The Chastening: Inside the Crisis that Rocked the Gobal Financial Systems and Humbled the I.M.F
by Paul Blustein
New York: Public Affairs, 2001, pp. 426.
Paul Blustein is a staff writer at The Washington Post, and therefore carries with him the left-of-centre and internationalist outlook of that very liberal newspaper. Nonetheless his analysis of the 1997 Asian financial crisis and the attempts by the International Monetary Fund to stem it is perceptive and is of importance.
Blustein points out that the adoption of I.M.F. rescue packages by Asian countries did not have the intended stabilising effects. In 1997, in Thailand the approval of an I.M.F.-led rescue totalling $U.S. 17 billion did not prevent the immediate further falls in the baht. Likewise the I.M.F.-led rescue of Indonesia totalling $U.S. 33 billion did not prevent the immediate further falls in the rupiah. There were similar falls in the Korean won after the $U.S. 55 billion rescue, as also occurred with the rouble after the $U.S. 22 billion rescue of Russia in 1998 and with the real after the $U.S. 41 billion rescue of Brazil.
(A significant condition of these various rescues was that the countries in difficulties were required to make large amounts of their prime assets available to international – and hence particularly, American – investors.)
“Thorough scrutiny of these developments lays bare how distressingly volatile the global economy has become in the new era of massive international capital flows. Unless steps are taken to make the system safer, the next crisis could be much more disastrous.”
Further, the level of competence in the I.M.F. has frequently been over-rated. Blustein points out that the 1997 Korean crisis arose “less than a month after the I.M.F. staff had drafted a confidential report assessing the Korean economy as essentially safe from the turbulence besetting South-East Asia”. Blustein notes that the I.M.F. has made “serious mistakes”:
“Some of these involved the Fund’s well-known penchant for over-prescribing audacity, an example being the excessive fiscal stringency it demanded of Thailand. Others reflected the Fund’s lack of expertise in banking issues, an example being its decision to close sixteen banks in Indonesia without providing a proper safety net for the remainder of the country’s banking system.”
“The Chastening” is an interesting and indeed beguiling book, which examines the workings of the I.M.F. and its recent failures and successes with some detail.
For economists and government policy advisers it is a book that should be bought and read. For most, non-expert, readers the chief interest resides in the first and final chapters, which set out Blustein’s chief concerns and his comments on various proposals that have been put forward for strengthening the I.M.F. or providing some other mechanism for preventing or resolving national financial crises. Blustein sees some hope in “standstills” – a temporary suspension of payments to foreign creditors until a crisis has been stabilised – and believes that these should be added to other preventive or rescue methods such as large-scale international loan packages, so as to forestall outright defaults.
He is certainly correct in stating that these matters require urgent consideration: the 1997 Asian financial crisis was overcome only with very great difficulty. The threat of future, perhaps less tractable crises is of concern because the consequent damage to the world economic system, and hence to individual countries, might be far greater than should be contemplated.
National Observer No. 52 - Autumn 2002