Joseph E. Stiglitz is a Nobel-winning professor of economics at Columbia, a former World Bank chief economist and former chairman of President Clinton’s Council of Economic Advisors. But if he had not specialized in the dismal science, he likely would have been a muckraking journalist in the style of Westbrook Pegler, the controversial mid-20th century newspaper columnist. At least that is one impression a reader may take away upon finishing Stiglitz’s new book, Globalization and Its Discontents.
To be sure, some significant differences do exist between the men. For example, while Pegler turned his sights on such disparate targets as the Supreme Court and the Newspaper Guild, Stiglitz primarily limits his critique to the International Monetary Fund – and to a lesser degree, the World Bank – and their influence, for better or worse, on the process of globalization.
It is a timely book, issued in a period when protests against the process of globalization continue to spread across the globe, and Stiglitz musters some impressive ammunition for his indictment of the IMF. But like the people who take to the streets against GATT, NAFTA and other trade-friendly policies, the volume of his salvo may mask some gaps in his reasoning.
“I believe that globalization – the removal of barriers to free trade and the closer integration of national economies – can be a force for good and that it has the potential to enrich everyone in the world, particularly the poor,” Stiglitz writes in his preface. “But I also believe that if this is to be the case, the way globalization has been managed…need(s) to be radically rethought.”
Stiglitz says that the IMF, which adopted a commitment to capitalism during the Reagan-Thatcher era, is the culprit behind global mismanagement. “The IMF and the World Bank became the new missionary institutions, through which these ideas were pushed on the reluctant poor countries that often badly needed their loans and grants,” he writes. “Western banks benefited from the loosening of capital market controls in Latin America and Asia, but those regions suffered when inflows of speculative hot money … suddenly reversed.”
Stiglitz sees the invisible hand of the IMF behind almost every crisis, from the collapse of the post-communist Russian economy to the East Asian crisis that began when the Thai baht collapsed in July 1997. He says the common denominator among these and other implosions has been the IMF’s demand for fiscal austerity, privatization, and market liberalization.
In Russia, for example, Stiglitz points out that when most price controls were lifted virtually overnight in 1992, a period of hyperinflation was ushered in. The antidote, according to the IMF, was to tighten monetary policy through interest rate hikes. But Stiglitz says the liberalization and stabilization policies pushed by the IMF actually worked against the strategy of privatization as investment halted, savings evaporated due to inflation, and privatization led to asset stripping. Oligarchs with political connections, for example, were able to garner former state-owned assets for pennies on the dollar.
The problems in Russia were exacerbated in 1998 when the East Asian crisis depressed demand for oil and crude prices fell, robbing Russia of an important source of income. In Stiglitz’s view, the East Asian meltdown can be traced to currency speculators who took advantage of the region’s liberalized financial markets. Of course, those markets were opened in response to pressure from the IMF.
“If the crises had a familiar pattern, so too did the IMF’s responses: It provided huge amounts of money (the total bailout packages, including support from G-7 countries, was $95 billion) so the countries could sustain the exchange rate,” writes Stiglitz. “The money served another function: It enabled the countries to provide dollars to the firms that had borrowed from Western bankers to repay the loans.”
Stiglitz may say that the crises have a familiar pattern, but so do his explanations, which consist of a connect-the-dots approach that consistently points to the IMF’s free-market policies as a disrupting force, while virtually ignoring other causes. In his analysis of the East Asian crises, for example, Stiglitz plays down the destructive role of collusive government-business ties, particularly those involving the chaebol, or inter-networked conglomerates, and the banks.
In one telling statement, Stiglitz claims that South Korea “ignored outside advice and re-capitalized its two largest banks rather than closing them down. This is part of why Korea recovered relatively quickly.” But in a May 2002 interview with Business Week, Korean President Kim Dae Jung (who was in office during the 1998 crisis) notes that the country’s turnaround involved “ … a lot of pain. Some 600 of 2,100 financial institutions were shuttered, and 16 of the 30 largest chaebol were either broken up or are under new ownership.”
Stiglitz also serves up mainland China as an example of a country that bucked the IMF and prospered. He writes that during the East Asian meltdown, as developing world countries with liberalized capital markets saw their incomes decline, China’s grew at a rate close to 8%. The country averted the crisis by taking “a course directly opposite that advocated by the IMF.”
But despite Stiglitz’s faith in capital controls, China’s economic ability to escape unscathed is only as believable as the financial numbers it issues. And articles in such publications as the South China Morning Post (“The Numbers Game,” May 31, 2002) and Newsweek International (“Why China Cooks the Books,” April 1, 2002) call the validity of those numbers into question, noting that numbers in China are often more of a political than a scientific tool. Stiglitz’s acceptance of China’s statistics without question may, however, lead some readers to question his objectivity.
In his closing chapters, Stiglitz notes that globalization is here to stay, and says that if it is to work, there have to be global (as opposed to U.S.-dominated) public institutions that will help to set rules. One suggestion is to change the way that organizations like the IMF and World Bank are governed, primarily by revamping the system of voting rights that currently give the United States – as a primary contributor of funding – an effective veto.
While admitting that reform will be difficult, Stiglitz says that key changes should include recognition of the “dangers” of capital market liberalization; the replacement of IMF bailouts with nation-oriented bankruptcy and standstill provisions; improved safety nets, and disclosure of the expected poverty and unemployment impact of IMF programs. “If we are to address the legitimate concern of those who have expressed a discontent with globalization … then our voices must be raised,” concludes Stiglitz. “We cannot, we should not, stand idly by.”
Stiglitz has written a thought-provoking book, but in his quest to condemn the IMF’s approach, he appears to have chosen to ignore evidence that could undermine his position. For an economist, or any other scientist or academic, such a slip can only end up affecting the credibility of his views.