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Ex-Reagan blasts IMF policy


Martin Feldstein, former economic adviser to the Reagan administration, has sharply criticised the International Monetary Fund's (IMF) interference with the national sovereignty of the countries to which it has provided economic assistance.

Writing in the March 5 edition of the Financial Times, Feldstein termed the IMF's interference with national sovereignty inappropriate and incompatible with its the role, which should focus on policies needed to restore a country's access to international financial markets.

''Unfortunately, the International Monetary Fund seized the troubles in the region as an opportunity to insist on fundamental structural reforms,'' he said. ''By asserting that these economies were basically unsound and needed to remake their financial systems, tax and tariff structures, labour markets, central banking procedures and corporate governance, the IMF inappropriately frightened investors and lenders.''

The IMF has put together a combined US$100 billion in bailout packages for Thailand, South Korea and Indonesia, which in return must strictly adhere to the IMF-prescribed remedies.

In the case of Thailand, the IMF has ambitiously sought to reform its entire economic and institutional structure, from fiscal and monetary policy, foreign exchange management, privatisation, the finance and banking sector to the central bank's procedures.

Feldstein, now an economic professor at Harvard University, argued that past experience showed that the fundamentals of these economies were sound and the economic crises that had hit them were not caused by a sudden shift in fundamental conditions or in their basic policies.

''They got into trouble because of circumstances that could have been cured by a combination of standard macroeconomic adjustments and a temporary restructuring of foreign loans,'' he said.

The basic problem in Thailand, Indonesia and Malaysia had stemmed from the unsustainably large current account deficits, leading to a sharp accumulation of short-term foreign debts. The current account deficits had been fuelled by these countries' pegging their currencies to the US dollar in a fixed exchange regime. The fall of the Japanese yen had also added competitive pressure to the products of these countries.

Feldstein said all that Thailand, Indonesia and Malaysia needed to do was to end the policy of fixed exchange rates and to shrink their current account deficits.

Korea's problems had more to do with the short-term foreign debts of its banks and finance companies. Korea was about to experience a current account surplus by last summer and would only need to restructure its foreign bank loans to give it time to accumulate reserves to service the debts.

So instead of prescribing a simple remedy, the IMF had gone so far as to demand a structural reform to these economies, usurping the legitimate role of sovereign governments, Feldstein suggested.

Moreover, the IMF does not act as a lender of last resort for countries which faced balance of payments crisis. The IMF hands out funds only when it is satisfied that the recipient countries under its support programme strictly follow through with the reform package.

''Conditionality based on fundamental reforms is incompatible with the role of a lender of last resort,'' Feldstein said. ''Equally important, using IMF funds to pay off loans to private creditors weakens the incentive of lenders to be cautious in future lending.

He also expressed disagreement with the IMF's strong dose of high short-term interest rates to defend the local currencies, saying that the policy makes the present situation for those countries ''unnecessarily painful''.




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