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Joseph E. Stiglitz, chief economist of the World Bank from 1997 to 2000, was awarded the Nobel prize in economics in 2001. In the current issue of Aspenia, the journal of the Aspen Institute Italia, Stiglitz discusses the responses to his seminal book "Globalization and Its Discontents," published in 2002.

By Joseph E. Stiglitz

ROME -- The subject of globalization has become one of the issues of the day, and the perspective that I put forward in my book, "Globalization and Its Discontents," clearly hit a resonant chord. My central tenet was that globalization can (and has been in, say, East Asia) a powerful force for growth and reducing poverty, but in much of the world, it has not lived up to that potential.

The countries of East Asia grew through exports and through importing technology, by closing the knowledge gap between themselves and the more advanced industrial countries. But they took globalization on their own terms; they governed globalization in ways that made it work for them and for their poor. They rejected rapid capital, trade and financial liberalization, and other elements of the Washington Consensus policies that were pushed by the international economic institutions elsewhere.

Those countries that followed the dictates of the international economic institutions have not fared as well. In Latin America, often cited as the region that responded best to the lessons of the International Monetary Fund (IMF), growth in the last decade has been little more than half of what it was in the pre-reform decades of the '50s, '60s and '70s. Unemployment is up by 3 percentage points, and poverty (measured at the $2-a-day standard), even as a percentage of the population, is up. Argentina, the A+ student of the IMF, has become the region's basket case.

Globalization has made the countries of the entire region more vulnerable to the vicissitudes of the global market, without strengthening their safety nets, and today they are suffering the consequences. Throughout the region, voters are rejecting the Washington Consensus policies, and for good reason. It is not that they are not sufficiently patient: There is little evidence that there is any payoff to further patience. In countries like Bolivia, that have done everything that they were supposed to do, people are saying, "We have felt the pain -- for almost two decades now. When do we start getting the gain?"

Chile is sometimes pointed to as an exception -- perhaps the exception that proves the rule. But a closer look at the Chilean experience shows that it was successful because it was selective; in key ways it did not follow the dictates of the IMF. This is a perspective that Chile's president, Ricardo Lagos, shared with me in a recent visit to his country. It did not fully liberalize its capital markets to stop the inrush of capital in the heyday of emerging markets. It imposed rather what was effectively a tax on inflows. In spite of the pressure to privatize -- partially resulting from the distorted accounting systems that the IMF employs -- it did not rush headlong into privatization; today some 40 percent of exports come from state industries. As fully efficient as the private ones, the state-owned copper mines deliver to the government 10 times the revenues.

Most importantly, Chile emphasized some things that were not high on the Washington Consensus agenda: education and health. And while its egalitarian policies may not have succeeded in reducing poverty significantly, at least it bucked the regional trend. Of course, some of its policies were in accord with the recommendations of the Washington Consensus; as a small economy, it gained from trade liberalization -- though it finds the markets for many of its goods in the United States are blocked by protectionist measures, such as anti-dumping. And it has managed close to balanced budgets; most of its current debts are traceable to the bail-outs resulting from a financial crisis due to an earlier experiment in excessive deregulation.

There is a direct causal link between, on the one hand, the policies pushed by the IMF and the international economic regime established by the international economic organizations, and, on the other, the problems in the global economy (the failures in growth, poverty reduction, the transition from communism to a market economy and the never-ending series of crises in one country after another). For instance, asymmetric trade liberalization has not only meant that the less developed countries have received a smaller share of the benefits of trade liberalization, but the poorest region of the world, Sub-Saharan Africa, is actually worse off. The international financial regime has exhibited enormous instability -- big bail-outs in country after country have failed -- and at least part of the increased instability is due to the policy of capital market liberalization which the IMF and the U.S. Treasury pushed around the world.


The IMF now agrees that its policies in East Asia were excessively contractionary; that it mismanaged bank restructuring in Indonesia (it closed 16 banks, announced that there would be more closures but wouldn't disclose which ones, put depositors on notice that their deposits were not guaranteed and then seemed surprised when there was a run on the private domestic banks); that capital market liberalization can be highly risky. It has now even agreed that the bail-outs were a mistake and has turned its attention to bankruptcy and standstills.

The fact that it has admitted these mistakes nevertheless does not make it enthusiastic about someone else reminding the world about them, especially when those mistakes are put together to form a pattern.

Alas, the IMF response to my criticisms could have been the basis of a meaningful public debate on matters that have increasingly become a source of public concern. But the IMF and its supporters chose, instead, to hide behind a posture that has already brought it so much trouble, trying to create an image of institutional infallibility: If an IMF program fails, it is always the problem of the country that was supposed to implement the program, not with the design of the program itself. As program after program has failed, this particular defense is wearing increasingly thin.


Having debated the issues of globalization for so long and in so many places, I am aware of some of the legitimate bones of contention. Yes, the governance structure of the IMF is undemocratic, with one and only one country having the veto, with only finance ministers and central bank governors having a say (though the matters on which they pronounce have enormous implications for all segments of society). But it is true that some of the alternatives are tricky ones. If voting rights were assigned by population, then China and India would dominate. Were we to subscribe to the principle of one person-one vote, how would we treat the governments of countries that are not democracies, in which none of their citizens have voice?

