By Kanes
The IMF's prescription for all developing countries in trouble is a strong mixture of liberalization, deregulation and privatization aimed at integrating them with the world economy described as globalization. Liberalization, deregulation and privatization are designed to remove all obstacles such as tariffs and restrictions on foreign trade and investment, provide equal or national treatment foreign capital, eliminate State intervention to build, support and protect indigenous enterprise and to create a free market based on private enterprise. Such measures to integrate with the world economy are advocated mainly to allow foreign trading and investing firms unrestricted entry to developing countries to assist in their development with funds, technology, management and marketing skills. The IMF, however, has studiously avoided warning, the developing countries that globalization is double-edged, that it provides opportunities but also brings risks, that it can create wealth but it can also destroy it.

The Asian crisis was brought about paradoxically, by liberalization and opening the door widely of the financial sector which led to excessive borrowing from foreign banks, reckless lending by domestic banks to speculative activities and inflows of short-term speculative capital to stock exchanges. Short-term capital, being volatile, was quicker in getting out of the country at the first sign of trouble than in coming in. Thus, there was an outflow of over $100 billion of short-term capital in the last months of 1997, approximately 10 per cent of GDP; few countries could have withstood the shock of such a massive and sudden outflow. The result was - currency depreciation, crash of stock markets, debt defaults, bankruptcies and unemployment as discussed earlier.

Short-term Capital Movements
Notwithstanding the fact that liberalization by facilitating the entry and exit of disruptive short-term capital created the crisis of Asia and before that of Mexico, the IMF continuing to press the Asian countries to liberalize,deregulate and privatize further. The developing countries can use, as they have used before, national remedies to prevent or contain the crisis, such as control over foreign borrowings of banks and firms, bank supervision and restriction of credit to speculation and control of the capital account to discipline disruptive capital movements. The IMF, however, is opposed to such direct intervention and control. It ignores the fact that the only country in East Asia which escaped the crisis - China - did so precisely because it had not liberalized and opened up its economy but maintained instead control over foreign capital movements.

The IMF considers liberalization of capital accounts in developing countries so important that it has planned to amend the Articles of Association in order to obtain a mandate to oversee the liberalization of capital flows in all member countries so as to ensure unrestricted inflow and outflow of foreign loans, foreign funds for portfolio investment and other foreign exchange transactions. This is in addition to the jurisdiction it has over the current account to ensure the free use of foreign currencies for trade and investment. If the powers are thus enlarged, the IMF would in all probability make liberalization of the capital account a condition for its assistance; further, it would force the countries to remove all restrictions on the ownership by foreigners of national assets and achieve the objects of the multilateral Agreement on Investment. The developing countries would then be entirely defenceless against the disruptive effects of speculative capital.

The IMF argument that liberalisation of capital accounts is a necessary precondition for foreign investment and development is, however, challenged by Joseph Stiglit, Senior Vice-President and Chief Economist of the World Bank who argues as follows:-

"More generally there is little evidence that full capital account liberalization contributes to investment or growth. What is clear is that short-term capital flows increase volatility, which is bad for growth. Our research shows that countries which have gone further in financial liberalization including capital account liberalization, are more likely to experience financial crisis. Our research also demonstrates the large adverse effects of financial crises on growth. At the same time, in prudent countries increased short-term debt is matched by increases in reserves; a perverse process whereby developing countries borrow money at high interest rates from industrial country banks only to relent it (as currency reserves) at low interest rates to the Treasuries of these same industrial countries".

Controls over the capital accounts are designed mainly to prevent or regulate short-term capital movements which are disruptive but not long-term foreign direct investment in development projects. That capital account controls have not discouraged foreign direct investment has risen from $3.5 billion in 1990 to $43.0 billion in 1997. China is the largest recipient of foreign direct investment among developing countries despite it being a dirigiste economy.

Free market created by liberalization, contrary to the thesis of the IMF, does not guarantee optimal allocation of global resources. Take flows of private capital for instance. According to the World Bank. 95 per cent of private capital flows to developing countries in 1996 went to just 26 countries while 140 countries shared the balance 5 per cent. Thus, the majority of developing countries failed to attract foreign capital although most of them followed the IMF's prescriptions. Further, more private capital flowed into some countries like those of South East Asia than could be profitably employed at reasonable risk. Consequently, there is a major market failure in that free financial markets failed to produce an optimal global allocation of capital.

Control of Short-Term Capital Movements
Joseph Stiglitz, unlike the IMF, believes that short-term capital movements should be controlled: "Policies need to be designed which will both inhibit the flow of volatile short-term capital and at the same time encourage long-term capital, especially foreign direct investment". Three sets of policies are being discussed. The first is to eliminate distortionary policies which encourage short-term capital; the second is to strengthen the financial sector by making borrowers and lenders pay the full costs of their risks such as risk adjusted deposit premiums and capital adequacy standards, bank supervision and direct restrictions on real estate lending and exposure to foreign liabilities; the third is to restrict corporate borrowings from abroad such as the Chilean system of tax on short-term investments or disallowing tax deductability for interest on firm's foreign exchange debts. Stiglitz argues " Such policies may not work perfectly, but it is better to have a leaky umbrella on a rainy day than no umbrella at all".

Multilateral Regulatory Framework
The financial markets encouraged and nurtured by the IMF have now become too big for either the governments of the countries concerned or the IMF to control. The IMF estimated that the transactions in the foreign exchange market had quadrupled in a decade to $1000 billion a day in 1995. The trading in foreign currencies exceeds the value of world trade, output and investment by multiples of ten or more. The financial markets are so vast and powerful that they are out of reach of any government and macroeconomic, fiscal and monetary policies are incapable containing them. The Asian crisis illustrated how all attempts by Thailand, South Korea and Indonesia failed to arrest the fall in value of their currencies. The IMF helped to some extent to arrest the depreciation of their currencies, but having spent over $100 billion to bail them out, the IMF's reserves are at their lowest level and would not permit a rescue operation like that of Mexico or Asia in the near future.

International foreign currency trade has no rules, no supervision and no regulation. International trade merchandise (and services) is guided, monitored and regulated by the GATT/WTO, but there is no such institution for foreign exchange. It is well known that GATT/WTO has brought a code of conduct and some discipline to world trade in goods and services, but there is no code of conduct or discipline in foreign exchange markets. A country which violates the international code in trade, for example by dumping, is reported to the WTO and if proved guilty, duly punished but there is no dispute settling authority or court of appeal in trade of foreign exchange. Consequently, there is growing pressure to establish adequate institutional and regulatory framework to control, supervise and monitor foreign exchange markets, particularly international capital movements which cause great instability and destruction.

Professor G. K. Hellenier of the University of Toronto, Canada and Research Coordinator of the Group of 24 who argues that the United Nations should take the initiative to study and consider multilateral governance in global monetary and financial matters, states as follows:

"There is an overwhelming intellectual case for a strengthened multilateral framework both for the conduct of international/global finance and for sound global macroeconomic governance in the interest of both stability and development. But one cannot continue to recommend the strengthening of the roles of the IMF and World Bank in global macroeconomic management of the international financial system as long as their own governance has not been reconstituted so as to reflect more accurately and fairly in their activities and policies, their global membership, rather than the views and interests of a few major industrial countries".

It is also encouraging to know that the institute of International Finance - a US based group of 285 private financial firms - is launching an investigation to determine how private lending bodies contributed to the Asian crisis and to propose guidelines to avoiding such mistakes in the future.