Professor of Economics, University of Ottawa, author of THE GLOBALISATION OF POVERTY: impacts of IMF and World Bank reforms (Third World Network, Penang and Zed Books, London; 1997). The author can be contacted at chosso@travel-net.com

Since the onslaught of the debt crisis in the early 1980s, the IMF has played a central role in exchange rate policy, often requiring indebted Third World countries to devalue their currency by 50% as a "precondition" for the subsequent negotiation of a loan agreement. IMF-sponsored currency devaluations have invariably resulted in abrupt price hikes and a dramatic compression of real earnings.

What is distinct in the cases of Korea, Indonesia, and Thailand is that the devaluation (which preceded the bailout agreement and the imposition of sweeping macroeconomic reforms) had not been explicitly demanded by the Washington-based bureaucracy. Rather it was the result of speculative pressures on currency markets exerted by the large merchant banks and financial institutions (through the use of a variety of speculative instruments).

In the context of the Asian financial crisis, "institutional speculators" (rather than the IMF) have come to play an indirect role in the process of macroeconomic reform. In other words, international banking and financial institutions have (in a de facto sense) dictated country-level foreign exchange policy through the deliberate manipulation of currency markets. In this context, "institutional speculators" are involved in "setting the stage" for the subsequent IMF bailout operation. They are also involved in routine consultations with the Bretton Woods institutions pertaining to the various components of the macroeconomic reform package included in the bailout agreements (e.g. the deregulation of Korea's financial sector and the opening up of Seoul's bond market to foreign capital).

In turn, the same Western and Japanese financial and banking institutions (routinely involved in currency and stock market speculation) are the creditors of Asia's central banks. They also hold large amounts of short term debt and have, therefore, a vested interest in averting loan default by Asian financial institutions. Not surprisingly, these same Western and Japanese financial institutions have pressured G7 governments to implement the bailout operations of which they are the ultimate beneficiaries--i.e. the 57 billion dollars under the IMF sponsored agreement with the Seoul government will be used to reimburse Korea's creditors.

How will these multibillion-dollar operations be financed? The contribution of the Bretton Woods institutions and the Asian Development Bank (ADB) constitutes but a fraction of the total. The largest contributions to the bailouts are from G7 governments, requiring the issuing of vast amounts of public debt.

In other words, G7 governments have come to the rescue of the merchant and commercial banks by accepting to finance the bailout, yet to undertake this objective, G7 national treasuries are obliged to issue large amounts of public debt which is invariably underwritten by the large merchant banks. In other words, the "beneficiaries" of the bailout are also the underwriters of the public debt operation required to finance the bailout. An absurd situation: G7 governments are "financing their own indebtedness"...

While the bailouts are conducive to the building up of public debts (in both the Asian and G7 countries)--thereby reinforcing the stranglehold of the creditors over the conduct of economic policy-- tens of billions of dollars of public money are transferred into the hands of private financial institutions leading to an unprecedented accumulation of private wealth. In turn, the macroeconomic reforms imposed in the context of the IMF sponsored bailouts are conducive to a dramatic collapse of the real economy leading to the impoverishment of millions of people.

Michel Chossudovsky

Department of Economics University of Ottawa Ottawa ON K1N 6N5 Canada Fax: 1-613-7892050 E-Mail: chosso@travel-net.com Alternative fax: 1-613-5625999