The IMF bail-out packages for Iceland, Hungary and the Ukraine provoke more than a little déjà vu.
In the Asian crisis of 1997-98, the IMF stepped in with loans for the worst affected countries. These weren’t just ordinary loans, but required countries to implement the now notorious structural adjustment policies (SAP). In essence, SAPs required recipients of the loans to cut public spending, raise interest rates, restructure their financial systems, and remove trade protections.
Some astute commentators at the time noted that this seemed an odd cocktail to be prescribing. In America and the UK, the response to economic downturn is normally the opposite: public spending is raised and interest rates are cut with the aim of providing an economic stimulus. This is also what Gordon Brown and Alistair Darling have been proposing over the last few days.
So what happened to the Asian economies?
Did the IMF know something that everyone else had missed? Err… no. Things just got worse after the “rescues”. So much so that some came to refer to the Asian crisis as the “IMF crisis”. Countries like Thailand and Indonesia experienced massive currency devaluations, bankruptcies became widespread, and social unrest intensified.
It is more than a little worrying, then, to see that the IMF hasn’t changed its tune since the Asian crisis. Iceland has just raised interest rates from 12% to 18%. Hungary is widely reported to be taking similar action. Reigning in public spending has also been high on the agenda.
No wonder a former economist at the IMF is quoted in the FT as saying: ‘”This is beginning to look like the Asian crisis all over again… with Hungary playing the role of Thailand.”
Why is the IMF so intent on imposing its failed solutions yet again? It justifies them by saying that they will create the conditions to enable their loans to be repaid. This seems a little far-fetched, given what happened to the Asian economies. In a post next week we will pick up this story and consider who really benefitted from the last tranche of “rescue” packages. We’ll see that these claims are also somewhat disingenuous.
Postcript: Yet more evidence that we are prescribing to our less fortunate cousins, medicine we wouldn’t swallow ourselves: The Fed has cut the US interest rate to 1%, and some commentators have said it could go as low as 0.5%.