korean central bank in order to help it manage
its balance of payments problems. At the same time, they required the Korean
government to undertake a wide range of economic policy reforms, as already
specified in the letters of intent and other agreements associated with the IMF loan.
The IMF disbursed most of the proceeds from its SDR 15.5 billion ($20.9 billion) loan
to Korea up front, to deal with the immediate crisis.16 Subsequent disbursements from
the two World Bank SALs provided resources to help facilitate and encourage further
Korean compliance with the reform and stabilization plan. The $3 billion economic
The World Bank’s fiscal year runs July 1 through June 30.
By May 1998, only SDR 2.9 billion ($3.9 billion) of the IMF loan money remained undisbursed.
The undisbursed balance shrank to SDR 1.3 billion ($1.8 billion) by April 1999.
restructuring project17 included measures to restructure the Korean banking and
finance sector, reform corporate governance, promote competition and transparency,
strengthen needed regulatory procedures, enhance labor mobility, and develop social
safety nets to protect the poor.
In Thailand, the Bank also shifted from development projects to economic
reform. In 1998, its principal emphasis was a $350 million loan to finance the
restructuring of Thai financial institutions. It also approved two $15 million loans to
facilitate implementation of the restructuring program and improve economic
management. In 1999, the Bank approved two loans totaling $1 billion which aimed
to help the Thai authorities restructure the financial corporate sectors still further,
improve accountability and transparency, strengthen regulatory procedures, improve
the social safety net, and stimulate increased spending on social programs in order to
stimulate economic growth. A similar $600 million loan is planned for 2000.18 The
World Bank also approved a $300 million loan for Thailand in 1999 to help fund
emergency employment programs and assure the continued availability and expansion
of essential social service programs.
In Indonesia during 1998, because of uncertainties about the political situation
and the government’s degree of commitment to fundamental reform, the World Bank
focused most of its lending on the types of development projects it had sponsored in
the past. In fiscal 1998, it approved loans totaling $496 million for regional
development projects and regional roads and $146 million for education or social
projects. A December 1997 loan of $20 million was the only loan that year that was
clearly directly towards the broader issue of reform. The Bank focused additional
resources that year, however, on social concerns. Roughly $300 million in previously
approved funds were reprogrammed for immediate disbursement on social safety-net
activities – particularly labor-intensive employment programs and health and
education services benefitting the poor.
In fiscal 1999, the Bank found that the Indonesian government’s attitude towards
reform was more encouraging. In July 1998, it approved a structural adjustment loan
which promised to disburse $1 billion in balance-of-payments support as soon as the
government demonstrated that it had taken specified steps in four areas: (1) increasing
increase the efficiency and transparency of its public sector operations, (2) reforming
the financial sector and laying the groundwork for a future restructuring of corporate
debt, (3) implementing a range of structural and policy reforms aimed at improving
governance, productivity, and environmental sustainability, and (4) taking actions to
protect the poor and continuing investments in education and health. The Bank
determined, soon after loan approval, that the government had complied with the
conditions and it disbursed the full sum of the loan. The Bank also approved a $100
million urban renewal project and several projects totaling $170 million for social
safety-net activities in the health and education sectors.
“World Bank Approves Economic Reconstruction Loan to Korea.” World Bank news release
98/1597/EAP, December 23, 1997. Available from the Bank web site.
World Bank. Project Information Documents for Thailand-Economic and Financial Adjustment
Loans II and III, pid th58536 and th66068. Available from the Bank web site.
In May 1999, the Bank approved three additional loans, totaling $1.4 billion, to
support additional policy reform activities. Like the $1 billion policy reform loan
approved earlier, the proceeds from the loans were to be used for balance of payments
support. The funds would be disbursed, however, only after the government adopted
certain specified reforms. The $500 million policy reform loan required the
government to take steps towards further improvements in its fiscal and monetary
policies. It identified several major initiatives – particularly the resolution of bad
loans, the consolidation or closure of unsound banks, and changes in the rules on
corporate governance and investment – that were needed in the banking and
corporate sectors. It specified particular steps needed to improve governance and the
transparency and efficiency of public and private sector organizations. It also
identified particular actions necessary to improve environmental policy and its
implementation. The Bank determined, soon after the second policy reform loan was
approved, that the government had complied with the specified conditions and it
disbursed the balance of the loan.
