THE ROLE OF THE IMF IN THE IMPENDING GLOBAL SLOWDOWN
By Joseph Stiglitz
Joseph Stiglitz, formerly chief economist of the World Bank, won the
2001 Nobel prize for economics for his for analysis of markets with asymmetric
NEW YORK -- It's almost official: The United States is in a recession,
and, with it, the world is descending into the first major global slowdown
of the new era of globalization. The 1997-98 global financial crisis may
look pale in comparison. Then, a slowdown in one region -- East Asia --
spread from there to Russia and to Brazil, eventually threatening a global
meltdown. Even countries that seemingly had had good macro-management,
and been given A and A+ by the International Monetary Fund (IMF), were
They found their interest rates soaring and faced budgetary
problems to which their political systems could not, or did not, adapt
The IMF mismanaged that crisis, exacerbating the downturns, and as the
economies in East Asia slid into recession and depression, commodity prices
collapsed. It was as much through the deterioration of commodity prices
and trade as through capital markets that the problems of East Asia spread
around the world.
Then, strong growth in the United States helped prevent a downward tailspin.
Today, America is part of the problem rather than the solution. The fact
that the downturn is occurring almost in slow motion, unfolding gradually
before our very eyes -- unlike the crisis of '97 that took so much of
the world by surprise -- does not make it any less real. America was headed
for a recession -- if not already in one -- when the Sept. 11 attack occurred,
so it aggravated an already bad situation.
Once again monetary policy is showing that it is more effective in
reining in an overheated economy than in stimulating an economy in recession.
Monetary loosening with a mismanaged fiscal situation can lead to changes
in yield curves, so that medium- and long-term interest rates paid by
firms and households are little changed, even as the Fed lowers short-term
interest rates. Worse still, the Bush administration and Senate and House
Republicans seem hard at work designing programs of corporate giveaways
and tax breaks for the rich, all in the name of a stimulus package.
But in pushing their political agenda, they are putting the global economy
at risk: These stimulus packages will be little more
effective than the tax package passed earlier in the year, which did nothing
to avert America's recession. America is thus joining Japan in learning
how politics can interfere with macro-economic management and joining
Japan in recession, and possibly even in deflation.
Meanwhile, Europe is discovering that the straitjacket in which it put
itself may have solved yesterday's problems but left it ill prepared for
today's. It has an independent central bank that focuses exclusively on
inflation and, like a child, goes out of its way to prove its independence
every time political leaders rightfully express their concern about growth
and unemployment. Unable to draw upon monetary policy, it also cannot
turn to fiscal policy because of constraints on deficits.
America will weather this storm. It will recover, though the recession
will be longer and deeper than it would have been with better economic
management. But the rest of the world will not be so lucky. Already countries
like Singapore that managed to avoid a downturn in the last crisis
have sunk into recession; and many countries in Latin America are being
hit hard, even before they fully recovered from the last downturn.
While it would be nice to be able to blame macro-mismanagement in these
developing countries -- just as the IMF and the U.S. Treasury blame East
Asia's crisis on their lack of transparency -- this simply will not do:
Even countries like Bolivia and Uruguay that have continued to earn the
IMF's and Wall Street's respect are now facing recession and worse.
America and the other advanced industrialized countries have a large stake
in what happens -- if these countries see increasing unemployment, accompanied,
as it so often is, by urban crime and violence, a further dissolution
of the already fragile social capital, there will be disenchantment with
globalization, the market economy and possibly even democracy.
Fortunately, the international community has already set up an
institution to deal precisely with such a situation. As World War II was
coming to an end, the victorious nations worried that the world would
again slip into another depression. It had only been the war that had
moved the world out of that economic calamity.
The same person who had helped us understand the causes of such downturns
and what countries could do played the central role in crafting a new
global institution. The great intellect and international statesman was
Lord Keynes; the institution was the International Monetary Fund. It was
to provide liquidity to countries needing to finance expansionary fiscal
policies to overcome an economic downturn, in circumstances such as those
today, when monetary policy was proving ineffective.
Unfortunately, something happened in the 50 years since.
Today, all too often, the IMF insists as a condition for providing
assistance that countries engage in contractionary monetary and fiscal
policy, worsening the downturn -- in contrast to the IMF's founding principles,
in which assistance was to be provided on the condition that countries
engage in expansionary policies. Even countries that might be able to
obtain funds to stabilize their economy through, for instance, the forward
sale of natural resources are pressured not to do so.
And IMF pressure is effective, because without IMF support not only will
countries find it difficult attracting investors, but also much
foreign assistance is conditional on IMF approval. Today, countries are
repeatedly asking, ''Why is it that in the United States, when you are
facing a slump, you have expansionary fiscal policies?
These are the policies that we were taught in our economics courses in
your universities. Why is it that you go further -- pressure was put on
Japan to have expansionary policies? But when it comes to the poor developing
countries, least able to withstand a downturn, with the most inadequate
safety nets for those who will be thrown into unemployment and poverty,
you insist on contractionary policies?''
Today, we have the kind of problem that Keynes and others worried about
60 years ago: a global insufficiency of aggregate demand. The problem
is no surprise: A few countries, like China, are running massive surpluses,
in effect spending less than their income, putting the difference into
reserves. Other countries, worried about trade deficits, are trying to
trim them and put aside reserves. The IMF has the capacity to provide
the required liquidity. Even better, it can enhance global liquidity by
providing funds to areas of global concern -- to promote a better environment,
to help the poorest and most indebted countries, to fight diseases, to
To be sure, for this all to be done in the most effective way might
require revisions in the charters of the international institutions,
better teamwork between the World Bank, which has as its mandate the reduction
of poverty, and the IMF, which controls the availability of funds, and,
most importantly, a change of mindset, a return by the IMF to its original
mandate, a focus on today's global problems of unemployment and economic
Much is at stake: Even the countries that have been most faithful in implementing
the IMF reform packages are beginning to doubt. Reform brought a few good
years of growth, but the growth was not sustained; critics say it was
In Latin America, the record since reforms is little if any better than
before (by some calculations it is even worse), and even the good years
can be thought of as little more than a partial catch-up from the lost
decade of the '80s.
What growth has occurred has largely benefited the already relatively
well off -- even in a country like Mexico that has seen growth, those
at the bottom have not shared in the gains.
They were told that market reforms would bring them unprecedented prosperity.
Instead, it has brought unprecedented instability. Why should they continue
to believe in these reforms?
Why should they not turn to other nostrums, as false as they might be?
Time may be running out.
The IMF and the international community can play either a positive or
a negative role in how the story unfolds. Will there be a new generation
of alienated young men, unable to find gainful employment, disgruntled
with a system that has failed them, as it failed so many of their parents
and grandparents? We have the knowledge to do better. We even have the
institutions to implement it. The question is, will we have the will to
(c) 2001, Nobel Laureates. Distributed by Los Angeles Times Syndicate
International, a division of Tribune Media Services.
For immediate release (Distributed 11/19/01)
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