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Wed, Jul 30, 2003 - Page 12 News List

IMF blasts crisis handling

BLOOMBERG

The International Monetary Fund (IMF) made incorrect forecasts about Indonesia, Korea and Brazil and made errors in handling those countries' economic crises, an independent report from the IMF said.

The report, by the IMF's independent evaluation office, also blamed the fund's major shareholders, which include the US, for playing too large a role in dictating IMF policies.

Shareholders failed to initially authorize enough money to offset the Korean crisis and pushed in Indonesia for an overhaul of the judiciary that took the focus away from weakness in the banking industry, the report said.

In 1998, the Indonesian economy shrank 13 percent after investors pulled out of the nation's capital markets.

That same year, Korea's economy shrank 6.7 percent, compared with a positive forecast by the IMF, the report said. In 1999, Brazil's economy grew 0.8 percent, although the fund had forecast a contraction.

"There does seem to be a general problem that fund programs are too optimistic on growth" projections, Montek Singh Ahluwalia, director of the independent evaluation office, said during a news conference in Washington.

"In the case of Brazil, we were more cautious" because of mistakes made in Asia, he said.

The IMF in the late 1990s underestimated the vulnerabilities of the banking industry in Indonesia and Korea, the report said.

The IMF was also overly concerned about the risks of letting the Brazilian currency float for fear it "would have unsettled international markets already nervous after the Russian default" in 1998, the report said.

Critics such as former World Bank chief economist Joseph Stiglitz say IMF programs helped to deepen the economic crises that occurred during the 1990s and early 2000s in countries such as Korean and Argentina.

Ahluwalia said some of the bank's policies pushed by the fund were unwarranted, including the fiscal tightening in Korea.

Still, he said the measures were so small that they played no role in deepening the crisis.

The report also faulted shareholder conditions attached to a January 1998 loan to Indonesia.

In Indonesia, measures aimed at improving the nation's judicial system were put in place at the urging of the IMF's largest shareholders to signal "a clean break from the past," the report said.

The new International Monetary Fund programs instead shifted the focus away from improving Indonesia's banking industry, the report said.

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