JOSEPH E. STIGLITZ, HERO.

20 OCTOBER 2002: JOSEPH
E. STIGLITZ, HERO.

FROM THE
NEW YORK TIMES
:


October 19, 2002

Challenging the Growth
Gurus


By MICHAEL MASSING

As the chief economist of
the World Bank in the late 1990′s, Joseph E. Stiglitz got a firsthand look
at how policy was made at its sister institution, the International Monetary
Fund, and he was dismayed. Decisions, he said, were made on the basis of
ideology rather than sound economic reasoning.


    The fund
was made up of “third-rank students from first-rate universities,” as he
once put it. Frank discussion was discouraged, and developing countries
were expected to accept fund prescriptions without question. And those
prescriptions too often failed, leaving many nations sunk in poverty.

    The experience
convinced Mr. Stiglitz of the need to reassess the ingredients of growth.
As he wrote this year in “Globalization and Its Discontents,” “If the developed
countries were serious about paying more attention to the voices of the
developing countries, they could help fund a think tank ˜ independent from
the international economic organizations ˜ that would help them formulate
strategies and positions.”


    Now Mr.
Stiglitz himself has set up such an institute. The Initiative for Policy
Dialogue is at Columbia University’s School for International and Public
Affairs, where Mr. Stiglitz is a professor. It is bringing together economists,
political scientists and policy analysts from around the world to re-examine
the prevailing wisdom about development and to come up with alternative
strategies. “There’s not a Brookings or an American Enterprise Institute
for the developing world,” said Mr. Stiglitz, co-winner of the 2001 Nobel
Memorial Prize in Economic Science.


    It’s
an ambitious and controversial undertaking. Mr. Stiglitz is the I.M.F.’s
most visible critic, and the fund has made little secret of its disdain
for him. In a biting open letter posted on its Web site (www.imf.org),
Kenneth Rogoff, the fund’s director of research, calls Mr. Stiglitz’s ideas
about development “at best highly controversial, at worst snake oil.” His
“alternative medicines, involving ever more government intervention, are
highly dubious in many real world settings.”


    Undeterred,
Mr. Stiglitz is taking aim at the so-called Washington consensus, a package
of free-market, free-trade policies that, critics charge, the I.M.F. and
World Bank have imposed on third world nations. “We disagree with the World
Bank-I.M.F. idea that there’s one approach that’s right for all countries,”
Mr. Stiglitz said. Rather, he said, there is a range of policies that must
be selected based on conditions in each country.


    Mr. Stiglitz’s
effort to rewrite the textbook on development is being conducted through
14 panels that are re-evaluating such critical issues as bankruptcy, poverty,
privatization and trade. For each a dozen or so specialists from the Northern
and Southern Hemispheres are meeting to compare the experiences of different
countries and ponder what policies have worked where. The objective of
each group is to produce a series of papers that will provide a fresh look
at the components of growth.


    But Mr.
Stiglitz hopes his institute will be more than a paper exercise. He has
accused the I.M.F. of acting like a “colonial ruler” and stifling discussion
in developing countries, so in addition to the study groups, he is organizing
forums in some countries. The goal is to expand the policy debate beyond
the usual elite of government officials and business executives to include
civic leaders, activists, academics and journalists. So far, forums have
been held in Ethiopia, Moldova, Nigeria, the Philippines, Serbia and Vietnam.
At the Nigeria session a key theme was the need to raise living standards
in the countryside, where most Nigerians live. Soon after, Mr. Stiglitz
recalled, Nigeria’s agricultural minister obtained more money for agriculture.

    Mr. Stiglitz
spends about a third of his time advising foreign governments, providing
alternatives to the ideas of the I.M.F. He has been to Argentina four times
in the last four years and recently visited Bulgaria at the invitation
of that country’s president.


    “What’s
amazing,” Mr. Stiglitz said, “is how little information is available that
is disinterested and balanced. In many cases the discussion has been very
general. For instance, it’s said that countries need good corporate governance.
But what does that mean?”


    Finding
the answers to such questions is the goal of his institute’s study panels.
The panel on privatization, for example, is looking at the experiences
governments have had in selling state-owned enterprises. Gerard Roland,
a professor of economics at the University of California at Berkeley and
co-chairman of the panel, said that the fund had pushed governments to
give away the assets of such companies “as quickly as possible.” If those
assets don’t immediately end up in the right hands, the reasoning goes,
marketplace incentives will ensure that they eventually do, with less skilled
owners selling to more able ones. But in Russia and other countries that
tried this, Mr. Roland said, the new owners quickly became oligarchs who
blocked future reforms. The outcome was rampant corruption and a sharp
decline in output.


