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ECENTLY, LEADING GOVERNMENT, BUSINESS, cultural and religious figures gathered in Davos, a ski resort in the Swiss Alps, for the World Economic Forum Annual Meeting. One of the most sought-after figures was professor Jeffrey Sachs, director of the Harvard Institute for International Development, globe-trotting adviser on economic reform -- and a vocal critic of the International Monetary Fund's handling of the Asian crisis. Sachs spoke to Editor Ann Morrison and Senior Correspondent Alejandro Reyes about Asia's crisis. Excerpts:How do you see the crisis?
What we've experienced is a financial panic. The banks were pouring money into Asia up to mid-1997. Since then, they have been abruptly taking money out. That kind of change of direction leads to the kind of crisis we're seeing, with collapsing exchange rates, destabilized equity markets and economies going into free fall. . . . Part of the answer is that whenever there's a lot of short-term debt around, it's possible for capital movements to be self-fulfilling. If you predict doom and the short-term capital flows out and there are not enough foreign exchange reserves to cover the outflow, doom will occur.
From a national policy point of view, the lesson is don't allow short-term cross-border debt to build up to such high levels that you become vulnerable to a self-fulfilling outflow of capital. Another part of the lesson is that when the IMF or others intervene, their job should be to help stop a self-fulfilling panic, and that means confidence-building measures. In my view, although it's a minority opinion, the IMF did a lot of confidence-reducing measures. In particular, I blame the IMF for abruptly closing financial institutions throughout Asia, sending a remarkably abrupt, unprepared and dangerous signal . . . that you had better take your money out or you might lose it.
The way out of this panic often involves orderly work-out arrangements . . . getting debtors and creditors directly together to reschedule the terms of loans. The IMF put in a lot of money, but didn't really calm the markets. That just gave an exit instrument for international banks to get their money. What seems to be calming people are things like the rescheduling of Korea's short-term debt. Or, ironically, Indonesia's unilateral announcement of debt suspension. And then you read the wires and talk to the investor banks and everyone's thrilled. They say this is the first step of an orderly way out.
Have your views changed as a result of the IMF's responses to your criticism?
The IMF is moving in a very different direction from where they were. They'll never say it but we can watch. The first round failed. Its goals were to protect the creditworthiness of countries, maintain debt servicing, and stabilize exchange rates. What happened? Creditworthiness collapsed because all these countries ended up with junk-bond status for their debts. Debt service was suspended everywhere in the end. . . . The second round began with the Korean negotiations with banks. This is starting to provide some cushion, and we are going to get this kind of orderly work-out arrangement with [Indonesia, Korea and Thailand] and their creditors. That does not say everything's finished and the crisis is over. But it's a completely different framework now. . . . It's a more constructive direction.
What are some longer-term solutions? You mentioned the need to keep tabs on short-term lending. That's not something we see much of in Asia.
We'll see more of that. A lot needs to be done. I'm not sure the most convincing approach would be to control capital movements in Washington. I'd like to see governments take more responsibility. I'd like to see the international effort partly aimed at more disclosure so you know when huge bad debt is building up. . . . The second part is better harmonized rules for banking regulation. The IMF wants to take this role on itself, but it's a strange place to put the responsibility. We have an institution [the Swiss-based Bank for International Settlements] that has been in charge of bank regulation and standards but only applied to developed countries. I'd like to expand its role in developing countries.
Then there is clearly a case for a better ability to respond to [accidents]. When you have a bad debt situation, you need some orderly work-out mechanism. You need to bring the creditors and debtors together. You need to make sure that free riders don't simply claim their claims, and everybody else is stuck holding the bag. When a debtor is bankrupt you need a way to convert debt to equity and so forth. We don't have at the national or international level proper bankruptcy procedures. I've been recommending this for years and everybody shudders at it. . . . With this new crisis, I'm saying again that we need a method for orderly work-outs. Now there is a little bit more responsiveness.
What about the IMF?
The IMF is much too secretive and much too mediocre in its performance to justify that secrecy. We take for granted that everything it says and recommends is good, and the only question is whether governments comply. But the sad fact is that not all it recommends is so good. We're in a dangerous situation when you have a closed and secretive institution that makes a lot of mistakes. IMF programs should be public, not only so that participants in markets in Bangkok or Jakarta or Seoul know what's going on, but so that everybody can see the recommendations, where are they coming from, do they make sense in detail -- in detail. Most of the details count [but] are unknown except if someone slips you an under-the-table copy of these programs. That's a very bad situation.