The two other policy reform loans approved in May 1999 have not yet been fully
disbursed. The $600 million committed for the Social Safety Net Adjustment Loan
would be available (as balance of payments support) when the government
demonstrated that it had budgeted an adequate amount for social and safety-net
programs, when it demonstrated that it had adopted procedures to assure effective
implementation of those programs, and when it had created a system of monitoring
and control sufficient to safeguard the programs from delay, leakage, and corruption.
In February 2000, the World Bank determined that the Indonesian government had
made sufficient progress in these areas to merit disbursement of the first half of the
Similarly, the $300 million Water Sector Adjustment Loan seeks to improve the
national institutional framework for water resources development and management.
It aims in particular to improve the policies and procedures for river basin
management and irrigation. Among other things, it requires that more authority be
transferred to autonomous farmer organizations. A small portion of the proceeds of
the loan was disbursed upon approval. In February 2000, World Bank officials
believed that enough of the specified reforms may have been adopted to justify
disbursement of the second tranche, comprising a major share of the proceeds, in the
In sum, the World Bank says of its activities during the Asian financial crisis, that
it is helping build a new East Asia. It will be a region, the Bank says, with stronger
financial institutions, stronger companies, and increased openness, not only in trade
and finance, but also increasing in information and even, it suggests, in politics.
World Bank. Project Information Documents for Indonesia–Social Safety Net Adjustment Loan,
pid id63939. Interview with World Bank official. Available from the Bank web site.
World Bank. Project Information Documents for Indonesia–Water Sector Adjustment Loan, pid
id62715. Interview with World Bank official. Available from the Bank web site.
The Views of Some Prominent Critics
As the Asian financial crisis spread to other parts of the world and as the Russian
financial crisis of August 1999 led to default and the collapse of the ruble, many
analysts voiced sharp criticism of the appropriateness and effectiveness of the IFIs
policies promoting Asian and Russian reform. Prominent among these are Joseph
Stiglitz of the World Bank and Jeffrey Sachs of Harvard’s Institute for International
Development. Their views and the views of several colleagues are summarized
Critiques of the IFI Programs in Russia21
Stiglitz’s criticism focused22 on the policy differences between the Washington
Consensus and the Post-Washington Consensus. The latter policy accepted the
importance of the key macro economic pillars of the Washington Consensus such as
liberalization, stabilization and privatization, but called for priority changes at the
enterprise level and in economic institutions. Both Stiglitz and Sachs faulted the IMF
for failures in Russian reform resulting from Moscow following the Washington
Consensus policy adopted by the IMF in 1991.
Stiglitz is a leading architect of the Post-Washington Consensus policy. Sachs
consistently held the international financial institution responsible for failures he
perceived in Russian reform. The present discussion and the attached chronology
highlight the recent criticisms by Stiglitz and Sachs of the IMF in Russia and note the
public responses by officials in the IMF, the U.S. Treasury, and the World Bank to
the criticisms of IMF/Russian reform policy and performance.
Stiglitz described and criticized the Washington Consensus followed by the IMF
in the following statement: “the dictums of liberalization, stabilization and
privatization…were evidently not enough. An economy needs an institutional
infrastructure.”23 By highlighting institutional infrastructure, Stiglitz emphasized
developing “market-friendly” institutions, such as performing private commercial
banks and efficient enterprises. Growth in Gross Domestic Product from more
comprehensive reform was not enough. Successful reform also required enhancement
in the quality of life. To attain this performance, Stiglitz called for reform to
“promote democratic, equitable, and sustainable development.” 24
Sachs’s critique of the IMF Russian program focused mainly on reform failures
without calling for the specific policy changes recommended by Stiglitz. Sachs listed
five failures in Russian reforms: crony privatization, official corruption, flight capital,
poor donor oversight, and lack of structural change, and he held the IMF largely
Prepared by John P. Hardt, Senior Specialist in Post Soviet Economics.
