World Bank economist Joseph Stiglitz takes on the IMF
September 6, 2002 | Page 8
JOSEPH STIGLITZ, former World Bank chief economist, has written a controversial book attacking the International Monetary Fund (IMF) and its free-market policies. LEE SUSTAR looks at the debate and its significance for the struggle for global justice.
IN THE last decades of the old USSR, Western officials denounced the Kremlin whenever Moscow purged and harassed dissidents who had the courage to speak out. These days, economist Joseph Stiglitz is getting similar treatment--because he deviated from Washington's free-market party line.
First, Stiglitz was forced out of his job in late 1999 as the top economist at the World Bank for criticizing the IMF and the U.S. Treasury Department. Now the economic policymaking establishment and its media apologists are trying to discredit Stiglitz's new book, Globalization and its Discontents.
"Self-satisfied, misleading, irresponsible and simplistic," wrote a Financial Times columnist. "Overly tendentious, even vengeful," "sanctimonious" and often "shallow," was the verdict of a New York Times reviewer. In July, the IMF's chief economist, Kenneth Rogoff turned a public "discussion" with Stiglitz in Washington into character assassination, declaring, "Your ideas are at best highly controversial, at worst, snake oil."
It isn't hard to see why the free-market ideologues are so vicious in attacking Stiglitz, a recent winner of the prestigious Nobel Prize for economics. His book is a hard-hitting exposé of the so-called "Washington Consensus" of deregulation, privatization and "flexible" labor policies--often called "neoliberalism" and sold as "globalization."
"The net effect of the policies set by the Washington Consensus has all too often been to benefit the few at the expense of the many, the well-off at the expense of the poor," Stiglitz writes. "In many cases, commercial interests and values have superseded concern for the environment, democracy, human rights and social justice."
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THE IMF, as the chief enforcer of free-market policies in developing countries and the old Eastern bloc states, is Stiglitz's main target. "[I]n the standard competitive model--the model that underlies the IMF's market fundamentalism--demand always equals supply " he writes. "Someone who is not working has evidently chosen not to work. In this interpretation, unemployment in the Great Depression, when one out of four people was out of work, would be the result of a sudden increase in the desire for more leisure."
Yet in the IMF's view, the market is never the problem. "It must lie elsewhere--with greedy unions and politicians interfering with the workings of free markets, by demanding--and getting--excessively high wages," Stiglitz continues. "There is an obvious policy implication--if there is unemployment, wages should be reduced."
That was exactly what the IMF's prescribed--or rather, ordered--during the East Asian financial crisis of 1997-98. The economies in the region unraveled when foreign investors realized that countries like Thailand, South Korea and Indonesia would be unable to repay dollar-based loans in dollars on time or in full because their exports--and profits--were falling.
The IMF's solution: Devalue currencies to make exports cheaper--and cut food subsidies and other government spending to reduce budget deficits as part of the first phase of free-market "reforms" and "structural adjustment programs."
Stiglitz describes the terrible social cost--within months, unemployment quadrupled in South Korea and tripled in Thailand. In many of the crisis-stricken countries, Stiglitz writes, many people " refer to the economic and social storm that hit their nations simply as 'the IMF'--the way one would say 'the plague' or 'the Great Depression.'"
The IMF's second-in-command, Stanley Fischer, backed by then-U.S. Treasury Secretary Robert Rubin and his deputy, Lawrence Summers, argued that these tough policies would eventually lead to economic recovery.
In fact, the IMF policies only accelerated the flight of capital from the affected countries--a process made easier by the financial deregulation pushed by the U.S. Treasury. "Sure enough, just at the time the countries needed outside funds, the bankers asked for their money back," Stiglitz writes.
And, thanks to the IMF, they largely succeeded. But the countries affected suffered enormously. Stiglitz estimates that incomes are 20 percent lower than they would be if they had continued to grow at pre-crisis levels.
Rubin and Fischer did rather better, becoming top executives at Citigroup. In a passage that has outraged the Washington establishment, Stiglitz writes: "One could only ask, was Fischer being richly rewarded for having faithfully executed what he was told to do?"
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IMF POLICIES follow the discredited approach that President Herbert Hoover took to the Depression of the 1930s, Stiglitz argues. Then, cuts in government spending to balance the budget dragged down the economy and led to the deflation of prices. So it was in East Asia after the crisis, when the IMF pushed austerity and saw inflation as the main enemy even as the economies shrank.
Next, the IMF sought to avert a crisis in Russia by supporting the exchange rate of the ruble by loaning Moscow billions of dollars. But the money sent abroad by Russian mafia-business tycoons as a Russian default on its government bonds pushed the world financial system to the brink. "Some of us quipped that the IMF would have made life easier all around if it had simply sent the money directly into the Swiss and Cyprus bank accounts," Stiglitz recalls.
For workers, Russia's headlong rush into free markets resulted in social catastrophe--declining living standards and an economy that has shrunk by as much as a third since 1989. In other parts of the world, the results of the "neoliberal decade" are even worse.
According to the 2002 United Nations Human Development Report, the number of people in the world living on less than $1 per day, remained about the same--some 1.2 billion. In sub-Saharan Africa, the number dramatically increased from 242 million to 300 million--nearly half the population.
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STIGLITZ'S ALTERNATIVE is a kind of international Keynesianism--policies named after the liberal British economist who advocated government spending to stimulate a recession-bound economy, even if it results in budget deficits. But in proposing alternatives, Stiglitz is far less effective--because he shares the assumption that the market is the only conceivable way to organize the world economy.
He praises supposedly "communist" China for ignoring IMF advice and making a more gradual transition to a market economy. But China's success is based in large part on denying independent unions and keeping workers toiling for pennies an hour for transnational corporations--which Stiglitz skates over by criticizing China's "authoritarianism."
Another problem is that Stiglitz portrays the World Bank as the saintly twin of its evil sister institution, the IMF. But the World Bank itself typically requires "structural adjustment" programs as a condition of its loans.
And while he shows how the IMF reflects the interests of Washington and Western banks, Stiglitz retreats from drawing similar conclusions about the world system as a whole. For the financial panics of the 1990s--and, later, the stock-market bust in the U.S.--aren't simply the result of the policies of the IMF and other free-market policymakers. They are the inevitable results of a profit-driven world economy divided by competing nation-states. It's a system dominated by the U.S., which uses both economic and military means to get its way.
At his best, Stiglitz shows flashes of recognition of this dynamic. He describes how the IMF forced heads of state in East Asia to sign "letters of intent" that surrendered control of much of economic policy--and even dictated what laws would be passed by parliaments. "Had things really changed since the 'official' ending of colonialism a half century ago?" he writes.
Washington's financial bureaucrats and New York bankers are furious that an influential establishment economist like Stiglitz would dare to even ask such questions. But for opponents of corporate globalization, the book is a powerful vindication.