The Globe and Mail Book Review
June 22, 2002
The searing criticisms of IMF policies and programs are mostly on target and come from none other than Joseph Stiglitz, the former Chief Economist of the World Bank.
Everybody at the International Monetary Fund (IMF) and the U.S. Treasury is talking about this book. That its searing criticisms of IMF policies and programs are mostly on target and come from none other than Joseph Stiglitz, the former Chief Economist of the World Bank, make it impossible to dismiss as usual as the work of some starry-eyed, economically illiterate, anti-globalist.
Few economists have a more impressive blend of academic distinction and practical public policy experience. Currently a professor at Columbia University, he was the Chief Economist of the World Bank from 1997 to November 2000. Before that, he was a member and subsequently Chairman of President Clinton’s Council of Economic Advisors. If that is not enough to give his adversaries pause, he also shared the 2001 Nobel Prize in economics for his pioneering work on the economics of information.
From his White House and World Bank offices in Washington, Stiglitz enjoyed an unique ringside seat for all the major economic crises of the 1990s: the transition from communism in Russia and Eastern Europe; the 1994 Mexican peso crisis; the 1997 Asian crisis; and the 1998 Russian debt crisis. And in this book he tells all that he learned.
His main lesson concerns the failure of the so called “Washington Consensus,” which prescribes fiscal austerity, privatization and market liberalization for failing economies. In his view, it is more of an ideology of “market fundamentalism” than a rational approach to real world economic problems. The “Washington Consensus” had its origins as an appropriate response developed by the IMF and the U.S. Treasury to the Latin American economic crises of the 1980s, where countries got into trouble because of bloated government deficits and out-of-control money growth. But unfortunately, in the 1990s, it was turned into a “cookie-cutter” approach that was applied indiscriminately even where governments were running surpluses and inflation was low.
The liberalization of financial markets was an important aspect of the “Washington Consensus” that Stiglitz questions. He argues that it was driven largely by the financial interests of Wall Street that were being pushed by the U.S. Treasury, the largest and most important shareholder of the IMF and the World Bank. In his view, premature liberalization of financial markets interfered so much with the IMF’s main job of fostering macroeconomic stability that it actually became an important cause of the crises. In contrast, he advises more attention be paid to “sequencing and pacing” with financial market liberalization only coming after other reforms and a regulatory framework are in place.
Two episodes in particular attract his attention. The first is the Asian crisis, which started in Thailand in July 1997 with the collapse of the baht. The second is the ongoing transition to a market economy in Russia and the other states of the former Soviet Union and Eastern Europe.
According to Stiglitz, the IMF made the Asian crisis worse by insisting on budget cuts and interest rate hikes, which was exactly the wrong thing to do in the circumstances and was something that no Administration since Herbert Hoover would have dared to do in the United States in the face of such a worsening recession. The fiscal and monetary tightening required by the IMF reduced aggregate demand exacerbating the downturn. The resulting bankruptcies, and social unrest, further undermined confidence in the financial system and investment. Contagion and misguided IMF programs spread the crisis from Thailand to Indonesia and Korea. Only Malaysia managed to avoid an IMF program and was able to escape relatively unscathed thanks in part to the imposition of capital controls.
In Russia, Stiglitz objects to the bungled privatization of the economy, which led to asset stripping and the creation of the super-rich oligarchs who now lord over Russia’s economy. The failure of this shock therapy approach is contrasted by Stiglitz with the more successful gradual approach followed in China. Furthermore, in Stiglitz’s view, the large IMF loans to stabilize the ruble in 1998 just gave the newly rich more time to get their money out of the country into Swiss banks accounts. He regards it as ironic that the IMF which is so set against government intervention in markets is so enamored with supporting the exchange rate. He claims that IMF bailouts help the financial institutions that hold the debt, not ordinary citizens, again protecting the interests of Wall Street.
Beginning during the Asian crisis, Stiglitz sparred in public with increasing frequency with Stanley Fischer, the Deputy Managing Director of the IMF, and Lawrence Summers, the U.S. Treasury Secretary. While it’s amazing he was allowed to speak out for as long as he did, the axe finally fell in late 2000. A call from Summers to World Bank President James Wolfensohn was all it took to get Stiglitz sent back to academia where he had plenty of time to write this book.
Given the circumstances of his departure, it’s not surprising that Stiglitz is out to settle old scores. He mischievously observes that IMF staff have very little real knowledge of the developing countries outside of the five-star hotels they stay in “crunching numbers.” He also asks whether Stanley Fischer, the former Deputy Managing Director of the Fund, got his job as Vice Chairman of Citigroup as a reward for doing what he was told presumably by Robert Rubin, the current Chairman of Citigroup and former Secretary of the Treasury. This is a real blow below the belt as Stanley Fischer is widely respected as an economist who has always acted with integrity.
Although his preoccupation is with the IMF, Stiglitz also takes a few swipes at the World Trade Organization (WTO). His main gripe here is about the way developed countries always preach so sanctimoniously to the developing world about the benefits of trade, but refuse to open up their agricultural and textile and clothing markets to developing countries. Based on a World Bank study, he argues that the Uruguay Round actually left many developing countries, particularly in Africa worse off. In particular, he notes that the agreement on intellectual property rights stood in the way of the provision of AIDS medicines in South Africa. Stiglitz is also critical of the way the United States, the European Union and Japan have long called the shots at the WTO and the WTO’s alleged lack of transparency. Nevertheless, he sees the Doha Development Agenda as an encouraging sign of the increased influence of developing countries.
If you are looking for an analysis of the impact of globalization on the world economy, don’t look in this book. It contains very little about such key issues as the links between trade and growth, technology transfer, immigration, the information and telecommunications revolution, and the spread of global culture. Instead, this book gives a provocative insider’s account of the IMF’s mismanagement the international economy. For an equally rigorous and well-argued defense of the IMF, we’ll have to wait for Larry Summers or Stan Fischer to write their books. In the meantime, Stiglitz has provided the IMF’s opponents with plenty of ammunition. The protestors, who have been plaguing the IMF, World Bank, WTO and G8, have a new and unlikely champion in Joe Stiglitz.