The Financial Gleaner presents the final segment in the 5-part series, "Anatomy of a crisis," an examination of the 1990's financial sector crisis.
The Sound of Silence
The conspicuous pre-crisis absence of the IMF "-the international institutions go around the world preaching liberalisation, and the developing countries see that means open up your markets to our commodities, but we aren't going to open our markets to your commodities. In the 19th century, they used gunboats. Now they use economic weapons and arm twisting."
- Joseph Stiglitz, former World Bank Chief Economist, June 2000
It is rather ironic that it is the IMF that has eventually pointed out all the dangers associated with countries like Jamaica embarking into liberalisation without proper safeguards. While the Jamaican Government cannot be excused for its role in the events surrounding the crisis, the IMF should not have been allowed to play Pontius Pilate.
STRUCTURAL SAFEGUARDS
Post 1990's IMF literature waxes most eloquent on the need for regulatory and structural safeguards to precede or at least accompany liberalisation, capital account liberalisation in particular.
Hindsight, though, is 20/20, and one is hard-pressed to find any documented instance of the IMF issuing any warnings to Jamaica to temper liberalisation with a stronger regulatory environment.
Local economists point out that the late 1980's and early 1990's liberalisation programme was introduced under external pressure from the World Bank, IDB, and the IMF, and implemented under IMF supervision.
In January 2000, a global conference of economists was staged in Havana, Cuba. One of the papers circulated at that conference was written by Jamaican economist Mary McMorris, and titled "International Monetary Fund: Adaptability and Flexibility"
According to McMorris, "-In retrospect, the IMF-supported liberalisation programme was formulated without the necessary modifications to the macro-economic framework and was implemented before the required institutional reforms were in place-the relatively slow growth that Jamaica experienced in the early 1990's is therefore partly related to deficiencies in the timing and formulating of the economic and financial liberalisation policies that were guided by the IMF."
Like the Jamaican authorities, the Fund seemed to have been, at best, caught at a point on its learning curve where it did not see the dangers of Jamaica's rapid march into liberalisation. Unlike Finance Minister Omar Davies, however, there is no trace of any admission of culpability on the part of the Fund in helping to precipitate or failing to foresee the crisis that ensued.
The IMF's own documents indicate that it should have seen the Jamaican crisis coming.
A 1997 IMF working paper by Alicia Garcia - Herrero examined the financial sector crises experienced by three Baltic nations - Estonia, Latvia, and Lithuania - in the 1990's; and similar conditions experienced around the same time by Paraguay and Venezuela.
Significantly, among the causative reasons listed for the crises in these countries, all recorded incidents of financial liberalisation in the absence of adequate regulatory environments, just like Jamaica.
One other country with the very same complaint was listed in the paper - the Philippines - all the way back in 1980. According to the 1997 paper, "-the Philippines had just liberalised the financial system and the capital account previous to the crisis, without strengthening bank regulation and supervision. This increased the degree of bank distress."
Graciela L. Kaminsky, a George Washington University Professor and former staff economist at the Board of Governors of the United States Federal Reserve, presented a paper at an IMF Institute course on May 4, 1999.
The paper was titled "Currency and Banking Crises: The Early Warnings of Distress," and studied the onset of banking and/or currency crises in 20 selected countries between 1970 and 1995.
LIBERALISATION
Nineteen of the 20 countries examined suffered banking crises after the implementation of financial liberalisation, and 9 of the 19 suffered these banking crises well before any sign of a crisis in Jamaica.
Another IMF working paper, Monitoring Banking Sector Fragility: A Multivariate Approach, written in 1999 to explore approaches to predict and monitor banking sector fragility, uses the case of Jamaica in 1996, and Indonesia, Korea, Malaysia, the Philippines, and Thailand, all in 1997. Using the forecasting methodology it proposes with the data available from these countries, the paper indicates that the Jamaican episode should have been the easiest of the six to spot.
"-based on forecasts as of April-May 1997, estimated crises probabilities were relatively low for the five Asian countries, while Jamaica was well into the highest fragility zone as early as 1995."
