Martin Feldstein makes three criticisms of the International Monetary Fund's remedies for the Asian crisis ("Refocusing the IMF," March/April 1998). First, he argues that they are simply the same old IMF austerity medicine, inappropriately dispensed to countries suffering from a different malady. Second -- and the main theme -- he contends that by including in the program a number of structural elements, the IMF is unwisely going beyond its essential task of correcting the balance of payments and intruding into the countries' political processes. Third, he is troubled by the problem of moral hazard -- the bailout issue.
In fact, the IMF-supported programs in Thailand, Indonesia, and South Korea are anything but the usual medicine, precisely because of their heavy structural components, which are included because structural problems lie at the heart of the economic crises in the three countries. To ignore the structural issues would invite a repetition of the crisis. The macroeconomic parts of these programs consist of a combination of tight money to restore confidence in the currency and a modest firming up of fiscal policy to offset in part the massive costs of financial restructuring. And the moral hazard concern, while essential to deal with, is easily exaggerated. Before turning to these issues, a brief discussion of the origins of the crisis is helpful.
CAUSES AND CONTAGION
The economic crisis in Asia unfolded against the backdrop of several decades of outstanding economic performance. Nevertheless, in 1996 some problems were becoming evident. First, Thailand and other countries were showing signs of overheating in the form of large trade deficits and real estate and stock market bubbles. Second, pegged exchange-rate regimes had been maintained for too long, encouraging heavy external borrowing, which led, in turn, to excessive foreign exchange risk exposure on the part of domestic financial institutions and corporations. Third, lax prudential rules and financial oversight had permitted the quality of banks' loan portfolios to deteriorate sharply.
Developments in the advanced economies and global financial markets also contributed to
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