Asian Financial Crisis and IMF Conditionality

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After 1997 Asian financial crisis, the IMF conditionality had aggravated, in spite of its original intention, the economy of recipient countries such as Indonesia and Korea. The IMF arrangements in the early 1980s for the member countries resulted in financial turmoil in mid-1990s due to increasing portfolio investment in corporations through non bank financial institutions, especially in Thailand and Korea. These financial institutions developed quickly with limited experience and expertise on corporate financing after the liberalization.Restructuring financial sector is still in the process and financial markets are still premature stage of development with weak corporate governance and market discipline, the lack of transparent accounting practice by independent external auditing, and inadequate disclosure of corporate financial position. In addition, complex informal relationship and connection retained among monetary authorities, financial institutions and big conglomerates, specifically in Indonesia and Korea. Traditional regulations and protection for financial institutions including nationalized commercial banks had failed to build tip their expertise for credit-screening and project evaluation, and to develop risk management techniques with discrete internal control. Especially, too urgent sale of ailing banks to international financial institutions in Indonesia and Korea, around 2002 resulted in persistent instability in the financial markets in the countries.The IMF conditionality practices have been based on a market-supporting institutional framework. Therefore, it has been necessary to supplement the traditional instruments of conditionality by focusing on the microeconomic and institutional aspects of reform, especially restructuring the financial sector in the recipient country.