In its rush to have Westerners buy the banks, the IMF forgot one detail: to ensure that South Korea could recapture at least a fraction of those gains through taxation. Whether US investors had greater expertise in banking in emerging markets may be debatable; that they had greater expertise in tax avoidance is not.
The contrast between the IMF/US Treasury advice to East Asia and what has happened in the current subprime debacle is glaring. East Asian countries were told to raise their interest rates, causing a rash of defaults. In the current crisis, the US Federal Reserve and the European Central Bank cut interest rates.
Similarly, the countries caught up in the East Asia crisis were lectured on the need for greater transparency and better regulation. But lack of transparency played a central role in this past summer's credit crunch; toxic mortgages were sliced and diced, spread around the world and hidden away as collateral, so no one could be sure who was holding what. And there is now a chorus of caution about new regulations, which supposedly might hamper financial markets.
Finally, despite all the warnings about moral hazard, Western banks have been partly bailed out of their bad investments.
Following the 1997 crisis, there was a consensus that fundamental reform of the global financial architecture was needed. But, while the current system may lead to unnecessary instability and impose huge costs on developing countries, it serves some interests well. It is not surprising, then, that 10 years later, there has been no fundamental reform. Nor, therefore, is it surprising that the world is once again facing a period of global financial instability, with uncertain outcomes for the world's economies.
Joseph Stiglitz is a Nobel laureate in economics, professor of economics at Columbia University and was chairman of the Council of Economic Advisers to former US president Bill Clinton and chief economist and senior vice president at the World Bank. Copyright: Project Syndicate
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