It's not often that an IMF seminar turns into the academic equivalent of the Jerry Springer show. But then it's not often that a Nobel Prize winner and former senior official of the World Bank publicly accuses the IMF of wreaking economic and social havoc on millions of the world's poor.
Joe Stiglitz had come to the meeting for a friendly discussion of his book, Globalisation and its Discontents, which draws on his experience as a member of Clinton's Council of Economic Advisors (CEA) from 1993 to 1997 and as the World Bank's chief economist until early 2000. Instead, he got a cri de coeur from one of the IMF's more mild-mannered senior officials.
Ken Rogoff, the IMF's director of research, is best known for obscure technical studies on the behaviour of international currency markets. But his introductory remarks on this occasion were anything but opaque.
"Joe, as an academic, you are a towering genius," he said. "As a policymaker, however, you were just a bit less impressive." Rogoff accused Stiglitz of "carelessly slandering" IMF staff in a book that was "long on innuendo and short on footnotes." And he took no prisoners in discussing Stiglitz's blueprint for making the IMF a better place, calling it "at best highly controversial, at worst snake oil."
"You seem to believe that when investors are no longer willing to hold a government's debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF -no, make that we on planet earth-have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises... Perhaps the laws of economics are different in your part of the gamma quadrant...."
Stiglitz was said to be "shell-shocked" by Rogoff's tirade. No one had heard a senior official at either institution make such a strident ad hominem attack on a colleague's ideas since-well, since, Stiglitz.
In his book, Stiglitz speaks of his increasingly public efforts to persuade his colleagues in the US administration and the IMF that they were wrong. By and large, he feels himself to have failed. In east Asia, in Russia, and elsewhere, IMF policymakers ignored his advice, with what he thinks are disastrous consequences. Irritated by his frequent sallies, the then Treasury Secretary, Larry Summers (for whom I was working at the time) finally secured Stiglitz's departure from the Bank as a condition for James Wolfensohn's reappointment in 1999. Stiglitz's willingness to speak truth to power has since made him a hero of the anti-globalisation movement. But prior to Rogoff's outburst his former colleagues had declined public comment on his critique.
It would be difficult to overstate the sheer arrogance of Globalisation and its Discontents. At the CEA, he was the man who helped engineer the great US economic recovery. When things went less well, it was down to mistakes by the Federal Reserve. Even China, it turns out, has Stiglitz and fellow Nobel Prize winner Kenneth Arrow to thank for 20 years of rapid growth. The Chinese government listened to their advice about a gradualist approach to economic reform-ignoring the IMF. Russia did not, and paid the price.
Stiglitz does not mention his personal conflicts with Summers and others. But his frustration at the way he was treated by the administration and the IMF, plus his breathtaking self-assurance, do make it difficult to concentrate on the substance of his book. And that is a pity. Because in getting much wrong about the world and the IMF, his exasperating polemic gets some important things right.
He has four major complaints, each with a troubling kernel of truth. First, and most persistent, is the claim that the IMF "has failed in its mission." Driven by "market fundamentalism," the IMF has spent the past few decades encouraging countries to pursue policies that undermined the fabric of their societies and the stability of the global system. Opponents of globalisation have understood this, he says. But international policymakers paid little heed to the IMF's failures until the east Asian financial crisis put the institution centre stage.
It is true that despite progress raising life expectancy around the world and decent growth in about one third of the world's economies, the postwar vision of global economic progress and stability has not been fulfilled. But Stiglitz knows well that governments have proved perfectly capable of destroying their economies without any help from the IMF.
It is a tragedy that national income in many African countries today is now lower than it was in the early 1960s. But not all of the blame for that failure can be laid on the IMF. In fact, the bulk of the policy reforms that the IMF promoted in Africa and elsewhere since the early 1980s were aimed at correcting governments' past mistakes. Budget deficits needed to come down in Africa and Latin America after decades of governments living beyond their means. Moribund state enterprises needed to be privatised. And so on.
And yet, Stiglitz is right to say that the IMF was often over-zealous in its support for market reforms in these countries-and insensitive to local conditions. Focusing largely on macro-economic reforms, it did little to protect health and education from spending cuts. More often than not, domestic politics ensured that social spending was cut back first while the powerful groups running bankrupt state companies continued to receive support. Even when countries have managed to regain control of the economy-as Ethiopia did in the late 1990s-the IMF to this day spends too much time talking about inflation, and rather too little about growth.
Efforts such as the HIPC initiative to reduce poor country debt, the new emphasis on corruption and "good governance" in Bank and IMF programmes, and the IMF's new poverty reduction and growth facility for lending to very poor countries have gone some way to addressing these problems. More could certainly be done.
Important though they are, these are mistakes of emphasis rather than basic direction. Stiglitz is on stronger ground when he criticises the IMF's unthinking support for opening up national capital markets to the global system before their domestic financial systems were able to manage the effects. Stiglitz points out that Britain and other advanced nations took decades to open up this side of their economies. He also notes that the economic evidence for having a free flow of global capital is weak. Stiglitz fails to mention that Thailand and others were falling over themselves to attract "hot money" from abroad in the years leading up to the crisis. But he is right that the IMF and others should have insisted on a more gradual approach.
Looking back on this period, many senior officials at both the IMF and the US treasury have said that they understood the risks and did not put much energy behind the reforms. But the fact that official support for capital market liberalisation was absent-minded hardly makes it more defensible. Countries such as Korea were made much more vulnerable to crisis when they agreed to open up their domestic financial markets fully-in South Korea's case, as a condition for joining the OECD in 1997. The IMF claims that it is now much more alert to these dangers. But as Stiglitz points out, it is not clear that the change of rhetoric has come with a real change of IMF policy.
