IMF gave wrong medicine

CHENNAI, JAN 10: The International community and the International Monetary Fund IMF had quot;hit upon the wrong strategyquot; to solve ...

CHENNAI, JAN 10: The International community and the International Monetary Fund IMF had quot;hit upon the wrong strategyquot; to solve the Asian crisis, Jeffery D Sachs, professor at the Harvard Institute of International Development told The Indian Express in Chennai on Saturday. The IMF had prescribed the quot;wrongquot; medicine, he said, and quot;the prescription has to changequot;. He went on to say: quot;My hunch is that a better diagnosis will be soon taken.quot;

The crisis was not in the real economy of those countries, but in the financial sector. More specifically, Sachs said, it was a financial panic due to the sudden withdrawal of credit from affected countries. In fact, said the economist, the crisis was caused by a combination of bad policies suggested by the IMF and the shocks suffered by the banking system. It was a withdrawal of foreign confidence that hit the banking sector, which is particularly prone to such panic, he said.

That some of these countries adopted a strategy of keeping foreign banks out while accessing funds from the very same institutions, was a key factor in the development of the crisis as it allowed foreign banks to pull out the funds at a very short notice and without being affected. quot;If these banks had been present in the countries with a branch network in place, they would not have pulled funds out,quot; Sachs said. Pressure on banks from the IMF at this stage only exacerbated the situation.

Not only had IMF been unable to restore confidence in the markets, but its moves had quot;worsened an already worse situation,quot; he charged. The markets sensed that the medicine quot;does not fit the ills,quot; despite the institution8217;s 100-billion package, he pointed out.

On being asked how India could be saved from falling into the same trap, Sachs said, while India8217;s debt profile was much healthier, slower, proper and careful deregulation would help give more breathing space. The slower pace in India8217;s opening up her economy was proving to be advantageous now, he added. quot;India will have to recognise that long-term foreign investment has been a stabilising factor and go faster in opening up to this while understanding that short-term borrowings were destabilising.quot;

Banks will have to build up their capital base, keep away from loans of highly speculative nature and introduce improved supervisory techniques. They would have to put in place improved risk assessment and prudent systems. It would also mean opening up the country for foreign banks and allowing them to set up more branches here, he said.

The exchange rate will have to kept flexible and not be tied down to any particular band, he stressed. Asked whether there was any merit in the suggestion recently made by Harshad Mehta that the rupee be upvalued8217;, Sachs said: quot;It would be an exteremly dangerous move to artificially strengthen the rupee, especially in the context of the Asian experience.quot;Shackling the reforms process was no way out, he said and added that the consensus for liberalisation was much wider than acknowledged. The successes of the Asian Tigers8217; came through export-oriented policies.Moody8217;s move unjustified8217;

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CHENNAI: World-renowned economist, Jeffrey Sachs today flayed international consultants, Moody8217;s, for proposing to downgrade its rating of India and called for removal of the unjustified8217; move.

quot;It is a decision based on a misunderstanding that Indian reforms are off track. That8217;s not correct,quot; Sachs, also the director of Harvard Institute of International Developemnt, said at a plenary session at the CII partnership summit here.

The country, he said, enjoyed a widespread political base supporting the reforms and had dynamic leadership to carry forward with new measures.Neither was it vulnerable to the prevailing financial crisis gripping east and South East Asian economies, as it had not leveraged huge short-term debts from abroad as some of the affected countries had done.

He appealed to the international consultant firm to forbear from taking a final decision, wait till the elections and for the new government to take over. quot;Listen to what the new government has to say on reforms.quot;