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It Was A “Baht” Time!

imfgoIF Republican grandees like George Shultz, William Simon, and Walter Wriston are calling for an end to the International Monetary Fund as we know it, then it is clearly an issue whose time has come. The IMF has become a global force for hardship, austerity, and economic failure. Wherever the IMF travel schedule takes its senior staff, grass never grows again.

Last summer IMF chief Michel Camdessus visited Thailand and strongly suggested that the baht be de-linked from the U.S. dollar in order to effect a 15 per cent depreciation. Admittedly, by that stage, a devaluation of the baht had become inevitable. As Milton Friedman wrote in these pages a month ago about the Asian crisis: “The central banks of the countries involved tried to achieve two objectives — peg the exchange rate and promote domestic expansion — with a single instrument: control of the domestic money supply (more precisely, the banks’ own liabilities). The resulting domestic inflation led to overvalued exchange rates . . . Not devaluing would have been a second mistake that would only have increased the harm done by the first mistake.”

Thailand’s turmoil before and since the devaluation since — a 50 per cent fall in its currency and stock market, a government collapse, cabinet ministers coming and going, the banking system in chaos — was primarily the result of its domestic policies. But the IMF can hardly take refuge in that since an earlier IMF report had praised Thailand for its “remarkable economic performance . . . and sound economic policies.” It also failed to appreciate the effect that the baht’s devaluation would have on those neighboring countries that had inflated their economies while simultaneously saddling them with bureaucratic intervention, unsafe loans, and politically directed over-investment.

Hence, the contagion spread unevenly through the Pacific Rim: genuinely free-market economies like Hong Kong are so far weathering the storm; prudently managed economies like Taiwan and Singapore have successfully effected modest devaluations; it is the authoritarian crony capitalisms of Malaysia, Indonesia, and, now, South Korea that have been worst hit. South Korea — the 11th-largest world economy — had to abandon its currency, the won, and has seen its stock market sink by 40 per cent. Its brand of crony capitalism — operating through corporate conglomerates known as chaebols, with plenty of winks, and loans from the government to bail out corrupt managers and relatives — badly needs changing.

But there is no likelihood that the IMF will make such liberalization a priority. So far, it has been limping behind the crisis, demanding tax hikes in return for loans — a $10-billion loan (with $7 billion more from the World Bank) for Thailand; a $55-billion bailout package in the works for South Korea ($20 billion from the IMF, another $20 billion from the U.S. and Japan, and $15 billion from the World Bank); and don’t forget $40 billion of IMF promises to Indonesia.

The IMF was originally chartered after World War II to make temporary bridge loans to troubled Western currencies. But after the Bretton Woods arrangement was ended by President Nixon in 1971, the IMF, instead of disbanding, desperately searched for a new mission. First it made loans to prevent sovereign debtors from defaulting, especially in Latin America; then it broadened its scope to prop up entire failed economies. Instead of letting market discipline punish and pilot the advance of newly emerging economies, the IMF believes it knows best. But it doesn’t. A recent Heritage Foundation study found that more than half of the 89 less-developed countries that got IMF loans are no better off economically, and 32 of them are worse off.

All this leaves Treasury Secretary Robert Rubin in a weak position. By backing the IMF’s demand for more money, he is in effect ceding our country’s international financial policy to the IMF (much in the way Secretary of State Madeleine Albright has apparently turned over Iraq policy to the UN).

Instead of abdicating responsibility, Rubin should be promoting American interests. First, he should press the self-strangulated Asian economies to adopt market-liberalization measures (as, indeed, Taiwan is doing). Next, he should endeavor to restore long-term monetary stability in Asia. Ideally, that would mean persuading smaller Asian economies to adopt a full-scale currency board, in effect unifying their currencies with the dollar. If their governments are not prepared to accept the loss of economic sovereignty this involves — abolishing their central bank and seeing their monetary policy made in Washington — then the best recourse would be a sound domestic anti-inflationary monetary policy with a flexible exchange rate as an adjustment mechanism to the outside world. In either event, stability requires stable domestic financial policies. Finally, he should recruit our financial-services companies and their highly paid experts to help set up free and efficient Asian capital markets with depth, breadth, and resiliency. That would be better than IMF loans pegged to tax hikes and austerity — whether imposed to prop up an overvalued currency or to ensure that a devaluation does not add to inflationary pressures.

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