Stiglitz's second major complaint relates to the details of the programmes that the IMF supported in response to the crisis in east Asia, which he thinks often made the situation worse. The IMF and the US treasury did make some bad calls in the various support packages for Thailand, Indonesia and South Korea in the autumn of 1997. They permitted Thailand to go ahead with tightening the budget-despite the fact that the economy was in free fall. They mishandled the closure of Indonesian banks. And they allowed themselves to get caught too often defending fixed exchange rates that had lost market confidence.
Much though the IMF likes to shrug them off, these are not small issues. But where policies were clearly wrong, they were corrected-rapidly in the case of the Thai budget. And where they were not clearly right, they at least seemed to make the best of a bad situation. "Battlefield medicine," as Summers said at the time, "is never perfect." Even with the benefit of hindsight, Stiglitz fails to show that there was an alternative that would have done better in preventing investors running for the door. Nor does he explain why most of the crisis-hit economies staged rapid recoveries.
He does attempt to describe what he would have done in Asia. But here he only succeeds in showing his weakness as a policymaker. He argues, for example, that the IMF insisted that the countries in crisis raise interest rates to defend the currency, because it thought that domestic companies would suffer worse from a falling currency than from higher interest rates. Even today, it is an open question which option would have been better. But, according to Stiglitz, even if the IMF had been right that companies were badly insured against a collapse in the exchange rate, "a coherent analysis of the problem would have begun by asking why... do firms not buy insurance?" He concludes that the IMF itself was the problem, because by defending fixed exchange rates it had encouraged companies to believe they did not need to insure themselves against devaluation.
All of which is very interesting and pertinent to debates about the effects of IMF bailouts. But it is difficult to see the implications for IMF staffers trying to devise an effective programme for Indonesia in late 1997. Does he believe they should have packed up and left, to encourage Indonesian businesses to be more careful next time? Clearly not. As Rogoff noted, Stiglitz seems to think that Indonesia and others could have kept interest rates low and saved the currency. But he does very little to show how this miraculous result might have been achieved in the middle of a market meltdown.
This same curious lack of rigour shows up in Stiglitz's third major complaint-that the IMF and its G7 shareholders inexcusably "lost Russia." Here again, he identifies widely accepted flaws in western programmes in Russia in the 1990s: including the excessive emphasis on macro-economic policy rather than institutional reform, and the support for a disastrous mass privatisation. He also points out how much better it would have been for the Russian people to have had a more gradual approach to market reform, like China. But he does not explain how the international community or Russia might have promoted such an alternative in the tumultuous early 1990s.
Very few economists would suggest today that Russia could have taken a Chinese approach to reform. But things could clearly have gone much better. Stiglitz admits that Russia played a large part in its own failures but skirts around some important details. He lambasts the IMF, for example, for having landed Russia with an unsustainable fixed exchange rate system. He does not mention that it was the Russian government's idea to make that system more rigid in late 1997, a move that many insiders felt led directly to the August 1998 crisis. Nor that corrupt Russian managers had stolen large swathes of the state-owned energy sector, long before the ill-fated privatisation programme.
To be sure, there is plenty for the international community to regret in its dealings with Russia in the 1990s. But here, too, Stiglitz proves reluctant to spread the blame. The truth is that the G7 made some grand aid promises to Russia when the Soviet Union collapsed in 1991. But they largely failed to deliver any significant grants. That had a big impact on the kinds of policies and programmes that the west was able to support in Russia. But it is not the IMF's fault. Nor is it the IMF's fault that the World Bank, with all its experience of more long-term, structural reform, proved so slow off the mark-taking several years to finalise a single social sector loan.
If the structural concerns of the World Bank were too often sidelined, at least some of the blame for that failure must surely lie with the Bank itself. Instead, the world's leading development organisation is portrayed as a hapless bystander to the wrecking tactics of the IMF and the G7.
How on earth could they have all got things so wrong? That brings us to the fourth, and most frustrating part of Stiglitz's critique: the question of motive. Though he famously described the IMF's staff as "third-rate economists from first-rate universities," he does not think the IMF's failures are an accident. Rather, he thinks they stem from a particular vision of globalisation that has taken the institution far from its founders' intent.
Created to intervene in international markets and promote economic stability, the IMF has evolved into the world's leading proponent of free market forces. The result, in Stiglitz's view, is a multi-billion dollar contradiction in terms-a public institution that intervenes not to save countries from the markets but to save the markets from themselves. Only by seeing the IMF as pursuing the interests of the financial markets, he says, can one "make sense of what otherwise seemed to be a set of intellectually incoherent and inconsistent policies."
Stiglitz backs his claims by making pointed and occasionally slanderous remarks about the number of senior officials who have gone on to high-paying jobs on Wall Street. But you do not have to believe in a conspiracy of global capital to feel uneasy about the close correspondence between the kind of global economy that major US banks would like to create and the kind of global economy that has lately been promoted by the IMF. The question is what follows from this unhappy truth.
IMF and World Bank staff argue that their view of globalisation follows from the realities of the modern global economy. Poor countries will not progress far in this new world without being part of the global market-and they will not obtain access to that system without making themselves more attractive to foreign investors.
As Stiglitz notes, experience has pointed up numerous problems with this vision. Perhaps the most important is that it has led policymakers to focus too often on financial variables and narrow measures of economic growth, and too little on the lives of ordinary people. But Stiglitz's analysis of globalisation as a social and cultural phenomenon-which he compares to the arrival of Wal-Mart in small-town America-is brief and depressingly superficial. And his prescriptions for reforming the system, dashed off in the last pages of the book, are cursory. Foes of globalisation will love the barbs and the bravura from the international financial system's leading dissident. But those hoping for a Nobel Prize-winning account of how to make the world a better place will sadly have to look elsewhere.
