BT: FINANCIAL CRISIS - Economist sees IMF role should international credit dry up (23 Sep 2008)

FINANCIAL CRISIS
Economist sees IMF role should international credit dry up

He says effects of US crisis will hit the world for some time to come

(WASHINGTON) The International Monetary Fund has been sidelined from the US financial crisis, but that may not be true for long if governments are unable to access international credit.

'The IMF's day will come in this crisis,' said Kenneth Rogoff, a former IMF economist now at Harvard University.

'The echoes of this (crisis) are going to be reaching out into the world for some time to come. It's not over by any wild stretch of the imagination, so there is an awfully good chance that the IMF's business is going to pick up for better, for worse, over the next 12 months.'

The IMF, which has ladled out multibillion-dollar rescue packages to countries facing economic peril, has a mandate to oversee the global financial system and be an early-warning system to markets.

But its warnings about the US crisis have been off-base and inconsistent, raising further questions about its effectiveness in monitoring the global economy.

In April last year, months before the crisis began, its World Economic Outlook report gave a glowing prognosis for the world's economy. By late July, the fund remained upbeat on world growth prospects, even as the US housing market was unravelling and Bear Stearns hedge funds were failing.

When the IMF did issue warnings, they were often ineffective or ignored by its largest shareholder, the United States, where trouble brewed in the housing market.

Even with the US financial crisis being compared to the Great Depression, IMF managing director Dominique Strauss-Kahn, a former French finance minister who has been in the job for almost a year, has never given a speech in the United States on the US-led crisis.

'What's going on in the United States is very hard for any external body to exert any leverage,' said Mr Rogoff, who was at IMF at the time of the Brazilian and Argentine crises.

'Things are moving so fast that it's very hard to intervene,' he said, noting similar inaction of other agencies such as the Bank for International Settlements and Organisation for Economic Co-operation and Development.

'The period of acquiescence in international capital markets is over,' he said. 'Countries which don't have realistic macroeconomic strategies are going to come unglued.'

The IMF's response in the current crisis has ignited a fierce debate between IMF staff, management and its Asian members over the even-handedness of the IMF's endorsements of the US government's bailouts of institutions and its advice during the 1997/98 Asian financial crisis.

During the Asian crisis, the IMF opposed moves by Asian governments to pump public money to support the capital of ailing financial institutions, which led to a string of bankruptcies and thousands of job losses.

Still bitter towards the IMF, Asian government officials, and some senior staff, have told IMF management that the institution's actions smack of double standards.

The IMF has admitted that it made mistakes in the Asian crisis by putting an over-optimistic spin on the likely economic downturn and misjudging the market's response. But it defended the basic thrust of its policy recommendations to the one-time tiger economies of Thailand, Indonesia and South Korea.

The global economic landscape since the Asian financial crisis is now vastly changed, with China and India driving global growth and most Asian governments accumulating massive amounts of foreign exchange reserves to self-insure against returning to the fund for help.

The US financial crisis has also come at a time when the IMF is in the middle of a major restructuring of the institution in more than 60 years and some of its longest-serving directors have left or are leaving under a buyout plan to cut costs.

'The fund's role is to warn of building problems and to get people to pay attention to them,' said Raghuram Rajan, a former IMF economist and a University of Chicago's Graduate School of Business professor. Still, it has 'less influence regarding developed countries,' he added. 'Once this crisis is over, we will have to reconsider how the international agencies might play a role, because of the international impact.' - Reuters


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