The New Nation - Internet Edition

STRANGELY, ten years after the Asian financial crisis and its painful austerity cure, the International Monetary Fund is prescribing the opposite medicine for rich countries to fight off recession by flushing off the system with liquidity, the AFP news agency has reported. Lower interest rates, tax cuts and even the use of public funds to help ease conditions are not being ruled out as a financial crisis spreads from the United States to the world. Central banks in several developed economies have appropriately eased policy and they may need to continue easing until their economies find firmer footings, IMF chief economist Simon Johnson was quoted to have said.

When it was advising emerging countries in Asia and Latin America, the IMF had taken quite a different tack. The IMF preached discipline in public accounts, and the power of the market to separate the wheat from the chaff. Bankruptcies were part of cure. It was the Joseph Stiglitz point in the 1990s that at least for some countries like South Korea, the IMF was pushing too much austerity as recalled by Nancy Birdsall, president of the Centre for Global Development, a Washington think tank. Stiglitz, a 2001 Nobel laureate, who was the World Bank chief economist during the Asian crisis, objected particularly to the suggestion that interest rates be raised to create confidence in the currency.

In fact, the crisis the world is facing today is not a currency crisis in the traditional sense of the term as the context is different. This crisis is not originating from the macroeconomics but more from financial institutions. In other words, since it is not a problem of economic fundamentals, an austerity cure would be ineffective. It is the markets that need soothing to avoid a pummeling of the real economy. In Asia reducing interest rate would have just accelerated the decline of currencies.