The most contentious issue of all is that involving the role of the state -- the balance between government and the market. My own work on economies in which information is imperfect and markets incomplete -- problems that are particularly severe in the developing world -- showed that market failures are pervasive: that is, that market forces often do not lead to efficient outcomes, producing too much of some goods (like air and water pollution) and too little of other goods (like innovation and education).

Recent scandals in the United States, from Enron to Arthur Andersen to conflicts of interest and deception involving almost all the major financial institutions, have reinforced the experience of earlier problems, such as the savings-and-loan debacle of a decade ago. There is an important role for government regulation. Of course, governments often fail, too. But even so, markets and government provide an important check on each other, and we have learned much in recent years about how to improve the performance of each. The appropriate balance between the market and the state will differ among countries and over time.

There are other issues on which there can be meaningful debate, such as inflation. I argue that the IMF has been overly concerned with inflation. What matters for the well-being of individuals and of societies is growth, employment, income, stability, poverty, equality. Inflation is of concern because it may have adverse affects on these other objectives. Whether it does, and the extent to which it does, is a matter of theoretical and empirical debate. Of course, inflation does have adverse effects on the real value of bonds, so bondholders are always concerned about inflation, and most economists agree that hyperinflation is bad for the economy; but research at the World Bank and elsewhere shows that when inflation is below a certain critical level, further reductions have negligible effects.

Indeed, George Akerlof (who shared the Nobel Prize with me in 2001) and his collaborators have argued that pushing inflation too low can have adverse effects on the economy. Yet, as I explain in my book, the IMF has pushed to lower inflation, often at the expense of the more fundamental variables with which it should have been concerned. The argument that once started, inflation will increase in a vicious spiral -- one that is very costly to reverse -- is simply not true. And there is little evidence that central banks that focus exclusively on inflation (in contrast to the Federal Reserve Board, which also has a mandate on employment and growth) do better in terms of the fundamental variables of interest. Yet the IMF pushed central banks to focus exclusively on inflation even in countries with no history of an inflation problem.

Still another issue on which a chance for meaningful discussion has been lost is the role of big bail-outs versus bankruptcy and standstills. With the failure of Argentina, the sixth major failure of a big bail-out in as many years, enthusiasm for bail-outs has waned.

I had argued for more extensive reliance on bankruptcy and standstills in the East Asia crisis, just as Jeffrey Sachs and others had done in the earlier Latin American crisis. Finally, with the imminent Argentine collapse, the IMF itself began to talk about it, but it failed to see that a single creditor -- the IMF -- could not play the central role of a bankruptcy judge in a bankruptcy proceeding. It talked of modeling a bankruptcy procedure after Chapter 11 of the U.S. bankruptcy code (as I had urged during the East Asia crisis), but failed to note that for sovereign bankruptcy, the relevant chapter of the U.S. bankruptcy code was Chapter 9. This relates to localities and other public bodies, which emphasizes the centrality of the public functions to be maintained, and whose claim on resources was even more important than that of creditors.


One of the few substantive issues that has engaged critics and reviewers of my book concerns the use of counter-cyclical fiscal policy. The IMF's supporters seem to suggest either that the countries could not have financed counter-cyclical policies, or that it would have been inflationary. The IMF was founded to provide funds for countries facing an economic downturn, to enable them to have counter-cyclical policies. Yes, without the IMF it would have been difficult for them to finance the level of expenditures necessary to restore full employment. But the IMF has not only failed to live up to its mandate, it has actually worsened the problems.

By demanding that Argentina, for instance, pay back money to the IMF and the other international financial institutions -- even as the country sinks into a deep recession -- leaves that country with even fewer funds with which to stimulate the economy. With its pro-cyclical lending, it has become part of the problem rather than part of the solution. Moreover, capital market liberalization, which it has pushed throughout the world, has not only exposed developing countries to much more instability -- evidenced by 100 crises in the last three decades -- but has also given them less room to maneuver as they face a crisis. They are powerless to stop the capital flight, other than by raising interest rates, often to astronomical levels, further contributing to the depth of the downturn.


Of all my criticisms of globalization and the role of the international economic institutions, the one I thought was most damning was this: in their relations with the developing countries, Western economic advisors, especially those from the IMF, have failed to adopt the appropriate posture, which should be to inform countries about the alternatives, what the trade-offs are, what the uncertainties are. There is not a single Pareto-dominant policy -- a single policy that makes everyone better off than any other policy. And this is particularly so once the uncertainties about the consequences of policies are taken into account. Different policies entail different risks being borne by different groups. One of the achievements during my three years at the World Bank was the increased adoption of this perception.

In the advanced industrial countries, we recognize this, and we have fierce debates about economic issues -- about the role of the state, about balancing environment and the economy, about labor rights, about privatization of social security, about the independence of central banks. If the answers were obvious, there would be unanimity. But they are not obvious, and reasonable people -- even reasonable economists -- can well disagree.

My concern is not just that the IMF has taken positions that I thought were wrong, but that it has acted as if there were no alternative. Worse still, the power that it exerts has deprived the developing countries of the choices that ought rightly to be theirs.

It is not just that IMF policies, in the end, so often fail, with such great costs to some of the poorest people in the world; it is that in forcing these choices on the developing countries, they undermine democracy.

(c) 2003, Aspenia/Nobel Laureates, Distributed by Tribune Media Services.
For immediate release (Distributed 9/3/03)