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What does the IMF say about the lessons of East Asia?

J une 16, 1998 Dear Colleague, As we debate more funding and an expanded role for the International M onetary Fund, it behooves us to look at the lessons of IM F and other interventionist policies. The role of the IM F has changed markedly over time--from maintaining a Bretton Woods Gold Standard since its inception until the early 1970s, to one of mostly advising developing countries coupled with loans of small amounts for temporary situations until the M exican bailout. Supporters of a new, expanded role for the IM F need to explain the economic theories they use to justify its existence and why this new interventionist role of the IM F is not only the best use of taxpayer dollars but the best policy that we could pursue. The IM F publication Growth in East Asia: What We Can and What We Cannot Infer (M ichael Sarel, Economic Issues 1) explains well some of the competing theories: “The [Free Market] school...espous es and underlying belief in classical liberalis m which requires only that the government ‘get the basics right’ and opposes any other kind of government intervention. (G etting the basics right means creating an environment in which the economy will thrive by, for example, making sure t hat t he exchange rat e reflects the economic fundamentals, that interest rates yield a positive return, that inflation is kept under control, and that taxes are not so burdensome as to discourage economic activity.)” “The Revis ionist view does not share the neoclassical belief in t he efficiency of t he markets. It asserts that...markets work imperfectly. D eLong and Summers (1991) sum up this view : ‘The government s hould jump-start the industrialization processby transforming economic structure faster than private entrepreneurs would.’ Advocates of this view see the success of East Asia as confirming their conviction.” [Reference: D eLong, J. Bradford, and (now Deputy Secret ary of the T reas ury) Law rence H. Summers, “Equipment Investment and Economic Growth,” Q uarterly Journal of Econom ics , No. 106 (M ay 1991), pp. 445-502.] “A third [A gnostic] s chool...claims we cannot properly identify how such policies spur economic growth...Success has a thousand fathers; failure is an orphan...T he more one examines the individual East Asian economies have pursued, the more evident it becomes how different, and indeed contradictory, these policies have been. Rodrik (1994), for example, r emarks t hat t he East As ian model encompass es highly int erventionis t s trategies (Japan and Korea)...client elis m [cronyism] (Indonesia and Thailand); [and other strategies].” [Reference: Rodrik, D ani, “King Kong M eets Godzilla: The World Bank and the East As ian M iracle,” Chapter 1 in Mir acle or Des ign? L es sons Fr om the Eas t Exper ience, Overseas Development Council, 1994.] The revisionist advocates of interventionist governmental strategies cannot now deny paternity of the crises in East Asia and elsewhere and the cronyism and corruption that resulted from their misguided policies. We should return to the classical liberal idea of “getting the basics right.” We should not only reject more money for the IM F now but sunset the anachronistic Bretton Woods Act after several years and have a rational, informed debate on what role government should have and what U.S. policies should be. Respectfully,