Coming from any one of the IMFs traditional critics that statement wouldnt create any ripples. However, when a true blue don like Professor Desai writes a book indicting the Fund it makes a telling impact. Dr Desais Financial Crisis, Contagion, and Containment: From Asia To Argentina, (Princeton University Press, 2003) is a hard-nosed analysis of the Funds response to the Asian financial crisis and its aftermath in such diverse economies as Argentina, Russia and Turkey.
More importantly, Dr Desai deploys 1970s development economics metaphor of the centre and the periphery to show how the Fund has responded to financial crises in developed economies of the centre versus the developing emerging market economies of the periphery. Dr Desais findings are corroborated by the painstaking work of the IMFs Independent Evaluation Office (IEO) headed by Dr Montek Singh Ahluwalia that also indicted the Funds handling of the Asian financial crisis.
It is in the light of such professional criticism of the Funds role in dealing with financial crises in the period 1997-2002 that we must view the manner in which the Funds credibility issue came up in the selection of its next managing director. The mangled emerging market economies of Latin America and Asia have for the first time raised a banner of revolt, refusing to go along with the comfortable trans-Atlantic condominium. In the end a European has made it, but its one with a Latin heart! Spains former economy and finance minister Rodrigo Rato.
Much has been written about the Funds management of the Asian financial crisis, its misadventure in Russia and elsewhere, but Dr Desais is a comprehensive indictment of the inability of the Funds policy makers to differentiate between the economies of the developed centre and the developing periphery in pushing through its intellectually tendentious and academically dubious prescriptions with respect to cross-border capital flows.
The IMF sought to resolve an externally imposed crisis by subjecting these recession-prone economies to severe contractionary regimens, which would have been unthinkable in a developed economy in the midst of an economic downturn says Dr Desai adding, none of these countries were adequately prepared for achieving post-crisis stable growth by implementing independent monetary policy in the midst of unrestricted capital flows and freely floating exchange rates. These triple-policy arrangements, preferred by the IMF, were more suited to the developed economies with flexible markets, robust institutions, and adequate supervision of their banking and financial sectors.
Emphasising the importance of country ownership of stabilisation and adjustment policies, Dr Desai makes a case for policy autonomy and national sovereignty even in a globalised economy. The developed trinity, United States, European Union and Japan have retained policy autonomy and have internal structures that enable their governments to pursue pro- and contra-cyclical policies that enable them to stabilise exchange rates and pursue a monetary policy. In the open emerging markets of the periphery that have open capital accounts, there is no room for national policy manoeuvre.
India, China and countries like Malaysia that rejected IMF advice on capital account convertibility succeeded in warding off crises, while the countries that stuck to Fund advice fell victim to market whim and sentiment. Thus, says Dr Desai, the economies in the centre created their economic problems and owned their remedies. Emerging markets, on the other hand, experienced financial and currency turmoil associated with externally pressured opening up of their economies to short-term capital inflows and underwent IMF policy prescriptions that produced severe recessions.
Dr Desai poses some very interesting questions that her book answers in unexpected ways, making this a rare thriller of an economics book. Was the Asian crisis an episode of over-investment or of unregulated, premature capital flows Has Japan been a victimiser in East Asia Did investors assume that the IMF would bail them out if their Asian investments went sour Did moral hazard calculations prompt investors to stretch their risk taking or were they driven by a herd instinct Does corruption affect economic growth How does one measure it Can the Chilean inflow tax direct capital flows into long-term placements How did India and China only gradually liberalise their economies en route to full capital mobility while maintaining high growth rates
Such are the questions and the reader must read on to secure the tantalising answers on offer. Dr Desais conclusion is instructive: Financial globalisation is a complex process in which the animal spirits of risk-prone, return-savvy investors from the developed market economies with global, electronic reach collide with the weak financial institutions, traditional corporate practices, and vulnerable political arrangements of emerging market economies with disastrous consequences for the latter. A sensible approach with alternative possibilities is in order.
Read against this indictment a telling comment in Reserve Bank of India governor Venugopal Reddys speech at the IMF Spring Meetings last week where he explained why many Asian economies, including India, have opted to build huge forex reserves. Accumulation of foreign exchange reserves by several Asian countries observed Dr Reddy, seems to be linked to the lack of confidence of these countries in the existing international financial architecture.
Read in that a critique of the Fund and its behaviour over the past seven years in dealing with crises in emerging economies and you will see why the developing countries dont want another Monsieur Camdessus or Herr Kohler at the Fund. They would have preferred one of their own, chosen on merit, but have opted to settle in the end for the best European on offer. Mr Rato will profit from a reading of Dr Desais book and the IEO reports before he gets to Washington DC.