The world is just emerging from the Asian financial crisis, perhaps the most cataclysmic event to affect global capitalism since the Great Depression. While the United States emerged from this event unscathed—some might argue that it even benefited from the crisis as plummeting commodity prices reduced domestic inflationary pressures—many developing nations were not so lucky. Whereas the Great Depression induced a great deal of soul searching about capitalism’s basic principles, the seemingly quick global recovery from the financial crisis and its limited effect on industrial countries have brought a more mixed response—self-congratulation on the part of some, renewed criticism of the impacts of globalization by others. In both instances, however, the global economic arrangements were clearly inadequate. The international financial institutions and arrangements established at the end of World War II to guard against another global economic depression are widely viewed as incapable of managing the modern global economy. The International Monetary Fund (IMF), in particular, has failed to perform the tasks for which it was designed. Today, the institution requires serious reform to ensure a more stable global economic environment.

Beggar Thy Self

The IMF’s philosophy has moved far away from its roots. In this past financial crisis, the IMF provided funds under the explicit condition that countries engage in more contractionary fiscal and monetary policies than they might desire. The money went not to finance more expansionary fiscal policies but, instead, to bail out creditors from the more industrialized countries. The beggar-thy-neighbor policies that were so widely condemned gave way to even worse “beggar-thy-self” policies, with disastrous effects both for the home country and for its neighbors. The downward spiral in the region accelerated as declines in domestic GDP led to cutbacks in imports, thereby reducing regional exports. The beggar-thy-neighbor policy at least had the intention of making the nation’s own citizens better off. No such benefits resulted from the IMF’s beggar-thy-self policies. A country was told to build up its foreign-currency reserves and improve its current-account balance; this meant that it either had to increase exports or decrease imports. But exports could not rise overnight—in fact, as the country’s neighbors’ incomes plummeted, the prospects for increasing exports were even bleaker. Thus imports had to be reduced without imposing tariffs and without further devaluation. There was only one way that imports could be reduced in these circumstances: by reducing the consumption and investments that relied on imports. The immiseration of those at home was thus inevitable.

There is a further irony in the policies that the IMF pursued: while the IMF was created to promote global economic stability, some of its policies actually contributed to instability. There is now overwhelming support for the hypothesis that premature capital and financial market liberalization throughout the developing world, a central part of IMF reforms over the past two decades, was a central factor not only behind the most recent set of crises but also behind the instability that has characterized the global market over the past quarter century.

The Indictments

There is now widespread agreement that the IMF response to the Asian crisis was a failure. Although exchange rates stabilized, interest rates dropped, and the world eventually emerged intact from the crisis, none of this turnaround can be attributed to the IMF when we judge the success of its policies by whether the downturn was unnecessarily long or imposed unnecessarily high costs on workers. Of the four crisis countries in Asia, Indonesia remains in deep depression. The political turmoil there has proven a nearly insurmountable obstacle, but there is little doubt that the magnitude of the economic downturn contributed to the severity of the social and political unrest, that the turmoil was anticipated, and that IMF policies contributed to the magnitude of the economic downturn. Thailand has been the IMF’s most faithful student, carefully following its dictates for several years; yet it has still to regain its pre-crisis output level. With almost 40 percent of bank loans non-performing, the country’s future prospects are far from rosy. The two success cases are Malaysia, which avoided an IMF program, and South Korea, whose recovery can be attributed, at least in part, to its deviation from the IMF prescription in important ways. For instance, South Korea was told to restructure by dispensing excess capacity in industries such as computer chips. But the excess capacity was purely cyclical, and the passing of the downturn put billions of dollars into South Korean coffers, greatly aiding the country’s recovery. Had it followed the advice of outsiders, Korea would be in a far worse position today. Similarly, South Korea was urged to shut down or sell off two of its major banks; instead, it effectively nationalized them.

While there is some disagreement about the appropriateness of the policies pursued in East Asia, there is general consensus that the IMF pursued excessively contractionary fiscal policies, and that the manner in which it handled financial-sector restructuring, at least in Indonesia, was a dismal failure. Beyond this specific crisis, widespread evidence exists of other failures, such as the inability of the rescue packages in East Asia, Brazil, and Russia to sustain the exchange-rate cost of billions of US dollars. This money will come not from taxpayers in the United States or Europe, but largely from the pockets of those in the developing world, especially unskilled labor.

Intellectual Incoherence

There was a certain coherence in John Maynard Keynes’s post-World War II conception of the IMF and its role. Keynes believed that a market failure occurred when the actions of one country had spillover effects on others. Today, however, the dominant view inside the IMF is sometimes characterized as market fundamentalism, a strong belief that markets, by and large, work well, and governments, by and large, work poorly. One might suppose that an inherent tension exists here: the IMF, after all, is itself a governmental body, and many of the arguments concerning governmental inefficiency and incompetence hold with equal or stronger force at the international level than they do at the national level. From this perspective, the IMF’s economists would expect an international governmental body such as itself to be marked by failures.