Stiglitz, op. cit., footnote 2.
Joseph Stiglitz. World Bank Newsletter, TRANSITION, December 1998.
Stiglitz, “Democratic Development as the Fruits of Labor, January 2000.”
responsible for these failures.25 However, some observers contend that Sachs’s
prescriptions for Russian reform from 1991 to 1998 were very much in line with the
IMF and the Washington Consensus. Although Sachs welcomed the PostWashington Consensus as articulated by Stiglitz, he viewed success in Poland and
Slovenia and failure in Russia as more heavily influenced by geography, (i.e. proximity
to the European Union) than the history of pluralism or authoritarianism for countries
Responses to Stiglitz’s and Sachs’s criticisms of IMF Russian policy were made
by key officials in the IMF, Treasury and the World Bank, such as Stanley Fischer,
Lawrence Summers, and James Wolfenson. These official rejoinders did not criticize
the Post-Washington Consensus but questioned the critical interpretation of IMF
responsibility and culpability for Russian reform failures. They say that everyone had
gone through a learning process.27 Implementation of the IMF programs was limited
by what was politically possible.28 James Wolfenson, World Bank President, criticized
Stiglitz for his public criticism of a sister agency and also allowed that it was easier
to have 20-20 hindsight. It was announced that Stiglitz would leave the World Bank
on January 1, 2000 before expiration of his term in office.29 However, he did not
leave and his office at the World Bank reported on January 18 that he would be
staying on for another six months as Special Advisor to the President of the World
Up to the August 1998 crisis, the IMF had not publicly accepted the PostWashington Consensus.30 The Post-Washington Consensus was largely adopted in
the current IMF Russian program of July 1999 in the “Structural Reform ” section,
jointly drafted by the IMF and the World Bank. Some observers suggest that an
agreement of the IMF and its critics on the adoption of the Post-Washington
Consensus policy may be a step forward, but is still not sufficient for successful
reform. These critics believe that a missing piece in the critique may be administrative
and military reform. From their perspective, the bloated and counter-productive
civilian bureaucracy and military forces foster corruption and impede efficient
Sachs, “Calling the IMF to Account,” op. ed., the New York Times, September 8, 1999.
Sachs, “Eastern European Reforms: Why the Outcomes Differ So Sharply,” Boston Globe,
September 17, 1999.
Fischer, “What Went Wrong in Russian Reform?” Financial Times, September 17, 1999.
Summers, Testimony to House Banking Committee on Russia, September 1999.
World Bank Economist Felt He Had to Silence Criticism or Quit,” the New York Times; December
The IMF led Russian Assistance Program,” featuring Stanley Fisher and Aleksei Mozhin of the
IMF on a panel of the Heritage Foundation, July 23, 1998.
Brian Pinto, “The Russian Federation, Dismantling Russia’s Non-payment System Creating
Conditions for Growth.” World Bank, September 1999. For commentary, see Financial Times,
The World Bank has been more specific in their diagnosis of the poor Russian
economic performance and their prescriptions for remedial change in developing an
institutional infrastructure. The critical problem the World Bank addresses is that of
breaking up the non-payment system in Russia.32 Without an efficient tax code, a
working banking system and a bureaucratic system that regulates enterprises, Russia
will not be able to gather taxes, manage debt, pay wages and pensions and otherwise
make the system solvent. These changes would positively influence the Russian
economic incentive system. The present system is viewed as persistently undermining
Critiques of IFI Programs in Asia33
Jeffrey Sachs is a Harvard University professor and Director of the Harvard
Institute for International Development. He also was a member of the International
Financial Institution Advisory Commission which issued its report on March 8,
The Sachs criticism of the IMF seems to arise partly from his background as
Director of the Harvard University Institute for International Development (which is
to be closed ) and partly from his work advising governments of former communist
states in transition – such as Poland, Slovenia, and Russia. The Harvard Institute
focuses on alleviating poverty in developing countries, while Dr. Sachs has advised
transitional economies to adopt economic policies that include privatizing industries
and maintaining flexible exchange rate regimes. Sachs also plays the role of the
independent professorial advisor who can advocate policies without coping with the
difficulties of changing bureaucratic inertia or actually implementing them. He has
long criticized IMF programs in various countries and the way that the IMF operates.
