DAWN - International; 08 January, 1998

Asian blunder pulls the veil from hidden power
By Daniel Nelson

LONDON: One of the beneficial side-effects of the east Asian currency crisis has been the opportunity to take a closer look into the workings of the otherwise opaque International Monetary Fund (IMF).

The United States-dominated IMF and its junior partner, the World Bank, are the closest thing we have to a world government - certainly nearer than the virtually powerless United Nations. Although the IMF currently has no programmes in India or China, it virtually dictates the economic conditions of life to more than 70 governments, which dare not ignore its decisions on macro-economic policy.

It has no troops to enforce its "advice", but there is no need for military coercion when governments who resist find that all sources of finance dry up. Donors, bankers and investors are reluctant to commit themselves without a nod of approval from the Washington-based financial institutions.

Yet this world government in all but name is not accountable to the people it says are the beneficiaries of its policies, and operates behind tightly closed doors.

Democracy and transparency might be global watchwords, but, as with other organizations where real power resides, they are not the concern of the priesthood that runs the IMF.

Secrecy is backed up by a palpable arrogance which is felt even by officials at the World Bank - themselves often accused of overbearing behaviour by employees of UN development agencies. Yet the IMF failed to see the east Asian currency crash coming, even when it was, in financial terms, only seconds away.

Earlier in 1997, the Fund had lauded Thailand's "consistent record of sound macro-economic policies", and in October praised Seoul's "enviable fiscal record" and forecast six per cent economic growth for South Korea in 1998.

This incredible blunder was followed by the failure of the first US-IMF response to the South Korean crisis: a limited bail- out to be accompanied by IMF policies. It proved inadequate. Millions more dollars had to be found and other institutions, such as commercial banks, were forced to weigh in by rolling over loans and providing extra credit.

Fortunately, the debacles had one positive result - they opened the way for a debate, however muted and restricted, on the IMF's operations and its judgments.

First off the mark was Jeffrey Sachs, director of the Harvard Institute for International Development, who observed in Britain's Financial Times newspaper that the institution's failure to have even an inkling of the coming maelstrom was itself the main reason for a financial panic that vastly exaggerated the fundamental ills of the Asian economies.

He also argued that the IMF's secrecy made sustained professional and public scrutiny of its operations impossible, enabling it to "get away with serious mistakes ... that never come to light".

He called for a campaign to "shed light on the actions of this sometimes very valuable, but occasionally harmful, institution that acts in the name of the global public".

It had too much power, he insisted. "No single agency should have responsibility for economic policy in half the developing world."

He was joined by Denis Richard, chief economist of an Italian consultancy, IZI, who said the lack of independent evaluation of the IMF's work was at the core of its problems.

Currency speculator and philanthropist George Soros said the IMF bail-out had not worked, and added: "The prevailing system of international lending is fundamentally flawed, yet the IMF regards it as its mission to preserve the system."

The key point in this controversy is not the rightness of wrongness of the IMF's policies. Sachs criticizes the IMF's punitively high interest rates, whereas Soros sees them as necessary to prevent currencies going into free-fall.

Some critics want the organization to play a strongly interventionist role; others believe, in the words of one letter to the Financial Times, that this would probably make "the supply of international credit ... one more tool in the ability of the US to impose its will on weaker countries."

Free-marketeers welcome the IMF condition for helping Seoul - that foreign purchasers must be allowed to buy into previously protected South Korean enterprises - as a blow against inefficient "crony capitalism". But Mark Atkinson, a commentator for another British paper, The Guardian, describes it as "morally distasteful" for the IMF to use its lending ability to "demand draconian reforms which will ultimately benefit the West (while) requiring Korean shareholders, depositors and employees to suffer."

These are important issues, but an even more basic point is whether the IMF's workings - with little independent assessment and less public debate - are sufficiently healthy and effective. In every other area of life we are told the answer is no; that openness, accountability and democracy are essential; indeed, that the lack of these virtues is one reason why Asian economies have stumbled.

So why is that not the prescription for the IMF, too?-Dawn/Gemini News Service (c) News-Scan International.