IMF and Asia
Tuesday, 17 January 2012 00:14

Almost 15 years after botching up the Asian financial crisis, the International Monetary Fund is still persona non grata in Asia.  Presumably that is why the IMF's new number 2, David Lipton, was sent to Asia (Hong Kong) to make his maiden speech.

Like many before him in recent years, he was pleading for a new partnership with Asia.  "As Asia goes forward, the IMF stands ready to be a partner."

In its management of the 1997 Asian financial crisis, the IMF was guilty of several things, but mainly arrogance and imposing inappropriate policy reforms.  But in the IMF's defence, it quickly saw the errors of its ways, and readjusted its approach.  In the event, Asia's recovery from crisis was much faster than anyone ever imagined.  The only Asian economy to have really suffered from long term crisis effects is Japan -- in large part because it has avoided difficult structural reforms.

Times change, and so do people.  The IMF needs money, and Asia is the only part of the world with that.  The world economy needs demand, and Asia is one of the few parts of the world with that.  The IMF genuinely learnt many things from the 1997 Asian financial crisis.  And IMF senior management are now developing some cross-cultural skills, and learning to do business with Asians.

Following the 2008 Lehman shock, China and other Asian countries implemented massive stimulus packages, and bounced back quickly.  There was indeed an air of cockiness in the region as Asia was the locomotive of the world economy.

Now that the world economy is suffering from the whiplash of the European debt crisis, Asian voices are more circumspect.  It may not be as easy to stoke up their economies again.  And it may indeed be time to work more closely to work with the IMF.

But the "IMF stigma" still remains.  No self-respecting Asian government would ever borrow from the IMF.  It would be political suicide.

So what did Lipton have to say, after all?

Naturally, he emphasized the strength of Asia’s economies, the risk of Europe's sovereign debt crisis to Asian prosperity, and that Asia has a stake in seeing Europe solve its problems and even in playing a role in that process.

Of course, Lipton could not help noting that Asia has its own challenges, and that "By working together, more and better than in the past, Asia and the IMF can help ensure stability and prosperity for the region and for the world".

Asia is too reliant on export demand from US and the Euro area, and is vulnerable to financial contagion as European banks withdraw credit and investment from the region.  Looking ahead, Asia needs to ensure sustainable and strong medium-term growth, and reforms that make their economies less vulnerable to external shocks.

Lipton recognized that "the potential for collaboration is clouded by memories of the Asian financial crisis of 1997–98".  But he concluded that "the reforms undertaken during and after that difficult and traumatic period have given Asia the resilience to withstand the 2008 global financial crisis and are helping today".  In other words, he means that the IMF was right after all!

He also conceded that the IMF has learned important lessons from Asia’s experience which are reflected in the IMF's programs today.  While tough measures are needed to address deep economic problems, the conditions accompanying its programs need to be more focused on the problems at hand.  Broad social support for the reform policies is necessary, and protecting the most vulnerable parts of society is also necessary.  Many Asian observers would say that this is a case of one set of rules for the West, and another set for the rest.

Lipton proposes two areas where the IMF could support Asia's interests.  First, there is enhancing economic and financial surveillance for crisis prevention.  The IMF would like to work with its fledgling Asian surveillance competitor, the ASEAN+3 Macroeconomic Research Office (AMRO).

Second, there is developing an effective global financial safety net to help Asia withstand the risks of new external shocks.  The Fund is also working to better integrate its resources with regional reserve pooling arrangements like the Chiang Mai Initiative (the nascent Asian Monetary Fund).

Lipton concludes by recognizing that Asia’s voice should and is becoming increasingly influential in the IMF.  He does not say that Europe is still greatly over-represented, and Asia still greatly under-represented.

He also talks about Asia's representation in the IMF's senior management.  But of course there is no hint that the Managing Director job be given to an Asian.  The US has a stranglehold on the World Bank leadership, and Europe on the IMF.  These are prizes that they will never give up, no matter how the economic power structure of the world changes.

Having seen many of these players at close hand, I believe that the IMF and Asia will always have a testy relationship.  IMF staff, no matter their national origin, will always have a no-it-all air which smells of neo-colonialism.  And the US Treasury, which Lipton represents, will always be a driving force in IMF policies.

For their part, Asian with their long ancient traditions will always bear a grudge for decades, if not centuries.  This is exacerbated by the fact that weakly- or non-democratic regimes are always wont to identify an external party like the IMF as the cause of their problems.  The risk of a loss of face makes it difficult for them to ever forgive and forget.  Needless to say, the devaluation of the "Western brand" by the global financial crisis does not help kindle positive attitudes to Western-dominated organizations like the IMF.

Ultimately, Asia and the IMF can only develop a better and more mature relationship if Asia becomes substantively more active in the IMF.  This is difficult when Asian bureaucrats are obsessed with heirarchy, seniority and respect, more than competence and meritocracy.  At the working level, Asia is in fact highly represented in the IMF (and the World Bank), but more so by Indians (not East Asians) who understand the importance of higher education and communication abilities.

 

Reference:

Strengthening the Asia/IMF Relationship in a Highly Uncertain Global Environment.  Speech at the Asian Financial Forum by David Lipton, First Deputy Managing Director, International Monetary Fund.  Hong Kong, 16 January 2012

www.imf.org

IMF at the ready to aid rising Asia.  David Lipton, International Monetary Fund.  Australian Financial Review.  18 January 2012

www.afr.com


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