Characterizing the IMF's Crisis Management Strategy in 2008

I have observed that, compared to the Asian programs of 1997, the European programs of 2008 were somewhat better funded and that their structural conditionality streamlined and focused on the macro-critical area of bank restructuring. Other than these, the overall thrust of the programs was similar: fiscal and monetary tightening, coupled with banking reforms. To the extent that currency crises share common causes and consequences, this may not be so surprising.

Careful comparison of the program documents between Asia in 1997 and Europe in 2008, however, reveals that the difference was not so much about content but about philosophy. It is in the approach to crisis management that lessons were learned from the Asian crisis, and the European programs reflected the changes that had since been made in IMF policies and procedures. As a result, relative to the Asian programs, the European programs had the following features: (i) more emphasis on ownership, (ii) greater collaboration among stakeholders, (iii) more realistic assumptions and greater transparency about the risks and the logic of policy actions, and (iv) more built-in flexibility of targets and policy options. I explain each of these features in turn.

More emphasis on ownership

To demand a policy measure to which a government (and the society it represents) cannot fully commit itself, no matter how desirable the policy may be to the national economy, would increase the chance of program failure and might end up undermining market confidence. This is a lesson of the Asian crisis. The documents for the European programs emphasized that the choice of any policy measure was the authorities' and that the IMF was simply supporting that choice. This is what is called national or country ownership in the literature.

Ownership is not a new concept. At least in principle, all past IMF programs have been the “IMF-supported programs” of government-owned policies. But the Asian crisis led to a serious reflection on ownership as an essential element of any successful IMF intervention in member countries. The IMF has stated that streamlining of conditionality was in part meant to strengthen national ownership of IMF programs, by making conditionality more efficient and transparent, and increasing “flexibility and domestic control in program design and implementation” (IMF 2001b). It was also to strengthen country ownership that, in March 2009, the IMF discontinued the use of structural performance criteria.

The IMF defines ownership as “a willing assumption of responsibility for an agreed program of policies” by responsible officials in a borrowing country (IMF 2001a: 6). In this broad definition, an adopted policy may or may not be homegrown; it can be a product of negotiation between the country concerned and the IMF. In the recent European programs, however, ownership seemed to carry even greater substance: many of the policies had been the authorities' willing choice, often before they approached the IMF. Latvia's choice to keep the exchange rate peg is a case in point. With choice comes responsibility. As the program documents noted, the authorities accepted the resulting need for “exceptionally strong domestic policies” and understood the “possibility that recession could be protracted.”

Greater collaboration among stakeholders

The resources of the IMF can never be adequate to deal with a crisis caused by a capital flow reversal. This is also a lesson of the Asian crisis. When investor confidence is totally lost, no financing is adequate because not only foreign investors but also domestic residents could take money out of the country by liquidating assets and converting the proceeds into foreign currencies in the foreign exchange market. In this sense, IMF financing can only be catalytic. Its objective is to induce international investors to stay in the country (or better still to bring additional money into the country) by presenting a program worthy of their confidence.²² What this requires is not simple volume but quality of financing. The lesson of Asia is not necessarily that the programs were underfinanced, but that one cannot restore investor confidence with dubious numbers.

This is where IMF programs can be strengthened by collaboration with other stakeholders. The need to collaborate with other multilateral institutions has been well recognized by the IMF since the Asian crisis. The 2002 conditionality guidelines clearly state that the IMF's “program design… and conditionality will, insofar as possible, be consistent and integrated with those of other international institutions within a coherent country-led framework” (IMF 2002). Strengthening the IMF-World Bank collaboration in particular has been a constant theme (see, for example, IMF 2004a). In Europe, the IMF's new collaborative approach went even further, as it included not only multilateral institutions but also regional bodies and bilateral donors.