The policies he advocates, generally stem from principles of free markets,
privatization, debt restructuring/relief, and transparency in IMF operations, although
he also appears sympathetic to the East Asian reliance on state-led industrialization.
With respect to the role and operations of the IMF in the Asian financial crisis,
Sachs has made the following statements:
The IMF deepened the sense of panic in Thailand, Indonesia, and
South Korea by undermining foreign investor and lender confidence
by its dire public pronouncements and proposed austerity programs.
The IMF’s approach to Asia was patterned after its approach to
problems in Latin America and elsewhere – a focus on restraining
government spending and raising interest rates to stabilize currency
values rather than on containing private-sector financial panic.
Prepared by Dick K. Nanto, Specialist in Industry and Trade.
International Financial Institution Advisory Commission. Report of the International Financial
Institution Advisory Commission. March 8, 2000. 124 p.
The IMF insistence on closing weak financial institutions and
tightening regulatory standards worsened the crisis by drying up
lending in Thailand, South Korea, and Indonesia.35
Almost every IMF prediction about the Asian financial crisis and its
own “bailout” programs has been proven wrong.
The IMF is not being held accountable for its actions, its failed
forecasts, and the details of the “advice” it imposes on the developing
IMF program documents are not open to public debate and critical
The IMF is dominated by the United States, European Union, and
Japan. Developing countries have little influence in IMF decision
making despite their large populations.36
Sachs’ criticisms of the IMF appear to have some validity and have been heard
from other quarters also. Some of them have been bolstered by benefit of hindsight,
but others were made during the crisis and before the negative effects of the IMF
prescriptions were felt in the countries in question. The IMF has been reviewing its
own programs as well as responding to criticisms from Sachs and others. It has
modified its operating methods and pursued policies oriented toward alleviating
poverty in addition to their traditional purpose of stabilizing exchange rates.
Did the IMF Worsen the Crisis? The core of Sachs’ criticism is that the IMF
worsened the Asian financial crisis rather than easing it by its dire public
pronouncements and the fiscal austerity and high interest rate policies (tight monetary
and fiscal policies) it required of borrowing countries as a condition for loans. Sachs
views the Asian financial crisis as being caused more by investor/lender panic than
structural financial problems and governmental economic policies. For him, the
solution should have been more to stop the panic rather than to perform major surgery
on frail economic systems. He admits that the Asian countries had allowed
themselves to become too dependent on short-term borrowing in foreign currencies
for long-term domestic projects and had maintained their exchange rates fixed at
excessively high values despite clear market signals that devaluation would have been
prudent. He points out, however, that just months before the onset of the financial
turmoil, the IMF and other organizations were praising the economic performance
(growth rates) of the very Asian nations hit by the crisis. According to Sachs, since
the short-term borrowing was private, the solution should have been to work out a
deal with private foreign creditors in order to stem the panic and to provide some
short-term liquidity, rather than for the IMF to rely on high interest rates and fiscal
austerity to try to keep capital from fleeing the countries in question. The high
interest rates, in particular, plunged the economies into deep recession.
Sachs, Jeffrey. Fixing the IMF Remedy. Banker, v. 148. February 1998. Pp. 16-18.
Sachs, Jeffrey. The IMF and the Asian Flu. The American Prospect, March-April 1998. P. 1621.
The IMF maintains, however, that the high interest rates were a short-term
emergency measure. The rates came down as the economies were stabilized. In
South Korea and somewhat less so in Thailand, the recessions were relatively shortlived, given the severity of the initial crises. According to most observers, the
political turmoil in Indonesia that accompanied the financial crisis made a return to
normalcy nearly impossible – regardless of what the IMF did or did not do. Much of
the capital flight (converting liquid assets into foreign currency), moreover, was by
investors in stock markets and by local wealth-holders who were trying to protect
their wealth by converting assets into dollars as their home currency values
plummeted. Reassuring these investors would have been a much more formidable
task than gathering a small number of creditor bankers in New York to discuss rolling
over their loans. In other words, Sachs may have a good point, but in the midst of a
financial panic, working out a deal with enough private foreign creditors and investors
to stem the capital flight would have been extremely difficult or impossible.
