Meghnad Desai criticises a Nobel laureate's attack on globalisation
Joseph Stiglitz has had an astounding career. While he was still a graduate student in the mid-1960s, we all heard about this young, whiz-kid student of Paul Samuelson, who, on top of doing his PhD thesis, had written and submitted 30 papers to learned journals.
Stiglitz went on to make his mark on economic theory with broad-ranging and analytical interventions in public finance, economic development, industrial economics and pure economic theory. He is a pioneer in refashioning the logic of market failure by tracing it to gaps and asymmetries in the availability of information, such as that between buyers and sellers, and deservedly shared a Nobel prize in economics with George Akerlof and Michael Spence.
But unlike his fellow prizewinners, Stiglitz has gone on to the practical side of policy advice and creation. He was on the Council of Economic Advisors to the US president and served as chairman during the Clinton presidency. He then moved to the World Bank as its chief economist in February 1997. By January 2000, he had made himself sufficiently disliked by the US Treasury and the International Monetary Fund for the US to insist that it would renew World Bank president James Wolfenson's tenure only if he sacked Stiglitz.
Thus Stiglitz went from the heart of the American economics establishment to its outer reaches within three years. This book explains to a large extent the reasons for his journey. In essence, he learnt that the role of policy adviser is enabling in the national context, but stifling in the global context.
Stiglitz has written an extensive critique of the policies and practices of the IMF, the sister institution of the World Bank. Many non-governmental organisations in the development field have been critical of the IMF as well as the World Bank, the twin sisters established at Bretton Woods in 1945, and of the World Trade Organisation established in 1994. Stiglitz, however, is the first economist with pukka credentials as an academic to join this critique. His book will become a weapon in the battle centred on globalisation. The argument therefore merits careful examination.
But first we need some necessary background that Stiglitz, in focusing on his time at the World Bank, does not give. When the Bretton Woods negotiations were taking place in 1944, the construction of a new global economic order was very much the aim. Keynes wanted to set up a single global currency for settling balance-of-trade deficits, with a bank to advance credits to enable countries to maintain full employment rather than pursue deflationary or protectionist policies. Hence, the creation of the IMF. But there was also recognition of the need for a long-term fund to help with the reconstruction and development of war-damaged Europe. Hence, the International Bank for Reconstruction and Development - the World Bank.
At this time there were few independent countries in Asia and Africa, and the third world had not been invented - the focus was entirely on Europe. The IMF was to police the gold-based dollar exchange standard of fixed-exchange rates, and the World Bank was to provide development loans to central, southern and southeastern Europe.
But by the early 1970s, the system of fixed exchange rates had collapsed and the IMF lost its raison d'être. The World Bank, in the meantime, had dropped reconstruction from its concerns and championed development. After a quarter of a century of conservative lending policies, the bank became an organisation for combating third-world poverty under the leadership of Robert McNamara.
The quadrupling of oil prices in 1973 changed the global economic context. High inflation and unemployment - stagflation - made Keynesian macro-economic policies unpopular. There was a revival of neoclassical marker-oriented liberal economics led by Chicago University economists. Keynesian macro-economic theory was replaced by the "new classical" macro-economics of Robert Lucas. At the same time, the recycling of petrodollars from oil-exporting countries to the nations of eastern Europe and the third world bound more countries into a global financial nexus than had been the case in previous decades. Floating exchange rates added to the importance of financial markets. Satellite technology linked financial markets across the globe in a chain of instantaneous buying and selling around the clock, seven days a week.
When oil prices rose again in 1979, several developed countries - the US, UK and West Germany especially - adopted monetarist policies and raised annual interest rates from the 5 per cent average of the 1970s (with inflation of 15 per cent) to 15 per cent (inflation was by then 7-10 per cent). The countries that had extensively borrowed petrodollars at 5 per cent now had to repay them at 15 per cent. All of them were caught in a debt crisis, a shortage of foreign exchange and inflation.