Except for Ukraine, the documents clearly stated that the programs were an internationally coordinated effort of several stakeholders. The participation of the European Commission may have been a legal formality in the case of the two European Union member states, given that part of national sovereignty had been transferred to the supranational institution. However, not just the European Commission but also some Nordic countries (not to mention the World Bank) appear to have participated in the preparation of the financing programs. Such a possibility was unthinkable during the Asian crisis. Even the participation of the World Bank in the program negotiations was more limited. One reason that the IMF received criticism was the suspicion that it had incorporated the views of the United States in a non-transparent way (even though the country did not offer a penny in the case of Thailand).

The IMF's position was different in Europe: it allowed anybody who was willing to provide financing to participate in the preparation of the programs. This is why the headline figure for official financing was more credible than had been the case in Asia. At the same time, all stakeholders were made to assume responsibility for the outcome of the programs. For example, Dominique Strauss-Kahn, Managing Director of the IMF, in announcing the staff-level agreement with Hungary, stated that the, “the success of the policy package will be a shared responsibility between all stakeholders in the country and the international community.”²³ Such a view reflected the position that the IMF was only a member of the international community; it was no longer the fire department for the whole world but the coordinator of a group of fire fighters. It was also a reflection of the more open culture of the institution.

More realistic assumptions and greater transparency about the risks and the logic of policy actions

Not disclosing information can give surprise to the market and may end up undermining the program. This is also a lesson of the Asian crisis. Thus, compared to the Asian programs, a far greater amount of information was disclosed to the public about the European programs, from the initial stage of the negotiations to the announcement of the approved programs.²⁴ Transparency has increased in many public institutions throughout the world over the past decade, with the IMF being no exception. In the context of IMF programs, transparency has also been considered to be a vehicle of enhancing ownership through deepening the “base of support for sound policies among a country's domestic interest groups” (Drazen and Isard 2004).

As a reflection of transparency, the European programs were more realistic and forthright about risks. For example, the program documents indicated that recession was inevitable in Latvia; and 2009 would be a tough year for Ukraine, with the likelihood of a prolonged recession. As noted, the forecasts for capital flow reversals and economic growth were more realistic than had been the case in Asia over 10 years ago. Behind this approach is the philosophy that, when there is bad information, it is better to disclose it at the outset than to hide and let the market discover the information at a later time. In the end, it is not unfounded optimism but honesty that pays off in terms of enhancing the probability of success. Although the public will never know if all unfavorable information was disclosed, downside risks were sufficiently spelled out in the program documents to dispel any impression that the IMF was trying to be overly optimistic to sell the program.

Nor does it help to create doubt. Loss of investor confidence in the program may result unless policies that can become controversial, such as fiscal tightening, high interest rate policy, and the defense of an exchange rate peg, are fully explained and understood. For this reason, the programs for the European programs tried to explain the logic of all core policy measures. For example, in Iceland, the program documents explained that the focus of conditionality was initially placed on bank restructuring but would shift to medium-term fiscal consolidation once market confidence was restored; the documents then explained that, despite the goal of fiscal consolidation, the fiscal deficit would widen in 2009 because automatic stabilizers would come into play. In Hungary, the program documents explained that fiscal tightening would reduce financing needs in the short run and reduce the size of the public sector in the medium term.

More built-in flexibility of targets and policy options

Although the success of a crisis management program depends to a large extent on how international investors react, it is difficult to predict their behavior. As economic conditions that influence their behavior change frequently, an inflexible program may eventually become self-defeating. For this reason, the European programs appeared to incorporate a high degree of flexibility. For example, the program documents for Ukraine, while targeting a balanced budget for 2009, stated that the target could be adjusted flexibly in view of prevailing conditions.²⁵ The biggest uncertainty in all of the programs concerned the costs of banking sector restructuring. Thus, they were excluded from fiscal conditionality in all of them. Flexibility also applied to policy options. In Iceland and Ukraine, the programs included provisions to retain not only capital outflow controls but also some exchange controls for current payments. In this respect, flexibility can also be thought of as a condition for and the outcome of greater national ownership.

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