By Paul Blustein
Washington Post Staff Writer
Wednesday, January 20, 1999; Page F03

The International Monetary Fund acknowledged yesterday that it made some mistakes in its rescues of Thailand, South Korea and Indonesia in 1997 and 1998 -- notably in underestimating the severity of those countries' recessions.

But in a report on the Asian financial crisis written by IMF staff economists, the fund largely dismissed criticism that it made the crisis worse by insisting that the Thai, Indonesian and Korean governments adopt painful economic policies such as high interest rates.

The report provides, in much greater detail than previous IMF statements, the fund's reply to critics who have attacked various aspects of its prescriptions for the Asian countries stricken by sudden loss of investor confidence. Among the critics are staffers at the IMF's sister institution, the World Bank, whose chief economist, Joseph E. Stiglitz, has suggested that the fund committed a key error by imposing high interest rates on countries that were already headed for recession.

The report conceded in unusually candid terms that the fund was "far off the mark" in its initial assessment of how badly the Asian economies would be affected by the crisis -- one result being that, in Thailand in particular, the IMF prescribed a stringent policy for cutting the budget deficit that proved too harsh and later had to be eased.

Part of the IMF's motivation for issuing somewhat optimistic forecasts was to avoid exacerbating market turmoil, according to the report, and the fund's projections were no worse than those of most private forecasters in failing to foresee the deep recessions that materialized. That "is not very reassuring, however, as the Fund should in principle have been able to anticipate events better than outside observers," the report said.

Still, the report contended that restrictive fiscal policies were not responsible for the downturns in Asia, and in any case the fund -- its penchant for austerity notwithstanding -- encouraged Asian governments to increase government spending once the depth of their slumps became clear.

The report contains a strong defense of the IMF's advice for crisis-stricken Asian countries to adopt a tight-money policy and raise interest rates in an effort to keep their currencies from weakening too much.

The IMF's recipe wasn't overly draconian, the report argued. In Indonesia, if anything, the central bank responded to political pressures by expanding the money supply so fast that markets lost total confidence in the currency -- and Indonesia has proven much slower to turn around than Korea or Thailand, where tight money "achieved its basic objective" of stabilizing the nation's currency and preventing inflation.

"This report gives no particular credence to the view that we fundamentally erred by getting countries to raise interest rates," said Jack Boorman, director of the IMF's policy development and review department, who oversaw the report's preparation.

The report reiterates the fund's acknowledgment that in Indonesia, an IMF-backed approach for closing troubled banks worked poorly and may have exacerbated a bank panic in late 1997.