At any rate, the IMF appears to have been affected by its experience in the Asian
financial panic and is taking more preventive measures to try to keep panics from
occurring. The IMF also shares the conclusion of many observers that the “efficient
operation of the international system requires more private sector involvement in the
prevention and resolution of financial crises.”37 In other words, the IMF feels that
foreign banks and other lenders (rather than investors and local citizens) need to bear
more of the costs of financial crises.
The IMF maintains, moreover, that the monetary and fiscal restraints on the
countries in crisis were eased as economies stabilized or dropped into recession and
regulations were revised as appropriate. The IMF also states that it recognizes that
macroeconomic stability alone cannot solve financial crises. During most of its
existence, the IMF has focused on “first-generation reforms” intended to make
markets work more efficiently to ensure stability. These included reforms in pricing,
exchange rates, taxes, and government expenditures and by establishing rudimentary
market institutions. These actions proved particularly important for Eastern European
countries as they dropped their failing systems based on central planning and control.
The IMF now recognizes that financial stability also relies on “second-generation
reforms,” that is, reforms and institution-building that is needed for a country to attain
sustained, high-quality growth. The scope of these reforms is now being defined and
would include sound economic, social, and political institutions.38
Closing Weak Financial Institutions. Sachs also criticizes the IMF for
insisting that weak financial institutions be closed and their regulatory standards be
tightened. He claims that this worsened the crisis by drying up lending. Lending
activity by banks and other financial institutions certainly did drop and, for a time,
dried up during the financial crises in Thailand, South Korea, and Indonesia. The
Sachs criticism, however, raises the age-old problem of moral hazard. Does one “bail
Fischer, Stanley. Learning the Lessons of Financial Crises: The Roles of the Public and Private
Sectors. Speech given at the Emerging Market Traders’ Association Annual Meeting. New York,
December 9, 1999.
Camdessus, Michael. Second Generation Reforms: Reflections and New Challenges. Remarks
to the IMF Conference on Second Generation Reforms. Washington, November 8, 1999.
out” banks or other financial institutions that engaged in unsound lending in order to
keep the economy going knowing that such bailouts will encourage further unsound
lending in the future? Should banks that cannot meet minimum capital adequacy
standards be allowed to continue lending – particularly if their source of funds is a
quasi-governmental bank – even though the threat of massive bank closings causes
such a crisis of confidence in the banking system that it has major negative effects on
the economy? These questions are not easy to answer, and future policies to contain
financial panic probably will have to include a delicate mix of actions that include both
harsh and supportive policies toward financial institutions. With respect to the
international capital adequacy standards for banks, the Basel (Switzerland) Committee
on Banking Supervision in June 1999 proposed that the existing standard be
overhauled. This issue now is being debated in international financial circles. The
new standard would address problems of risk management more completely.39
Poor Forecasts. A further criticism by Sachs of the IMF is that almost every
prediction it has made about the Asian financial crisis and its own “bailout” programs
have been proven wrong. Specifically, Sachs points out that IMF projections of
economic recovery were too optimistic and that economies were harder hit than
anticipated. In retrospect, not only IMF economists, but few other economists or
observers, foresaw the severity of the Asian financial crisis. The crisis was outside the
range of immediately probable events. Still, the IMF could have benefitted from the
experience of experts from the World Bank, Asian Development Bank, and other
Asian institutions during the early stages of the crisis who voiced opinions that the
IMF requirements appeared too stringent. In the South Korean case, recovery is
proceeding faster than anticipated at the beginning of the crisis.
