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Bitter IMF pills difficult for Asia to swallow

(China Daily)
Updated: 2008-12-03 15:28

As the global economic crisis worsens, the International Monetary Fund has returned to the center of the world's economic stage.

At the recent G20 meeting held in Washington, leaders agreed to give more resources and enhance the function of the fund as a way to cope with the ongoing economic crisis.

Meanwhile, the fund, which makes bailout loans to troubled economies, is also expected to undergo further reforms to better represent the economic weight of emerging economies.

The agreement in spite of being a step in the right direction, may not prove useful for Asian countries, said Wing Thye Woo, a senior fellow at Brookings Institution, a Washington DC-based think-tank.

Woo said Asian countries, especially those in East Asia, have a deep distrust for the fund, given its "poor track record" during the 1997 Asian financial crisis and "no proof" that it has improved its competence over the years. Instead, he said it's more important for Asian countries to enhance regional financial cooperation, such as further grow the existing fund established by 13 Asian nations.

An expert on the East Asian economies, Woo headed the project "Asia Competitiveness Report 1999" to analyze the Asian financial crisis for the annual meeting of the World Economic Forum in Davos, Switzerland. Over the years, he also advised the US Treasury Department, the IMF, World Bank and the United Nations on economic issues concerning Asia.

At his office in Washington DC, Woo spoke with China Daily reporter Wang Xu about how Asian economies should better cooperate to battle the ongoing financial crisis.

Q: The G20 meeting decided to give more resources and role to the IMF. What is your opinion on this agreement?

A: It is not an encouraging news, at least for Asian countries. If the economy of an Asian country is in trouble, very few of them, particularly East Asian countries, would be willing to go to the IMF for help. For any president in East Asian nations, such a choice would be a political suicide.

For example, South Korea has put money into the Chiang Mai Initiative, an $80 billion currency swap line established by China, South Korea, Japan and 10 Southeast Asian nations. The initiative allows member nations to borrow foreign currency from each other to augment foreign exchange reserves.

Last month, South Korea was facing severe problems, but it refused to resort to the fund. The reason is once it draws more than 20 percent of its lending quota, it has to accept IMF supervision or the IMF conditionality, which requires a borrower to make commitments on economic and financial policies, according to IMF's instructions. This was just not acceptable for South Korea at the moment.

South Korea was finally saved as the US Federal Reserve gave it a swap line, and not because of the IMF.

Q: The IMF just created the short-term liquidity facility, which has lowered the conditionality for a lender. Will that make any difference?

A: The political opposition to IMF is very strong amongst East Asian nations. The distrust is largely due to the fund's poor performance during the 1997 Asian financial crisis. At that time, the fundamentals of the Southeast Asian nations were not too bad and the turmoil in the financial market was largely due to speculative attacks.

From the very beginning, it was more of a panic situation and not a crisis. If the governments could stabilize the banking system, it would not have developed into a crisis.

In some ways, the IMF turned the panic into a crisis. In Indonesia, they came in and closed the bank owned by the president's brother. If the president's brother's bank could not be trusted, which one can you trust? So the move triggered the collapse of the whole banking system.

You can also look at what the US government is doing now to battle the current crisis. Instead of letting AIG and Citigroup go under, it bailed them out, which is contrary to the IMF approach.

I would say that at the moment no Malaysian, Indonesian and South Korean government could go to the IMF and expect to survive.

Q: Then what's your suggestion for the Asian countries, especially East Asian nations, to safeguard the stability of the financial market?

A: There should be recognition that different regions should have regional financial facilities so that they can help their neighbors. America, Asia and Europe are the three regions that can afford to have such facilities.

East Asia has the money now and has already agreed to establish a fund of its own, but the fund's current size is too small. If a country wants to borrow more than 20 percent of its quota it will have to adopt IMF conditionalities, negating the usefulness of such a fund.

Q: Why does the Asia fund have the "flight-to-IMF" clause?

A: All these countries agreed to pool their money together on the condition that the money could only be used to defend a currency against speculative attacks. They do not want to defend a failing currency, because the government messed up.

At the moment, the region doesn't have a bureaucracy to decide whether the reason is a speculative attack or poor domestic policy, so once the sum is more than 20 percent, they put the borrower under the IMF conditionality.

Over time, Asian countries should build their own bureaucracy to monitor the health of an economy, which could help grow the size of the fund and make it more useful.

Q: The G20 leaders agreed to further reform the IMF and increase the representation of emerging countries in it. What are your views on this?

A: A reform of the IMF is basically reducing the voting rights of the European nations and it has been under discussion for a few years. Over the past five years, the European nations shifted less than 3 percentage points of their voting rights to developing economies. The change is very slow.

And chances are meaningful changes will also take a long time, probably more than a decade. But once the crisis is over, there will be little motivation to carry on the reform.

Actually, there are two ways to strengthen international financial cooperation. One is to increase the size of the existing IMF.

The other is to create more "IMFs" for different regions. It's like going to the hospital. If one doctor tells you to have a major operation, you often want to see a second doctor for more advice. And these two doctors can work together as well.