Created 2/7/1998
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Brief Comment on Steven Radelet and Jeffrey Sachs, "The Onset of the East Asian Financial Crisis"

J. Bradford DeLong
University of California at Berkeley and NBER


My reaction to hearing Jeff Sachs present this paper this morning was one of cognitive dissonance.

First of all, the five-fold classification of crises advanced in the paper is very nice. The point that the proper response to a crisis depends on what kind of crisis it is is well-made. And I share the view that lenders-of-last-resort in financial panic and disorderly workout cases should recognize that in a sense fundamentals are sound in East Asia today--and that in such cases there should be a kinder, gentler IMF.

But on the other hand you can never be certain in real time of the mix of crisis types: all crises are mixtures, with some "moral hazard" and some "policy induced" component as well as "financial panic" and "disorderly workout" components. So you should never make policy as if the crisis is entirely made up of one and only one pure type.

Moreover, as far lenders-of-last resort that put their existence at risk by the scale of intervention are concerned, they have to be prudent, to act as if the crisis has a substantial policy-induced and moral-hazard component. In this case the IMF very badly needs to get its money back quickly, in time for the next crisis, due in 2001.

Remember that the right thinks that because of the IMF East Asian economies are not suffering enough, while the left thinks that, because of the IMF, East Asian and Wall Street power elites are not suffering enough. All the political criticisms from right and left--from members of bodies to which the IMF is accountable--are that the IMF is giving the hard-earned wealth of first-world taxpayers away to the unworthy, and should stop. Calls for making the IMF more "accountable" are thus implicitly calls for it to loan less--and impose more conditionality--on East Asian economies.

Thus, cognitive dissonance.

Steven Radelet and Jeffrey Sachs as economic analysts have have a sophisticated argument that the IMF is getting much less than its money's worth of lender-of-last-resort services from the massive resources it is committing. But when I look at Jeffrey Sachs as op-ed writer--who calls the IMF "arrogant", making an "untimely request [for additional funding]", "so used to secrecy", holding a "monopoly of power", "unaccountable", "[W]hat happened to the first $117 billion?... used... to pay off Western banks, thereby keeping Wall Street happy", I find that the strong substantive argument of Radelet and Sachs is just not getting through. The point that the desired end is a kinder, gentler IMF that will loan more money on easier terms (rather than an IMF that will make East Asia's forthcoming depression deeper) is completely lost.

When the argument is shrunk down to op-ed length, somehow Jeffrey Sachs sounds like a clone of Lauch Faircloth--which he is not. Somehow the rhetoric has drifted very, very far away from the true analytical position.

Notes on Steven Radelet and Jeffrey Sachs, "The Onset of the East Asian Financial Crisis," February 7, 1998

Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax

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