Abstract

Increasing globalization of capital markets poses new challenges for the design and implementation of IMF-supported programs. These challenges have been thrown into sharpest relief in recent capital account crises, during which rapid reversals of capital inflows brought about large and abrupt current account adjustments with pervasive macroeconomic consequences.

Increasing globalization of capital markets poses new challenges for the design and implementation of IMF-supported programs. These challenges have been thrown into sharpest relief in recent capital account crises, during which rapid reversals of capital inflows brought about large and abrupt current account adjustments with pervasive macroeconomic consequences.

The reversal of capital inflows in these recent crises occurred very suddenly, reflecting a sharp shift in market sentiment. This contrasts with the situation that more traditional programs were designed to tackle, where ongoing macroeconomic imbalances generally result in a relatively gradual deterioration on the external side. Although concerns over the sustainability of current account deficits and exchange rate pegs played a role, they do not explain the suddenness and magnitude of the shifts in the capital account. Various other vulnerabilities, such as adverse public debt dynamics (Brazil and Turkey), a risky public debt management strategy (Mexico), and pervasive financial sector weaknesses (e.g., Indonesia, the Republic of Korea, and Thailand) appear to have been critical in changing investor confidence.

Given the differences in their origins, IMF-supported programs in capital account crisis were confronted with challenges that differed considerably from those of more traditional IMF programs.1 Given the dominant role of private capital flows, estimates of sustainable current account positions and financing needs were subject to much greater uncertainty, the impact of the programs on market confidence became critical, and policies had to address a variety of vulnerabilities that were at the root of the crises.

There are three main reasons for focusing on a comparison of the programs formulated in response to these crises. First, the crisis cases raise issues of whether the policy response in the context of IMF-supported programs took adequate account of what was distinctive about these crises; this is particularly important in formulating an appropriate response to other capital account crises that will inevitably occur in the future. Second, they raise the more general question of whether, or to what extent, macroeconomic policies can influence the adjustment process once a crisis has erupted. Third, some of the problems confronted in these crisis cases, and the issues of crisis prevention they raise, are, writ large, those faced by other countries in the context of financial globalization.

This paper examines the experience with IMF-supported programs in the context of eight capital account crises in the 1990s. In some cases, new IMF-supported programs were formulated in response to a crisis, while in two of the countries (Argentina and the Philippines), IMF-supported arrangements that were in place at the beginning of the crisis were extended and augmented, and policies were modified. The sample includes Turkey (1994), Mexico (1995), Argentina (1995), Thailand (1997), Indonesia (1997), Korea (1997), the Philippines (1997), and Brazil (1999).2 The paper focuses on the broad macroeconomic strategy of these programs in addressing the crises: the financing and external adjustment envisaged and the role of macroeconomic and structural policies. The chronology of events in the individual countries is presented in Appendix V.

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