Imf Under The Microscope
The other difference in the present case is the identity of the critics of the IMF. They do not come from the conventional Left but are strong believers in market friendliness; and they have serious doubts, not over the efficacy of the policies that the affected countries have been following, but over the global communitys ability to come up with a system to tackle the swings in free-flowing financial markets. The most articulate among the critics is Jeffrey Sachs, the high profile economist who has just been around telling Indians: if you are in trouble, dont go to the IMF. Prof Sachs dislike of the IMF goes back to the time when his advice to the newly emerged Russian state went to waste because the IMF was not willing to bankroll it. But that does not mean his critique, minus the rhetoric, should not be noted. He argues that the Asian crisis is not one in the real world but in the financial arena. All such crises are in the end financial, and flow from lack of creditor confidence. But Prof Sachs may have a point nevertheless, when he says that the IMF medicine is worse than the disease. For example, when devaluation has made the regions car exporters very competitive, banks are being asked to close, denying them the working capital without which they cannot manufacture, export and pay off their debts.
What is Prof Sachs solution? Dont close down banks and spread unemployment, recapitalise the banks; be very careful about short-term foreign debt; dont dollarise your economy, that is both banks and firms going in for short-term dollar debt; and more interestingly, let foreign banks come in and lend in the domestic currency so that they cannot simply recall loans and close the window.
Some longer-term solutions have also been spelt out by the very leaders of the present system. The US Fed chief, Alan Greenspan, has suggested that rescue packages may have to bear much bigger tickets as, in a globally unified financial system, panic and default spread very easily and the bill becomes astronomical in no time. This implies that what you need is a global central bank as a lender of last resort, but the IMF does not have a bottomless pocket, and is not geared to play this role. A more feasible solution would follow from the assumption that the collective wisdom of the financial markets is the same as that of a herd of sheep, so impose a tax on foreign currency transactions.