Introduction

The paper examines the crisis management programs that the International Monetary Fund (IMF) adopted in 2008 in Europe to see how it applied the lessons of Asia. The Asian crisis of 1997 was a watershed event in the evolution of the international financial¹ architecture designed to prevent, manage, and resolve a financial crisis. A number of initiatives have since been launched, including the 1999 establishment of the Financial Stability Forum (FSF),1 the 1999 introduction of the Financial Sector Assessment Program (FSAP), and a number of less visible reform efforts within the IMF. Many of these reforms in the IMF's crisis-response policies, however, remained largely untested because the plentiful global supply of capital left little room for IMF financing during much of the 2000s.² The situation changed in late 2008 when the global financial crisis led to a sharp contraction of global credit and caused several European countries to seek financial support under the IMF's conditional lending facility.

This is an opportunity to examine how the IMF applied in practice the lessons it had learned from Asia over 10 years ago. The many criticisms of the IMF's crisis response in Asia can be grouped into three broad categories: (i) the IMF went ahead with underfinanced programs, (ii) its adjustment programs were ill-conceived in terms of macroeconomic conditionality, and (iii) it imposed structural conditionality in areas not relevant to crisis management. In this paper, I review the content of the IMF programs in Asia and Europe in each of these areas before attempting a broad characterization of the 2008 European programs in terms of how the IMF applied the lessons of Asia. The comparison is between the initial programs, which will allow us to consider program design issues abstracting from the issue of how the IMF may have responded to subsequent country-specific developments, including unanticipated events.³

Although more than a dozen countries concluded financing arrangements with the IMF between November 2008 and May 2009 (see IMF 2009b for details), I focus on the capital account crisis cases of Hungary, Iceland, Latvia, and Ukraine, to which the IMF provided exceptional access financing immediately after the onset of the global crisis. The choice of the four early European cases is motivated by three considerations. First, the IMF substantially changed the way it designs lending programs in March 2009. In what it calls the “modernization” of conditionality, the IMF attempted to reduce the “stigma” attached to IMF lending by increasing reliance on ex ante and review-based conditionality and discontinuing the use of performance criteria for structural measures; it increased the flexibility of standby arrangements by doing away with the presumption of quarterly phasing, raising the access limit, and permitting greater upfront disbursements (IMF 2009a). For these and other reasons, it would be difficult to examine the content of the succeeding programs to identify the lessons of Asia, separate from the innovations introduced at the urging of the G20 Leaders Summit in an extraordinary environment of worsening global economic and financial conditions.

Second, not all early arrangements (agreed prior to the March 2009 reform) were comparable in some important respects to those agreed with Indonesia, the Republic of Korea, and Thailand over 10 years ago. For example, though Pakistan was another early case (with the program approved in November 2008), it was not a bona fide capital account crisis case. The country had mismanaged macroeconomic policies and essentially faced a current account crisis, with warning signs appearing already in mid-2007 (though the problem was exacerbated by the withdrawal of capital associated with the global financial crisis). There should be little disagreement that Pakistan in any case needed the conventional therapy of fiscal and monetary tightening. Likewise, the arrangements for Costa Rica, El Salvador, and Guatemala were precautionary (with no presumption that funds would actually be disbursed) and, unlike the situation in Asia, the countries did not face an immediate collapse of the exchange rate or depletion of reserves.

Finally, it is possible that the programs adopted in early 2009 already embodied the influence of the forthcoming innovations being discussed within the IMF at the time. There was then an increasing recognition that these countries were victims of the global economic turmoil, which may have influenced the way the financing programs were designed. In contrast, there was a greater perception that the crisis was largely homegrown (albeit exacerbated by the global crisis) in the first four European cases, with financial sector vulnerabilities playing a key role in three of them; the four countries also claimed the largest ratios of external liabilities to gross domestic product (GDP) among all the countries that received IMF financial assistance in recent months.4⁴ This may explain why the first four European programs envisaged the strongest external adjustment of all recent IMF standby arrangements (IMF 2009b). In these respects, these four cases share greater commonality with the Asian crisis cases than with the other recent ones. The upshot is that in order to see how the IMF may have applied the lessons of Asia in the context of the recent global financial crisis, it is both sufficient and helpful to focus on the early European cases of Hungary, Iceland, Latvia, and Ukraine.

The paper is organized as follows: Section 2 discusses the size of official financing in the crisis management programs of Asia (Indonesia, Korea, and Thailand) and Europe (Hungary, Iceland, Latvia, and Ukraine). Section 3 discusses the content of macroeconomic conditionality, including high interest rate policy, fiscal tightening, and the underlying assumptions. Section 4 compares structural conditionality between Asia and Europe, highlighting the evolution of the IMF's thinking over the past decade. Section 5 identifies the key features of the IMF's approach to crisis management in 2008, explaining how the IMF applied the lessons of Asia in Europe. Finally, Section 6 presents concluding remarks.

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