    Poland
initially planned to have a similar program, Mr. Roland continued, but
it was blocked by the Polish parliament. So privatization there proceeded
more gradually. As a result Polish enterprises ended up with more seasoned
owners, and its economy grew more briskly. By comparing such experiences,
Mr. Roland’s group is trying to determine which approaches work best in
which circumstances.


    “When
the I.M.F. says that these are the particular policies you should follow,”
Mr. Roland said, “those policies often aren’t thought through and don’t
have a scientific basis. Policies have to be adjusted to each country’s
environment.”


    Similarly,
the panel on trade is examining the effect of efforts to lower trade barriers.
“The I.M.F. and World Bank are pushing across-the-board trade liberalization,”
said Dani Rodrik, a professor of economics at Harvard University and co-chairman
of the committee. In reality, he added, “Trade reform is something that
has to be tailored to each country’s circumstances, taking into account
its geographic advantage, its institutional needs, its relations with its
main trading partners.” He added: “What are the best policies to encourage
foreign investment? Is this good for all countries, or are some countries
throwing away resources through tax subsidies? And how can trade policy
be targeted to reduce poverty? We’re not trying to present a particular
take but to summarize and describe what we know about these issues.”

    Such
an approach troubles Jagdish Bhagwati, a colleague of Mr. Stiglitz’s at
Columbia and a strong advocate of free trade. “Joe assumes that there’s
a monolithic view at the fund and the bank, but that’s not the case,” he
said. The whole idea that there’s a Washington consensus that promotes
a one-size-fits-all policy is absurd, he said, adding, “In practice shoe
sizes are bound to vary and do. The real choice is between wearing shoes
and going barefoot. Socialism didn’t work. In countries like India, Egypt,
Brazil and China, the market was absent. The debate is moving away from
knee-jerk interventionism and excessive controls.”


    Mr. Stiglitz’s
institute, Mr. Bhagwati went on, is not including people “who really have
alternative points of view.” Its trade group, he said, “has none of the
big trade people,” including himself. “The Initiative for Policy Dialogue
is in danger of turning into the Initiative for Policy Monologue.”


    Mr. Rodrik
disputed this. Of the five economists from developed nations invited to
join his panel, he said, two ˜ Gene Grossman of Princeton and Rob Feenstra
of the University of California at Davis ˜ are former students of Mr. Bhagwati.
(Mr. Feenstra declined to join because of time constraints; Mr. Grossman
has yet to decide.) The three other economists “are also utterly mainstream,”
Mr. Rodrik said. Mr. Bhagwati himself may be asked to join the group. “We
have no intention of keeping certain views off the table,” Mr. Rodrik added.
“That would defeat the purpose.”


    The institute’s
architects deny any inclination to turn the clock back to an era of state
farms and five-year plans. Thomas Heller, a professor of international
law at Stanford University and co-chairman of the committee studying the
rule of law, said that while it has become clear that the wholesale withdrawal
of government from the economy is ill-considered, no one would deny the
value of the market. The institute, he said, “is attempting to make a series
of adjustments without getting countries to go back to the state-heavy
systems of the past. We don’t want to throw out the baby with the bath
water.”


    Is the
institute likely to have any impact? That depends on how confrontational
it becomes, said Robert Solow, an emeritus professor of economics at the
Massachusetts Institute of Technology. A recipient of the Nobel in economic
science who has long argued that governments must be prepared to intervene
in the market, Mr. Solow said the idea that a Washington consensus forces
cookie-cutter-type policies on every country is overdrawn. “If you look
at the way the World Bank and I.M.F. operate,” he said, “you will see that
they have regional and country specialists who know their way around. When
they deal with a country, they study it very knowledgeably, and their prescriptions
do pay attention to local conditions.”


    On the
other hand, he said, I.M.F. programs “do tend to have an awful lot in common,
whether they’re aimed at Turkey or Thailand.” So the institute’s effort
to look at how different policies work in different environments could
prove useful, Mr. Solow said. If, however, it “starts with the notion that
it’s going to turn everything upside down, that it’s going to be the dark
destroyer of the I.M.F. and the World Bank, then it won’t succeed.`

    Rather,
he said, the institute should try “to bring around the international financial
institutions, to present a reasonable case and induce them to move a little
bit.”