Profs. Work to Solve World Financial Crisis

This summer, in came the bear and out went the bull as stock markets plummeted, forcing people across the globe to recognize the severity of the recent economic crisis.

In turn, international leaders have looked to Harvard faculty for advice on how to solve the problem.

Jeffrey D. Sachs, director of the Harvard Institute for International Development (HIID), has been called in by representatives from Central America, South America, Africa, Eastern Europe and Asia.

"The issue is explaining the crisis and what kind of policy response they should take," Sachs said.

One central tenet of Sachs' advice has been to reject policy formulated by the International Monetary Fund (IMF), a group of 182 countries whose purpose is to promote global financial stability through such activities as money lending and financial policy review.

"I'm very unhappy with the approach of the IMF," Sachs said. " In general, if [the countries I advise] go for an IMF program, I make sure the program is a good as possible. Sometimes, they don't see any alternative because of the short-term funds. But the amount is not worth the result."

On the other side of the IMF debate is Marshall I. Goldman, assistant director of the Davis Center for Russian Studies, who has testified before Congress and debriefed the National Security Council before President Clinton's Moscow trip.

"Everyone recognizes that the IMF isn't perfect," he said. "If you have a 10-alarm fire, you don't close the one firehouse you have because it's made some mistakes."

Congress called on Goldman to give his opinion on whether the United States should allocate funds for the IMF.

"We should give support for agriculture and some of the regions [in Russia]," Goldman said.

Yet, he warned, "It has to be done carefully."

Goldman said scholars at the Davis Center have often predicted changes in the market when academics elsewhere failed to spot the warning signs.

"Some analyses here have been more on target then those elsewhere in the university and elsewhere in the country. There were some people in the other parts of the University who were optimists about the way the reforms were going," Goldman said. "Some of us here were more skeptical of what was happening and felt that some of the things that were being done were wrong. We were proved to be correct."

Richard Pipes, Baird professor of history emeritus and a member of the Davis Center Executive Committee, traveled with Goldman to Washington to speak to Congressional members.

Pipes echoes Sachs' laissez-faire approach.

"Let the Russians take care of themselves," he said. "They're just too used to getting injections of money from the West. We should cut them off and force them to put their house in order."

Economics Professor Dwight H. Perkins has also been involved in international affairs, advising both China and Vietnam on how to avoid future problems.

"Neither has been hit directly by the panic," he said. "The main thing they want to understand is what lessons can youlearn, [like] don't open financial markets to theoutside world with a sick banking system. The nameof the game is to get rid of the conditions thatcaused it."

Perkins cited two underlying reasons for theworld economic crisis: financial panic and thestructural inadequacies of banks.

For example, Perkins said that in Indonesia,investors anticipated a crisis because of thecountry's economic similarities to itscash-strapped neighbor, Thailand, and pulled theirmoney out.

Their actions, Perkins said, led to the plungethey had initially feared.

Felipe B. Larrain, director of the CentralAmerican Project at HIID, is currently advisingthe governments of Colombia, Costa Rica, Ecuador,El Salvador, Guatemala, Honduras, Nicaragua andChile on macroeconomic policy.

He said he has noticed many of the sameproblems Perkins has.

"I have discussed...exchange rate policy,financial markets, fiscal policy (especially howto cope with the loss of fiscal income due to theslump in commodity prices) and social policies(how to protect and improve the most vulnerablesectors of the population)," Larrain wrote in ane-mail message Tuesday.

Larrain wrote that the crisis became a globalaffair because the affected countries incorrectlyperceived the problem.

While he acknowledged that some developingcountries had fundamental fiscal flaws, includingovervalued currencies, large current accountdeficits and credit booms with no appropriateappraisal, he also attributed some responsibilityto developed nations.

"The lack of leadership in the industrialcountries exacerbated the problem," Larrain wrote.

"Most conspicuous has been Japan's appallinginaction, but the U.S. should have played a muchmore active role a long time ago," he added.

Although economic growth will slow down in1999, Larrain wrote that appropriate action canstill prevent a full-blown world crisis.

"The U.S. cannot remain isolated," Larrainsaid. "If Brazil and Latin America fall into acrisis, the U.S. will be hurt deeply on trade[and] profits."

Meanwhile, Harvard faculty members continue toplay an active role in international economicadvising.

"Individuals are always eager to give theiropinions," Goldman said. "Academics always are[willing to give advice] whether anyone wants tohear them or not,

Perkins cited two underlying reasons for theworld economic crisis: financial panic and thestructural inadequacies of banks.

For example, Perkins said that in Indonesia,investors anticipated a crisis because of thecountry's economic similarities to itscash-strapped neighbor, Thailand, and pulled theirmoney out.

Their actions, Perkins said, led to the plungethey had initially feared.

Felipe B. Larrain, director of the CentralAmerican Project at HIID, is currently advisingthe governments of Colombia, Costa Rica, Ecuador,El Salvador, Guatemala, Honduras, Nicaragua andChile on macroeconomic policy.

He said he has noticed many of the sameproblems Perkins has.

"I have discussed...exchange rate policy,financial markets, fiscal policy (especially howto cope with the loss of fiscal income due to theslump in commodity prices) and social policies(how to protect and improve the most vulnerablesectors of the population)," Larrain wrote in ane-mail message Tuesday.

Larrain wrote that the crisis became a globalaffair because the affected countries incorrectlyperceived the problem.

While he acknowledged that some developingcountries had fundamental fiscal flaws, includingovervalued currencies, large current accountdeficits and credit booms with no appropriateappraisal, he also attributed some responsibilityto developed nations.

"The lack of leadership in the industrialcountries exacerbated the problem," Larrain wrote.

"Most conspicuous has been Japan's appallinginaction, but the U.S. should have played a muchmore active role a long time ago," he added.

Although economic growth will slow down in1999, Larrain wrote that appropriate action canstill prevent a full-blown world crisis.

"The U.S. cannot remain isolated," Larrainsaid. "If Brazil and Latin America fall into acrisis, the U.S. will be hurt deeply on trade[and] profits."

Meanwhile, Harvard faculty members continue toplay an active role in international economicadvising.

"Individuals are always eager to give theiropinions," Goldman said. "Academics always are[willing to give advice] whether anyone wants tohear them or not,