IMF Accountability. Sachs states that the IMF is not being held accountable
for its actions and the details of the “advice” it imposes on the developing world. He
points out that the IMF is loath to disclose information to the public who need it to
protect their investments and to evaluate IMF policies. IMF program documents have
not been open to public debate and critical scrutiny. The IMF counters that by
disclosing certain sensitive financial information about countries, it would run the risk
of causing the very financial panics it was trying to prevent. During the Asian
financial crisis, however, several IMF documents related to the South Korean support
program were posted on various Korean Internet sites. The IMF with the permission
of the countries involved, therefore, is making public on its Internet home page
documents that deal with IMF-supported programs of reform and adjustment. The
IMF also is now having external evaluations conducted of its surveillance and
IMF Not Attuned to Needs of Poor Nations. Sachs also claims that the IMF
is dominated by the United States, Europe, and Japan and is not attuned to the special
needs of developing nations – such as alleviating poverty. The IMF and it supporters
respond that problems of economic development and poverty have been the purview
Engelen, Klaus C. Shoot-Out at the Basel Corral. The International Economy, January/February
2000. pp. 46-49.
of the World Bank and other development banks rather than of the IMF. However,
after the Asian financial crisis threw some 20 million people into poverty and certain
officials of the World Bank publicly expressed dissatisfaction with IMF actions, the
IMF has been shifting its policies more toward poverty alleviation. In a 1999 speech,
Stanley Fisher, the First Deputy Managing Director of the IMF, said that the Asian
financial crisis had been terrible and had taken a high toll on many people, especially
the poorest and most vulnerable in society.40 The IMF has joined with the World
Bank in a joint strategy to make poverty reduction the centerpiece of their joint
strategies in the 75 poorest countries of the world.41 Other analysts fault both the
Sachs criticism and the IMF defense by arguing that poverty alleviation aid reflects
“old thinking” and that sound market-friendly economic and fiscal policies are still the
best way to promote development.
As for the large influence of the United States, Europe, and Japan in the IMF,
voting power in the IMF is based primarily on subscriptions to the IMF’s capital base.
Currently, the United States holds about 18% of the votes. Since decisions require
an 85% majority of the IMF’s total voting power, the U.S. effectively holds veto
rights in the organization. This, of course, gives it considerable authority in
determining IMF policies – despite the fact that traditionally, the IMF is headed by an
In summary, many of the criticisms by Jeffrey Sachs of the IMF with respect to
the Asian financial crisis have been incorporated – to a certain extent – into the
operations of the institution. Whether the changes in IMF operations and policies
come from its own internal thinking and policy reviews or from the criticism of
outsiders like Sachs, however, is unclear. Most likely, the changes resulted from a
combination of policy failures, outside criticism, and internal institutional thought.
Even with the changes the IMF has made, however, it still has encountered problems
in attempting to assist countries, such as Russia and Brazil, as they have been
confronted with financial crises. As IMF programs have hit snags, Sachs continues
to critique the institution and its policies and will probably continue to do so into the
Fisher, Stanley. The Road to a Sustainable Recovery in Asia. Speech before the World Economic
Forum, Singapore, October 18, 1999.
Camdessus, Michel. From the Crises of the 1990s to the New Millennium. Remarks to the
International Graduate School of Management, Palacio de Congresos, Madrid, Spain. November
Relevant CRS Products
Readers desiring further information about the Russian and Asian situations might
consult the following CRS products:
Raymond J. Ahearn. South Korea’s Economic Prospects. CRS Report RS20041,
February 1, 1999.
William H. Cooper and John P. Hardt. Russian Capital Flight, Economic Reforms,
and U.S. Interests: an Analysis. CRS Report RL30394, December 27, 1999.
Global Financial Turmoil and the International Monetary Fund. CRS Info Pak
IP245G. Updated continuously.
Stuart D. Goldman. Russia. CRS Issue brief IB92089. Updated continuously.
John P. Hardt. Russia’s Economic Policy Dilemma and U.S. Interests. CRS Report
RL30266, July 23, 1999.
Larry A. Niksch. Indonesia: Political/Economic Situation and U.S. Policy. CRS
Report 98-686 F, March 20, 1999.
