Asian Problems, the IMF, and the World Economy

Between 1990 and 1996, capital inflows to emerging market countries rose from $60 billion to $194 billion. Mexico’s problems in 1995 changed the form of these capital transfers. Equity owners learned from their losses. After 1995, portfolio investment declined, but direct investment increased. Banks were bailed out, so they continued to lend. Bank loans rose with direct investment. No one carefully monitored these flows. When problems developed in Asia last year, neither the International Monetary Fund (IMF) nor the private lenders knew the magnitude of some of these countries debts within a large range. Firms borrowed directly and through their subsidiaries. Often the total was not shown on any balance sheet. The provision of the IMF Articles of Agreement requiring surveillance, and the decision to strengthen surveillance following the 1995 Mexican problem, proved to be of little use. Though important, the IMF’s failure to monitor seems small beside the elementary mistakes of private lenders. The lenders ignored three principles of prudent behavior that history has shown repeatedly to be a major reason for financial failure.