Wed, Nov 21, 2007 - Page 9 News List

Subprime crisis highlights hypocrisy of the IMF and the US

By Joseph Stiglitz

This year marks the 10th anniversary of the East Asia crisis, which began in Thailand on July 2, 1997, spread to Indonesia in October and to South Korea in December. Eventually, it became a global financial crisis, embroiling Russia and Latin American countries, such as Brazil, and unleashing forces that played out over the ensuing years: Argentina in 2001 may be counted among its victims.

There were many other innocent victims, including countries that had not even engaged in the international capital flows that were at the root of the crisis. Laos was among the worst-affected countries.

Though every crisis eventually ends, no one knew at the time how broad, deep, and long the ensuing recessions and depressions would be. It was the worst global crisis since the Great Depression.

As the World Bank's chief economist and senior vice president, I was in the middle of the conflagration and the debates about its causes and the appropriate policy responses.

This summer and fall, I revisited many of the affected countries, including Malaysia, Laos, Thailand and Indonesia. It is heartwarming to see their recovery. These countries are now growing at 5 percent or 6 percent or more -- not quite as fast as in the days of the East Asia miracle, but far more rapidly than many thought possible.

Many countries changed their policies, but in directions markedly different from the reforms that the IMF had urged. The poor were among those who bore the biggest burden, as wages plummeted and unemployment soared.

As countries emerged, many placed a new emphasis on "harmony" in an effort to redress the growing divide between rich and poor, urban and rural. They gave greater weight to investments in people, launching innovative initiatives to bring health care and access to finance to more of their citizens, and creating social funds to help develop local communities.

Looking back at the crisis a decade later, we can see more clearly how wrong the diagnosis, prescription and prognosis of the IMF and US Treasury were. The fundamental problem was premature capital market liberalization.

It is therefore ironic to see the US Treasury secretary once again pushing for capital market liberalization in India -- one of the two major developing countries (along with China) to emerge unscathed from the 1997 crisis.

It is no accident that these countries that had not fully liberalized their capital markets have done so well. Research by the IMF has confirmed what every serious study had shown: Capital market liberalization brings instability, but not necessarily growth. (India and China have, by the same token, been the fastest-growing economies.)

Of course, Wall Street -- whose interests the US Treasury represents -- profits from capital market liberalization: They make money as capital flows in, as it flows out, and in the restructuring that occurs in the resulting havoc.

In South Korea, the IMF urged the sale of the country's banks to US investors, despite the fact that South Koreans had managed their own economy impressively for four decades, with higher growth, more stability and without the systemic scandals that have marked US financial markets.

In some cases, US firms bought the banks, held on to them until South Korea recovered, and then resold them, reaping billions in capital gains.

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