Sept. 8, 1999

Two years ago, the global economy faced certain catastrophe. What began as a financial hiccup in Thailand in July 1997 metamorphosed into an economic crisis that spread its tentacles across vast swathes of the globe. Neighboring countries in Asia succumbed to the contagion. The miracle economies of South Korea, Indonesia, Malaysia and the Philippines ground to a halt, their currencies decimated, their stock markets ravaged, and unemployment rising ominously. Emerging markets in Russia, Latin America and Africa shuddered in unison. Western Europe, barely showing signs of recovery from a slowdown, now faced an inglorious return to the abyss. Even the mighty United States, it appeared, would fall prey to the Asian contagion.

The bleakness of the situation was exacerbated by the seeming incompetence of the forces sent to rescue the economies in distress. The International Monetary Fund arrived in Asia to dispense cash to the ailing countries of South Korea, Thailand and Indonesia. But the largesse came with strings attached which, to the IMF's myriad critics, were criminally stringent. Raising interest rates, cried its detractors on the political left, would strangle business investment, dashing any hopes of an economic recovery. There was no lack of opprobrium from the other end of the political spectrum either: the right contended that, by doling out funds to incorrigible governments, the IMF was encouraging them to pursue ill-conceived policies. The term, moral hazard, once found only in economics textbooks, now appeared almost daily in the grim editorials of conservative newspapers.

The IMF ploughed ahead gamely. Casting aside calls for esoteric remedies (such as currency boards), it enjoined the ailing countries to follow standard economic prescriptions: cut government spending, reduce money growth, open up markets to trade, reform the banking system, whittle down the power of oligopolies - all largely conventional remedies that few economists would quarrel with.

Now, two years later, the IMF has reason to feel vindicated. Asia appears to have stabilized, its currencies and stock markets on the ascendant once again. The jitters that gripped Brazil and Russia earlier this year seem to have quieted down. Europe is on the march, and the United States, with nary a blip, has continued to enjoy robust economic growth.

This strain of optimism is also evident in the latest economic growth projections of the IMF. In 1999 and 2000, says the IMF, the global economy will grow by 3% and 3.5% respectively. These figures have been revised upwards from the projections made in May.

How is the United States expected to fare? In 1999, U.S. gross domestic product is forecast to grow by a very solid 3.7%. But, in a move certain to raise the ire of investors, the IMF suggests that the Fed should raise interest rates. Ah, the IMF, it just can't leave well enough alone....

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