Dick K. Nanto. Global Financial Turmoil, the IMF, and the New Financial
Architecture. CRS Report RL 30272, July 15, 1999.
Jonathan E. Sanford. Multilateral Development Banks: Issues for the 106th Congress.
CRS Issue Brief 96008. Updated continuously.
Jonathan E. Sanford. IMF and World Bank; U.S. Contributions and Agency Budgets.
CRS Report RS20413, December 9, 1999.
Patricia Wertman. International Monetary Fund (IMF) Reform: Past Solutions,
Current Proposals. CRS Report RL30132, May 28, 1999.
Articles and Other Published Reports
These are listed in reverse chronological order. Full-text versions are available
by calling CRS at 7-5700 or FAX 7-6745. Additional references may be found in the
footnotes to the text.
“IMF mission to Visit Moscow After Presidential Election.” Interfax
Prepared by Robert Howe, CRS Office of Information Resources Management.
“IMF Will No Longer Grant Credits to Russia, No Matter Who
Becomes Its New Managing Director,” by Semyon Novoprudksy.
Russian Press Digest.
“Former PM Blasts IMF For Stance on Russia.” Interfax Russian
“Russia’s Unique Economy May Have Led To 1998 Crisis: World
Bank Report Suggests the Financial Crisis Was Caused by the Wrong
Medicine Being Given To an Unusual Patient,” by John Thornhill.
Financial Times (USA ed. 1).
“The Summit Where Money Is Where the Mouths Are: At Davos,
Where the Big Boys Pay $250,000 US For the Best Seats,” by Stan
Persky. Vancouver Sun.
“World Bank Dissenter Sticks to His Guns; On Eve of Davos Forum,
Departing Official Chides Russia and IMF,” by Alan Friedman.
International Herald Tribune.
“Harvard to Close Scandal-Tinged Foreign Institute [Institute for
International Development]”, by David Abel. Boston Globe.
World Bank’s Stiglitz vs. Camdessus,” [editorial]. Moscow Times.
“Stiglitz Bows Out With a Broadside,” by Duncan Hughes. Sunday
“Democratic Development as the Fruits of Labor,” by Joseph Stiglitz.
Keynote address to the Industrial Relations Research Association,
“U.S. Blocks Aid to Russian Oil Company,” by David E. Sanger.
New York Times.
“The Bumpy Ride of Joe Stiglitz.” The Economist.
“Invisible Hand or Chaos? Theories on How Markets Work May
Diverge Sharply But All Help Our Understanding of the Efficiency of
Market Economies,” by John Kay. Financial Times.
“IMF’s Camdessus Reviews Status of Russian Program.” News Brief
no. 99/91. Available on the Internet at the IMF website:
“Stiglitz’s Return to Research Has Economists Rejoicing,” by Jagdish
Bhagwati. New York Times.
“Stiglitz: A Dissenter’s Uneasy Role,” by Louis Uchitelle.
International Herald Tribune.
The IMF’s Dilemma in Russia: a Stratfor Commentary. Available on
the Internet at:
“Camdessus at Crossroads, to Lose Either Career or Political Future,”
by Pyotr Antonov. Interfax Russian News.
“World Bank Economist Felt He Had to Silence Criticism or Quit,”
by Louis Uchitelle. New York Times.
“Stiglitz Hits at World Bank Policy,” by Alan Beattie. Financial
Times (London ed. 1).
“Stiglitz departs.” Financial times (London ed. 1).
“Chief Economist of the World Bank Quits,” by Richard Wolffe.
Financial Times (London ed. 1).
“Knives Out in Washington For a Free Spirit. Joseph Stiglitz: He
May Have Criticised the Institutional Consensus on Too Many
Points,” by Nancy Dunne. Financial Times (London ed. 2).
“IMF’s Camdessus Misses the Point.” A “global intelligence update.”
A v a i l a b l e
t h e
I n t e r n e t
a t :
“Russia Economy: Too-Quick Reform?” EIU ViewsWire.
“Shakeup at the IMF, and the Global Shakeup Yet to Come.” A
“global intelligence update.”
