The World Bank, the IMF,

The World Bank, the IMF, and the Asian financial crisis

Kenneth Rogoff reports that James Wolfensohn's World Bank wasn't helpful when the IMF was trying to put East Asia back together during the financial crisis of 1997-98:

"Another controversial move was Wolfensohn's decision during the 1990s Asian crisis to declare war by proxy on the bank's sister institution, the International Monetary Fund. The bank was understandably peeved at the U.S. Treasury for forcing it to commit a huge share of its antipoverty funds to bailing out middle-income countries like Korea. Unable or unwilling to attack the bank's major shareholder (America) directly, Wolfensohn tacitly launched his troops in a series of wild-swinging attacks on the fund.

Having the bank slam the IMF was carrying the two sister agencies' usual good-cop-bad-cop, routine too far. The bank not only succeeded in deflecting the ire of anti-globalization protesters onto the fund, it poured gasoline on the flames and caused real damage. This tactic surely did little to advance the cause of poverty relief, as the fund is an institution that overall has done far more good than harm in developing countries. Fortunately, the IMF has finally started to rebuild its image over the past few years, thanks in part to (so far) very successful bailouts of Brazil and Turkey."

Sebastian Mallaby spends a few pages on the Bank's involvement in the Asian financial crisis in his new book on James Wolfensohn's presidency, The World's Banker. Summarizing :

The IMF plays a more important role in addressing financial crises than the World Bank. It has financial expertise that the Bank does not, and it has an organizational culture that allows it to respond much more quickly than the Bank. "But when it came to financial turmoil, the IMF remained the expert. It could parachute into a country and come up with a prescription in a week or two; the Bank took months mulling over its analysis." (187)

Moreover, the Bank's ability to respond in Asia was hurt by Wolfensohn's management style, which led to considerable upper-level turnover. Bank efforts to put together a fast reaction "swat" team were a failure. (190, 192-193)

During the crisis, the IMF took control of relief efforts, shunting the Bank aside. This rankled the Bank. Bank staff felt their expertise was ignored. (187)

Wolfensohn was especially annoyed. The Bank's performance in the Asian crisis contrasted with a Bank triumph early in his tenure: its ability to move quickly to support the peace process in the Balkans. This had impressed the Bank's "principal stockholder," the U.S., represented by the Clinton Administration. The Bank did not look as good in Asia. (191)

Moreover, the Bank was expected to provide a lot of funding for the relief efforts organized by the IMF, without being given much input, or choice. Bank failure to put up the money when requested would have appeared to make it responsible for the failure of a plan to save a country in distress. This really bugged Wolfensohn. (192)

The result was, that the Wolfensohn sought to distance the Bank from the crisis (193-195).

"The first weapon in this distancing strategy came in the form of Joe Stiglitz, the brilliant and mischievous future Nobel laureate who had joined the Bank as chief economist at the start of 1997...When the Asian crisis got under way, there was a lot of tumbling. The IMF, which had always annoyed Stiglitz by failing to incorporate his economic theory into its models, made a series of errors in the design of its bailouts....Stiglitz could not contain his glee. He lambasted the IMF, focusing particularly on two errors...Stiglitz talked as though the IMF was run by idiots. Wolfensohn allowed him to sound off to the press, blackening the IMF's name just when its crisis-fighting reputation was most precious. From time to time Wolfensohn would rein him in, but then Stiglitz would charge off again, and it was hard to avoid the conclusion that Wolfensohn was quite pleased about his pugilistic rudeness. The boss couldn't say those things himself, of course; and he found it upsetting when his underling got more media attention than he did; but he privately relished the humiliation of the Bank's humiliators..."

Wolfensohn also sought to distance the Bank from the IMF, by publically distinguishing between an IMF function of dealing with the financial crisis, and a Bank function of addressing the poverty incidental to the IMF's efforts (195):

"...the Bank's billions, he proclaimed, would not be used merely to prop up Indonesia's currency; they would be used to fight the jump in poverty that accompanied the crisis. There was not much substance to this rhetoric, since all money flowing to the Indonesian government would help to prop up the exchange rate, and all money (even money from the cold-eyed IMF) would mitigate cuts in social spending. But as public-relations strategy the Bank's poverty-fighting line sounded just right..."

Sources: Ken Rogoff, "A Final Grade for Wolfensohn." Newsweek, January 17, 2005. Accessed at http://msnbc.msn.com/id/6803429/site/newsweek/ on January 17, 2005;

Sebastian Mallaby. The World's Banker. A Story of Failed States, Financial Crises, and the Wealth and Poverty of Nations. Penguin Press. 2004. The Asian financial crisis is discussed on pages 183-196.

Mallaby's colleague at the Washington Post, Paul Blustein, also talks about Bank-IMF relations in his book on the crisis, The Chastening. My favorite anecdote from Blustein: even the choice of word processor divided the Bank from the IMF. The Bank used WordPerfect and the IMF used Word; they couldn't exchange files easily.

Mallaby paints a lively, but not highly nuanced, picture of Stiglitz. Blustein is probably better, but not as much fun. Stiglitz makes his own case in Globalization and its Discontents. The Asian crisis is covered in Chapter 4.

Kenneth Rogoff, chief economist of the IMF, responded to Stiglitz's charges in this unusual open letter. Here is an article on the debate from the Financial Times:"The Odd Couple of Global Finance".

Comments

[r4i karten]

Hi,
I had heard many believed Asia was sufficiently decoupled from the Western financial systems. Asia has not had a subprime mortgage crisis like many nations in the West have, for example. Many Asian nations have witnessed rapid growth and wealth creation in recent years. This lead to enormous investment in Western countries. In addition, there was increased foreign investment in Asia, mostly from the West.