Part III continues Wangkon936's discussion about IMF's bailout of Korea in 1997. In Part IV, the Korean will discuss the social reaction to the bailout.
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After the East Asian Economic Crisis
So, at the 10th anniversary of the crisis in 2008, many asked if Asia was better off after IMF involvement. Yes and no. Countries like Thailand may have regressed. Although the IMF itself will say that Thai banks and regulatory controls are stronger than they have ever been, the Thai economy's average GDP growth rate of 7-8% has not fully recovered. Real GDP per capita, after adjusting for inflation, has seen little improvement as well from 1996 highs. Korea has done better, and in part this was due to the IMF mandated reforms. Admittedly, some reforms were instituted as a direct and indirect result of the IMF's transformative conditions they had placed on Korea in 1997. One can even argue that the IMF induced reforms didn't do enough, if one is to think that Korea's export led, high capital expenditure conglomerate oriented strategy is not a long term solution to its growth.
Overall, the region has more stable regional macroeconomic policies, particularly through the accumulation of substantial foreign reserves. Gone are the days where Korea's foreign reserves were just a dubious $25 billion. They are now more than ten times that size. Second, the transparency of policies has increased, as reflected in the routine disclosure of external debt and reserve information by Asian authorities. Third, corporate governance has improved through the reform of regulatory and supervisory systems.
However, the IMF's methodology of using aspects of “shock therapy” as part of their prescription has alienated many of the poorer and middle income economies. A good example is Latin America. As mentioned before, the IMF did not have a good reputation within the region when it provided help to Argentina in 1991. So, when Argentina decided to pay off its last remaining $9.8 billion to the IMF in 2006, Venezuela committed $2.5 billion to that total. Thus, Argentina found an alternative source to help fulfill their obligations to the IMF. Now six Latin American countries, including Argentina and Venezuela have formed a new lending institution called the "Bank of the South." Although many details remain to be worked out, when one looks at the rhetoric surrounding the establishment of the bank, the intention is clearly to form an alternative to the IMF, particularly when they need a lender of last resort.
Within Asia too there is a nascent belief that perhaps the region needs it's own lender of last resort as well. The Asian countries took steps in this direction by establishing a regional stabilization fund with the Chiang Mai Initiative that began in 2000. This includes a collection of bilateral currency swap arrangements among the ASEAN countries plus China, Japan, and South Korea. Under these arrangements, these countries would be able to access at least some foreign exchange reserves in the event of a liquidity or currency devaluation crisis of the type that was experienced in 1997. Although the initiative is still tied to the IMF when a country needs to swap a very large amount of currency, many economists believe that it will further weaken the region's link to the IMF. So far, the thirteen Asian countries agreed, in principle, to pool part of their over $3 trillion of reserves for a stabilization fund. These currency swap arrangements helped Korea avoid being a full participant of the “Great Recession” of 2008.
What's Next for the IMF?
The sum of all this is that organizations like the IMF (and the World Bank) are losing relevance and influence internationally. However, institutions like the IMF have a lot to offer the rest of the world. Regional and global economic and financial crisis need international cooperation to limit their scope and severity and prevent wider contagion. Furthermore, the IMF, built upon Western institutions, traditions, economic philosophies, etc. have the potential to spread more sophisticated economic and financial best practices to developing countries and that could be conducive to more transparent governments, pluralistic societies, the spread of democratic ideals and sustainable economic growth rates, particularly when a country is moving towards a knowledge-based economy. Many economists and policy makers still believe this to be true, despite the mistake that were made by Western institutions in creating the subprime crisis in 2008.
The Bank of the South in Latin America, that is seeking to replace some functions of IMF, has been established by left leaning governments of that region (particularly Uruguay, Paraguay, Ecuador, and especially Venezuela). It is especially telling that the headquarters of the Bank of the South will be in the capital of Venezuela, Caracas. Furthermore, President Hugo Chávez of Venezuela has been its most vocal supporter. It's unclear what the future will bring, but many believe that this will likely mean a situation where Latin American countries may find it easier to shift more to the left to policies that are less capitalistic and more socialistic in nature. It may also mean a shift away from Latin American interest in Western institutions and development models, particularly among the poorer countries of that region.
The IMF was established with well-meaning ideals after difficult lessons learned from the Great Depression and the tremendous amount of rebuilding required after WWII. However, the way it has pursued its policies and given help to developing countries have alienated many of the regions and nations they have professed to help. This has hurt their ultimate mandate of being the go to authoritative institution to provide economic and financial stability, particularly to nations that can't defend themselves in times of economic difficulty.
The good news is that it appears the IMF is not oblivious to the harsh feelings and memories in the countries they have helped. Even the IMF would say it would have done things differently in both Asia and Latin America. For example, back in 1997, the IMF criticized Malaysia for pegging its currency to the U.S. dollar to protect it from currency speculators, but now it is generally viewed as a wise decision. With Korea, it has also been admitted that their recommendation to tighten credit and raise interest rates was not the right move either. Yet, for the larger question of what the IMF did in Korea was “fair” or “unfair” is more difficult to answer and open to interpretation. The majority of knowledgeable analysts would say that the IMF's handling of preventing and responding to the unfolding crisis in Korea (and elsewhere) was not efficient and suboptimal. The IMF has clearly taken some of those lessons and applied them in Russia in 1998 and Spain and Greece in 2010. However, it is the belief of this author that Korea was not a completely innocent party to it's own economic difficulties, given it's fondness of overloading on debt to fuel growth.
The world has changed quite a bit since 1997. There is more globalized trade and many of the countries that were squarely in the “developing” camp are moving to become wealthier nations, rivaling what was considered G-7 countries 15 years ago. Nations like Brazil in Latin America and both China and India in Asia are becoming more influential in the world economy. Together with Russia, they form the so-called BRIC countries and now have 14.2% voting power in the IMF, close to the 15% necessary to exercise a veto. Even a middle sized country like Korea, now a G-20 nation, is the 16th largest voting power in the IMF. At the very least, Korea could be an important swing voter in the IMF. Thus, today Korea is not a country the IMF can easily dictate terms to if it ever needs the organization's help again.
Understanding the increased importance of Korea in the region, in July 2010 the IMF co-hosted a conference in Korea a few months before the G-20 summit that was also to be held in said country. In the conference the IMF admitted that they had made mistakes in Korea, and elsewhere, and looked to mend fences. Although they said that difficult choices had to be made and they had to be made quickly in an unfolding economic crisis, in hindsight it was possible to do so without forcing so much austerity to the general population. However, forgiveness does not come easy, especially in a nation like Korea. That will be the subject of part IV.
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