OCTOBER 8, 1999

Tough Love and the Asia Crisis

Austerity was -- and still is -- needed, says an IMF official

Stanley Fischer, first deputy managing editor of the International Monetary Fund, declared on Oct. 7 that the recent backsliding on reform in Asia vindicates the IMF's push for harsh measures in the early stages of the Asia crisis. And he called for more corporate restructuring in the hardest-hit countries.

When the crisis began in July, 1997, the IMF urged South Korea, Thailand, and Indonesia to take drastic fiscal austerity and reform measures. Critics said the reforms caused more pain than necessary. The IMF then relented slightly, allowing countries under its programs to run small budget deficits, but it still pressed for restructuring of the financial and corporate sectors.

"The more I look at what's happening, the more concerned I become," Fischer told the Japan Society in New York, pointing to recent moves by the South Korean government to keep the virtually bankrupt Daewoo Group afloat, as well as a lack of progress in Thailand in sorting out its debt problems. "There is a risk that the burgeoning recovery will reduce the urgency of reform, and allow complacency, or normal politics, to set in. Many of the gains that have been so painfully acquired over the last two years could be reversed. Corporate sector restructuring, and financial sector restructuring, has to continue."

Fischer declared that the IMF was right to pressure Asian countries for reforms early in the process. "Many people said, 'Stabilize first, push later,'" said Fischer. "Every day that passes makes clear the validity of [our] judgment." He noted that IMF-imposed austerity has been good for Japan's economy. Growth in Japan may end up surpassing the IMF projections of 1% for this year, and 1.5% for next year.

By Sheri Prasso in New York