International Herald Tribune Paris, Thursday, December 3, 1998
IMF and U.S. Mishandled Asia Crisis, World Bank Charges
'Substantial Risk' of Recession Remains, but Worst-Hit Nations May Start to Grow Again in 2000
By David E. Sanger New York Times Service
WASHINGTON - The World Bank issued an implicit, searing assessment Wednesday of how its sister institution, the International Monetary Fund, had misjudged the financial crisis that began in Southeast Asia 18 months ago and had prescribed economic policies that turned investor panic into deep recessions.In its first comprehensive history of the crisis, the World Bank predicts that the worst-hit nations will probably begin to stabilize in 1999 and to grow again in 2000. But, the report adds, ''There is still a substantial risk that the world economy will plunge into recession in 1999.''
The growth of global economic output, it projects, will drop this year to 1.8 percent from 3.2 percent in 1997 and will revive ''only modestly'' next year.
Top officials of the World Bank decided to delete direct references to the IMF and the U.S. Treasury from the report, describing events and decisions but not the officials or institutions that made them. But the report leaves little doubt about what the international lending bank views as the key misjudgment: The IMF's decision - with the advice of the U.S. Treasury - to press Thailand, Indonesia and South Korea to raise interest rates in an effort to stabilize their currencies.
The increases were intended to restore investors' confidence and keep them from selling off any easily liquidated assets they held in the afflicted countries. But the report concludes that the strategy backfired, creating a far larger disaster. It failed to save companies that had invested in overvalued real estate, said Joseph Stiglitz, chief economist of the World Bank, ''because those firms were already dead.''
But the high interest rates, he said, ''created a huge number of bankruptcies'' as small businesses suddenly could not pay off debts or buy raw materials. The result, he said, was that the countries were plunged into recession, ''there was no early restoration of confidence and the currencies continued to fall for some time.''
The tension between the World Bank and the IMF, both of which were created by the Bretton Woods agreement in 1944 to stabilize the world economy, has flared up repeatedly over the past 18 months. Their strategic disagreements have become part of a much broader debate over whether the severity of the crisis could have been lessened.
The IMF continues to insist that it made the best judgments it could, though at a seminar this week one Fund official conceded that the organization had made some judgments ''too quickly'' and mistakenly thought it was simply seeing a repeat of past currency crises.
But the World Bank report amounts to a blow-by-blow account of how misjudgments - by global investors, by Asian officials who were blind to the risks that they were taking by depending on short-term foreign investments and finally by international officials trying to repair the damage - multiplied the damage.
It also calls for a tremendous slowdown in the movement to deregulate financial markets in developing countries, a reversal of the policy that the IMF advocated as late as April 1997, just three months before the collapse of the Thai baht touched off the crisis.
International Herald Tribune Paris, Saturday, December 5, 1998
World Bank Denies It Held IMF at Fault
The Associated Press
WASHINGTON - The president of the World Bank, James Wolfensohn, has denied published reports that the bank criticized handling of the Asian financial crisis by its sister institution, the International Monetary Fund.
''There has never been any doubt on our part that the International Monetary Fund has carried out this most difficult task with strength and judgment,'' Mr. Wolfensohn said Thursday. ''We support them and are grateful for the irreplaceable role that they play.''
He added that the World Bank was too busy with its mandate of working to alleviate the consequences of the Asian crisis - millions forced into poverty and extensive unemployment - to second-guess IMF decisions. But economists from the two institutions will sometimes debate specific issues privately, he said.
Mr. Wolfensohn was responding to a report in The New York Times, which was published Thursday in the International Herald Tribune, and a separate report in The Washington Post. The reports said that the World Bank's annual Global Economic Prospects report, released Wednesday, amounted to blaming the IMF for making Asia's financial crisis worse.
''This interpretation is false,'' Mr. Wolfensohn said.
Without identifying the Fund by name, the World Bank report criticized the high-interest-rate policy the Fund recommended to Asian countries in 1997 to prop up currencies.Joseph Stiglitz, the World Bank's chief economist, said that the policy had not worked and had driven Asia deeper into recession. The IMF's two leading economists, Stanley Fischer and Michael Mussa, have disputed this view.
The Times quoted unidentified World Bank officials as saying that the Fund's name had been left out of the report as a conciliatory gesture.