This gave the IMF the chance to revive itself. Having done nothing to warn governments against borrowing in the 1970s, it became the pivotal institution to which debtor countries had to come for loans. Like anyone lending to poor high-risk borrowers, the IMF laid down stringent conditions for structural adjustment. It had been won over to Chicago-style macro-economics and imposed a strict regime of control on money supply, low or no-budget deficits and abandonment of overvalued fixed exchange rates.
The IMF became the bête noire of the third world in the 1980s. "Structural adjustment" policies required the cutting of subsidies that benefited the poor in many cases; devaluation raised prices and caused inflation, which then required future cuts in money supply and public spending. The IMF urged client countries to expand their exports, which being mainly primary commodities helped to accelerate a fall in the prices of these throughout the 1980s. The World Bank, no longer led by McNamara but by more orthodox US bankers, supported the IMF. The poorest countries of Africa experienced a decline in per capita incomes, and a rise in infant mortality and ill health.
It was the UN Development Programme that challenged this orthodox Washington-based consensus, urging the pursuit of "human development". In the 1990s, the World Bank began to adopt a human development stance. Only then did it and the IMF begin to sing different tunes, when the World Bank came to appreciate that market orthodoxy could often be harmful, like the statist orthodoxy of the 1960s and 1970s. As the 1990s brought further liberalisation and privatisation in eastern Europe, as well as in Asia and Latin America, the IMF, on the other hand, rejoiced in the success of its favourite nostrums.
Stiglitz focuses on the faults of the IMF in great detail, as it tried to deal with the Asian crisis of 1997-98, the challenge of Russia's transition to a market economy, the faltering liberalisation in eastern Europe and the problems of arranging financial rescue packages for failing banking systems. He writes as if most of his criticisms of the IMF were not already well rehearsed. One feels he writes not so much as a distinguished economic theorist, but as a former World Bank official doing down the ugly sister.
Thus, he accuses the IMF of using the same macro-economic model for every country it lends to. This may be true, but it is the macro-economic model cited in leading textbooks, whether written by Chicago or Massachusetts Institute of Technology economists. There are small differences about price rigidities or policy lags, but there is a lot of consensus on this model - desirable or not. Stiglitz joins, too, in the populist attacks on the WTO. While the IMF and World Bank have structures dominated by rich countries, the WTO has a much more symmetrical structure: one country, one vote. It is an arena where the US has not had things all its way. Developed countries have been hypocritical in protecting their agriculture and even industries, depriving poor countries of access to their markets. Only a stronger WTO can overcome these barriers. Stiglitz takes an easy way out here.
He also argues that since the IMF has finance ministers on its governing board, they serve the interests of financial markets. For the WTO, read trade ministers with commercial interests. He complains that "institutions have come to reflect the mind sets of those to whom they are accountable". But surely they cannot reflect the priorities of people they are not accountable to? Finance ministers and trade ministers represent their countries and in most cases are democratically elected. The IMF, the WTO or the World Bank cannot be, at one and the same time, accountable and ignore the views of such people.
Stiglitz is a champion of the theory of market failure and its policy implications. He has pioneered an analysis of credit rationing in capital markets, of share cropping and farm tenancy. But here the ground is more contested than he admits. While some argue that the cure for market failure lies in further liberalisation, Stiglitz urges better regulation. He may be right, but he writes as if there is no counter-argument.
Globalisation has been the most rapid transformative process of development in the past two or three decades. Accelerated transfer of private foreign capital and technology, increasing access to rich countries' markets and acquisition of credible monetary and fiscal policies have industrialised the third world faster than was thought possible, and reduced poverty in China, India and most other Asian countries by a larger proportion since the 1980s than in the previous eight decades of the 20th century. The problems that poor countries face are often due to rich-country dominance of economic governance.
The palliative may not be to tinker with the IMF or its economic theory. Instead, we should ask whether we need the old Bretton Woods institutions that are constitutionally the handmaidens of rich countries. Should we not have global economic institutions like the more democratic WTO? Maybe now that Stiglitz is back in academia, he will ask more searching questions and advocate more radical strategies.
Lord Desai is professor of economics, London School of Economics.
Globalisation and its Discontents
Author - Joseph Stiglitz
ISBN - 0 713 99664 1
Publisher - Allan Lane The Penguin Press
Price - £16.99
Pages - 282