Question

According to Stiglitz, the policies of the IMF after the financial crisis in East Asia, made the crisis worse, deepening and prolonging the economic damage to the affected countries. What were some of the IMF's policies? How did they worsen the economic damage?

Answer 1

The IMF used its emergency finance procedure to provide funds to Thailand, Indonesia and Korea. They were given a total aid of US $35 billion by IMF. The countries were also advised to undertake temporary tightening of their monetary policies to tackle exchange rate depreciation. The IMF loans were provided under certain conditions that included the adoption and implementation of certain reforms in the three countries. These reforms included: non-viable financial institutions had to either be closed or merged, the financial system had to be restructured, trade barriers were to be removed, foreign acquisition of domestic businesses were to be allowed. The IMF also provided for an additional financing of US $77 billion from other multilateral and bilateral sources.

Failures of the IMF policies:

1. The pre-crisis analysis of the economic environment of Indonesia and Korea were not strong and vigorous enough to identify all the weaknesses of the countries.
2. Certain IMF measures suggested were at fault like the tightening of monetary policies in Indonesia and Korea.
3. The IMF faced various political pressures from other financial institutions like the World Bank and within the institution that resulted in inefficient decision making.