.. fied the crisis was the fact that the nations seeing all of elements that are comprising the crisis occur in their economies have lost confidence in their currencies and the financial institutions. However, what turned this bad financial situation into a catastrophe was the loss of confidence that turned into self-reinforcing panic. Although, the world was shocked at the intensity of the crisis they – meaning the United Nations, the IMF and the affiliated countries began getting involved in order to start the recovery process as soon as possible. This aided Asia’s troubled markets from spreading their ‘virus’ onto the nearby, vulnerable markets and then to the apparently unconnected markets.

What did the IMF do? Assessing the complex situation on the matter, the IMF had formulated a few propositions to help reestablish confidence in the affected countries. They are as follows: A temporary tightening of monetary policy to evoke exchange rate depreciation. Begin structural reforms to remove features of the economy that had become impediments to growth (such as monopolies, trade barriers, and nontransparent corporate practices). Initiating the reopening and / or maintaining lines of external financing. Maintenance of a sound fiscal policy, through the provision for rising budgetary costs of financial sector restructuring. Provided these factors the Asian counties should have been on their way to recovery. However, we have only begun to see slight improvement on their part, thus posing a question: How effective is the prescribed treatment? Arguments for the actions taken by the IMF There are three major criticisms that Martin Feldstein, a former presidential economist, makes of the International Monetary Fund’s remedies for the Asian crisis (“Refocusing the IMF,” 1998). First, he argues that IMF uses the same old type of medicine, inappropriately dispensed throughout the nations.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

Second, he contends that the IMF went beyond it’s essential task by including structural elements in the program, the essential task being the correcting the balance of payments. Finally, he is troubled by the bailout issue – referring to the fact that IMF provides a safety net and countries are not as concerned with taking excessive risk because they know that IMF will be there to bail them out. Stanley Fischer, who is first deputy managing director of the International Monetary Fund, addresses the three issues troubling Feldstein. Fischer contends that there could not possibly be the same method used for the nations that are in need of help. He says that the countries requesting assistance are different in the size of their current account deficit and the stages of crisis they are in. Therefore, the design of the programs reflected each individual country.

When the countries approached the IMF, Thailand and South Korea had very low reserves and the Indonesian rupiah was extensively depreciated. So, the IMF had to restore confidence in their currencies prier to the attempt of fixing any other problems. This could have only been achieved through the increase of interest rates temporarily, in order to make their currencies look more appealing. Even if the higher interest rates would make the situation with weak banks and corporations more complex. However, when confidence would be restored the interest rates can be lowered to the normal level. As in regard to Feldstein’s criticism of the structural elements incorporated into the reform programs, they were vital for the Asian financial sector. Due to the fact that the underling problems stemmed from the weakened financial institutions and complicated nontransparent relations among government and corporations, IMF had to include structural reforms.

Otherwise the IMF would have only addressed the balance of payment problem by landing money, it would not have been effective since the underling aspects were not considered. Responding to Feldstein’s third critique, Fischer addresses the issue of bailouts. Feldstein claims that countries may take an excessive risk knowing that IMF will bail them out if things go bad. Fischer says that to think that policymakers pursue risky courses of action because they anticipate that IMF safety net will catch them is far-fetched. Countries avoid going to the Fund, since historical precedence has shown that policymakers whose countries end up in trouble do not do well politically.

Therefore, this proves that countries do not do take unwise actions merely because they believe that there will be a safety net to catch them. What could have been done differently to contain the crisis? Some countries believed that the remedies put forth by the IMF were inadequate because Asian governing methods and economies are very different from ours. And furthermore Asia would have done better if an internal Monetary Fund was formulated. In August 1997 Japan proposed an Asian Monetary Fund to deal with the crisis. It secured pledges of $100 billion mostly from itself, China, Hong Kong, Taiwan, and Singapore (“The resources lie within,”19).

Most importantly Asians save a lot of their income compared to western countries and households do most of the saving. Domestic savings run about twice the American rate. Households put their savings in to low risk banks as opposed to Americans who use their savings to finance households’ own investment in housing. Therefore, the resources to begin the initial healing process may essentially lie within. Moreover, the Asian Monetary Fund would build on Asia’s saving surplus, and foreign exchange reserves. Where would the AMF get the resources to do this you may think? The AMF would have financing from the subscribed governments. The fact that they were able to secure $100 billion rapidly manifests that sizable sums are in prospects. Nevertheless the AMF never came to existence due to United States Treasury’s disapproval of Japan’s proposal.

Conclusion Looking retrospectively, we can contemplate the procedures that were done and theories what should have been done differently. However, what’s done is done and we can only examine the origin of the crisis and it’s development in an attempt to prevent another one from occurring. You may agree or disagree with the specific measures that IMF has implemented, but we really do not know would it have been better if other measures were utilized or if the IMF did not intervene at all. Asia’s economies seem to be slowly coming out of the “intensive care”. The exchange rates of all the crisis economies have strengthened from their lows, which were reached in January 1998. While the Indonesian rupiah remain deeply depreciated, it too has recovered significantly from the low it reached in June 1998.

In addition to that, interest rates in Korea and Thailand have declined remarkably since January as currency pressures have eased ( Even though the crisis is not completely resolved there is evident progress. The IMF has already drawn lessons from the crisis on how to strengthen the international financial system and the importance of a sound macroeconomic policy framework, and the dangers of unsustainable large current account deficit. Economics Essays.