There have been several criticisms lately of programs supported by the International Monetary Fund. The programs, say the critics, do not recognise the specific circumstances of the Asian crisis countries. They are said to be too contractionary, to push premature financial sector liberalisation, and to encourage investor folly by providing an official bailout. I will deal with the first two points. The third is different in kind and deserves separate treatment on another occasion.

When the IMF was called in to assist both Thailand and Korea, their reserves of were dangerously depleted and investor confidence was crumbling. Once a crisis erupts, easy solutions are not available, and a growth slowdown is inevitable.

The necessary first step is to rebuild confidence, which takes time and steady adherence to the economic program, just as in Mexico. Perhaps even more so as financial sector restructuring, rather than macro- economic stabilisation, is at the core of the IMF programs in Thailand, Indonesia and Korea. Not the same old medicine, but medicine to deal with the ills of each patient.

On the macroeconomics of program design, Fund programs must estimate a growth rate for output. Usually this projection is reasonably optimistic, assuming only a moderate slowdown of growth. In the Korean program, the growth rate assumed for 1998 is 2.5-3 per cent. Considering the deep crisis in which the program began, this cannot be viewed as a contractionary goal. Rather it is an effort to prevent an inevitable slowdown from being worse than necessary.

But why ask for fiscal tightening and higher interest rates at all? The IMF asks for no more fiscal adjustment than necessary to cover the costs of financial sector restructuring and to help restore a sustainable balance of payments.

The extent of fiscal tightening differs between programs. In Thailand, which was running a large (8 per cent of gross domestic product) current account deficit, the initial fiscal adjustment was 3 percent of GDP. In Korea, where the current account deficit was shrinking, the adjustment is 1.5 percent of GDP, largely to amortise the public sector costs of financial sector restructuring. The budget allows for the amortisation costs, not the up front capital costs, of the restructuring, because it is sensible to spread the budgetary costs over time rather than pay for them through an excessive immediate fiscal contraction.

Why not use an expansionary fiscal policy to offset the inevitable growth slowdown? External financing available only a few months ago has evaporated. Worse than that, a capital inflow has turned into a massive capital outflow. This is not the time to try to increase government borrowing. That can be done, and fiscal policy can turn a bit easier, when market confidence returns - as it inevitably will.

Turning to interest rates, recent Asian programs started after lengthy periods when monetary policy had sought to keep interest rates low, and reserves either poured out or the value of the currency plummeted, or both. International institutions and foreign governments then provided loans to the affected countries to help them maintain and rebuild reserves, and to restore confidence.

These loans were not provided to finance a continuing capital outflow, driven by low domestic interest rates. People need to be persuaded to keep their money at home or not to withdraw it. Interest rates need to be raised, not excessively, not permanently, but to help restore stability. Of course, higher interest rates create problems for the banking system, but the banking systems were in trouble at the start of the Fund-supported programs, not as a result of them. As stability is restored, interest rates will come down.

Why not, as some argue, keep interest rates low and allow the exchange rate to depreciate further, thus relieving the economy of the strain of higher interest rates? First, exchange rates have already depreciated too much - by 30-50 per cent in the affected countries, more than any calculation of initial over-valuation. Second, devaluation strains companies that have borrowed abroad. Third, and critical, excessive devaluations would help the crisis spread worldwide. The IMF was set up in part to prevent a repetition of that disastrous syndrome and will not ignore the systemic implications of actions taken under programs it supports.

Turning to financial sector liberalisation, each of the recent programs in east Asia provide substantial official support to the country in difficulty. It would be strange, with the country desperately short of foreign exchange, for the government to take steps to keep out private foreign capital. South Korea has long been touted as an example of the virtues of not opening the financial sector. One of the things to learn from the current crisis is that protecting the financial sector is in part simple protectionism, with all its familiar consequences of inefficiency and a failure to meet world standards.

Korea's decision to allow foreign banks to buy domestic banks and foreigners to buy 50 per cent of the shares in Korean companies are surely moves in the right direction. Some express concern at the elimination of restrictions on foreign borrowing by Korean companies and at the opening of domestic bond and money markets. But, in fact, the mistake was to allow domestic banks and corporations to borrow extensively abroad without prudential controls on their foreign exchange exposure.

The Korean program will seek to correct this through mechanisms that will be put in place in conjunction with the programs of the World Bank and the Asian Development Bank. This is consistent with past Fund support for market-based controls on short-term capital inflows - though that is hardly the prime problem at present.

There are many uncertainties about how to deal with the situation in east Asia. These IMF-supported programs differ from more traditional programs, particularly in their focus on financial sector restructuring. The IMF has always learned from its critics. And it will continue to do so.

Dr. Jim Kahal teaches at the University of Chicago and also manages an international economics consulting firm. He may be reached at jkahal@investmentlife.com.