Is IMF feeding the flames?

The International Monetary Fund’s (IMF) role is to help countries recover from financial crises by offering them loans, albeit with the caveat of imposing structural programmes, which is where the controversy begins. The 1997 Asian Financial Crisis was a convoluted region-wide crisis. Thailand, Singapore, Malaysia, Indonesia and South Korea operated in a hot-money bubble in the 1980s and 1990s: a high-risk, high-reward system whereby high-interest rates and fixed currency rates were pegged to the US dollar. They enjoyed a boom as cheap, low-interest loans in the US enabled them to borrow massively. Furthermore, the exchange rate was made more favourable to exporters. As a result, these countries welcomed significant economic growth in what is called the Asian economic miracle, in the form of an eight to 12 per cent increase in their GDP. However, the risk in this was its basis on speculative investments in the non-tradable sector, especially real estate. This is because the investment behind this growth was foreign and the growth itself was mostly attributable to exports as well as speculation. When the US eventually raised its interest rates and the dollar became stronger, investment in the US bounced back. This led to the appreciation of the Asian currencies that were pegged to the US dollar.