Available on the Internet at:
“Survey–Central and Eastern Europe. Evolution Exacts a High Price:
Russia,” by John Thornhill. Financial Times.
“Camdessus to resign at IMF,” by Ben McIntyre.
“Camdessus to Quit as Head of IMF; Financial Bailouts Were
Controversial,” by John Burgess. Washington Post.
“In Russia, Too, There’s No Good Economics Without History,” by
William Pfaff. International Herald Tribune.
“The Loose Cannon at the World Bank,” by David Ignatius.
International Herald Tribune.
“Growth is Not a Passive ‘Trickle-Down’ Strategy,” by Jagdish
Bhagwati. Financial Times (London ed. 1).
“What Went Wrong in Russia,” by Stanley Fischer. Financial Times.
“Reconsidering Russia,” [editorial]. Financial Times.
“Growth Is Not Enough,” by James Wolfensohn and Joseph Stiglitz.
“Economist Rebuked over Russia Views,” by Alan Beattie. Financial
“Eastern Europe Reforms: Why the Outcomes Differed So Sharply,”
by Jeffrey D. Sachs. Boston Globe.
“Sick Patients, Warring Doctors.” The Economist.
“Russia, Not I.M.F., Squandered Money,” three letters to the editor
by Patrick M. Boarman, John Simmons, and Michael McFaul. New
“Long Climb Out of a Black Hole,” by Michel Camdessus.
“Calling the I.M.F. To Account,” by Jeffrey D. Sachs. New York
“Russia: The Biggest Money Launderette in the World,” by Jonathan
Steele. The Guardian (London).
“IMF Funding to Russia,” by John Odling-Smee. IMF Survey.
Russia’s Economic Policy Dilemma and U.S. Interests, by John P.
Hardt. Washington, Congressional Research Service. [CRS Report
“Russia in Line for More Aid From IMF; Critics Question Where
Cash Goes,” by David R. Sands. Washington Times.
“Statement of the Government of the Russian Federation and Central
Bank of Russia on Economic Policies.” Available on the International
M o n e t a r y
F u n d ’ s
w e b s i t e
a t :
PBS, Frontline news program: “The Crash: Unraveling the 1998
Global Financial Crisis. . . Is the Worst Over?” Available on the
I n t e r n e t
P B S ’
w e b s i t e :
[www.pbs.org/wgbh/pages/frontline/shows/crash]. See especially the
following sections: “Russia: From Start to Crash” and “The IMF, the
World Bank & Their Critics.”
“Industry, World Bank Differ on Recipe for Russia.” Agence France
Taming Global Finance: A Better Architecture for Growth and Equity,
by Robert A. Blecker. Washington, Economic Policy Institute.
Executive summary of book available on the Internet at:
“Development Based on Participation–A Strategy for Transforming
Societies,” by Joseph E. Stiglitz. Transition: the Newsletter About
The Meaning of the Russian IMF Bailout, by Ariel Cohen, Marshall
I. Goldman, John P. Hardt, and Roger W. Robinson, Jr. Washington,
Heritage Foundation. (Heritage Lectures no. 626) Available on the
Internet at: [www.heritage.org/library/lecture/hl626.html].
“Economic Crises and the Financial Sector,” by Stanley Fischer.
Speech prepared for the FDIC Conference on Deposit Insurance,
Mayflower Hotel, Washington, D.C. Available on the Internet at:
“Commentary on the IMF Led Russian Assistance Program,” by John
P. Hardt. Notes from a panel discussion at the Heritage Foundation
entitled “The Meaning of the Russian IMF Bailout.”
“More Instruments and Broader Goals: Moving Toward the PostWashington Consensus,” by Joseph E. Stiglitz. Helsinki, UNU World
Institute for Development Economics Research. (WIDER Annual
The Transition in Eastern Europe and the Former Soviet Union: Some
Strategic Lessons From the Experience of 25 Countries Over Six
Years, by Nicholas Stern.
London, European Bank for
Reconstruction and Development. (Working Paper no. 18)