12 JULY 2002: 3 BILLION
PEOPLE ON THIS PLANET LIVE ON LESS THAN $2 A DAY.

 

FROM THE
NEW YORKER:

July 10, 2002 | home

 

MASTER OF DISASTER

by JOHN CASSIDY

A leading economist says
the protesters have a point about the I.M.F.

 

In 1998, Joseph Stiglitz,
a Columbia professor who shared last year’s Nobel

Prize in Economics, visited
a village in rural Morocco where aid workers had

been encouraging local women
to raise chickens. At the time, Stiglitz was the

chief economist of the World
Bank, the Washington-based lending agency, which

was supporting the project.
It had started out well. The Moroccan government

supplied the villagers with
as many newly hatched chicks as they needed. But at

some point, Stiglitz says,
the International Monetary Fund, the World Bank’s

sister organization, told
the Moroccan government to leave the task of

distributing chicks to private
enterprise. A for-profit firm agreed to supply

the villagers, but it refused
to guarantee the chicks’ survival˜a policy that

had calamitous consequences.
The impoverished peasants refused to risk what

little money they had on
livestock that were likely to die in large numbers in

infancy, and the nascent
industry withered. When Stiglitz arrived in Morocco,

the chicken coops were empty.
A promising attempt to alleviate poverty had

failed.

It may seem like a long way
from Moroccan chickens to the economic crisis in

Argentina, the recent financial
upheavals in Southeast Asia, the failures of

post-Soviet capitalism,
and anti-globalization protests on the streets of

Seattle and Genoa, but in
“Globalization and Its Discontents” (Norton; $24.95)

Stiglitz argues that all
these matters are related. In promoting private

enterprise wherever it can,
the I.M.F. was following the so-called Washington

Consensus view of economic
development, which sees the expansion of free-market

capitalism as the route
to prosperity. With the backing of the United States

Department of the Treasury,
the I.M.F. urges governments everywhere to

privatize, liberalize, and
retrench. In the past twenty-five years, many

developing countries have
followed this advice, dismantling their public-sector

enterprises and opening
up their economies to international trade and

investment. As a result,
the world has become more interconnected than ever,

with the level of exports,
imports, and cross-border investment all increasing

sharply.

According to classic economic
theory, this expansion of trade and commerce

should have made humanity
a lot better off. Ever since Adam Smith, economists

have generally agreed that
trade is a good thing, because it allows countries to

specialize in what they
do best. This “division of labor” (Smith’s phrase)

raises productivity, which
results in more income to spend on food, health,

education, and consumer
goods. Although some people lose their jobs as the

pattern of trade changes,
the winners gain enough to compensate the losers and

still have some left over
for themselves.

During the nineteen-seventies
and eighties, when countries like South Korea and

Singapore were exporting
their way out of poverty, the theory seemed to be

working as advertised. Globalization,
in Stiglitz’s words, “helped hundreds of

millions of people attain
higher standards of living, beyond what they, or most

economists, thought imaginable.”
During the past decade, however, something has

gone wrong. Since 1990,
the number of people living on less than two dollars a

day has risen by more
than a hundred million, to three billion. The gap between

rich and poor countries
has turned into a chasm. Even relatively prosperous

parts of the developing
world, such as Southeast Asia and Eastern Europe, have

fallen into unprecedented
slumps. “Globalization today is not working for many

of the world’s poor,”
Stiglitz declares. “It is not working for much of the

environment. It is not
working for the stability of the global economy.”

Why not? According to Stiglitz,
the rich countries have hijacked globalization,

using as weapons the I.M.F.,
the World Trade Organization, and other

international bodies that
are supposed to act in the interests of all countries.

These institutions are
“all too often closely aligned with the commercial and

financial interests of
those in the advanced industrial countries,” Stiglitz

writes, and the net effect
of the policies they promote is “to benefit the few

at the expense of the
many, the well-off at the expense of the poor.” The

governments of the rich
countries have pushed developing nations to open their

borders to computers
and banking services but continued to protect their own

farmers and textile workers
from the cheap food and clothes that poor countries

produce. They have supported
the extension of patent agreements that guarantee

high profits for Western
pharmaceutical companies like Pfizer and Merck while

depriving African governments
of the drugs they need to fight an AIDS epidemic.

“The
critics of globalization accuse Western countries of hypocrisy,” Stiglitz

writes,
“and the critics are right.”

If this argument brings to
mind the young protesters who have made a business of

disrupting international
summits, Stiglitz is unapologetic. Until the

anti-globalization movement
came along, “there was little hope for change and no

outlets for complaint,”
he writes. “Some of the protestors went to excesses;

some of the protestors were
arguing for higher protectionist barriers against

the developing countries,
which would have made their plight even worse. But

despite these problems,
it is the trade unionists, students,

environmentalists˜ordinary
citizens˜marching in the streets of Prague, Seattle,

Washington, and Genoa who
have put the need for reform on the agenda of the

developed world.”

As this passage suggests,
Stiglitz is part of a growing heterodoxy that seeks to

define a middle ground between
the Washington Consensus and the more radical

elements of the anti-globalization
movement. The financier and philanthropist

George Soros is part of
the dissenting movement, too, and he has written a pithy

little book, “On Globalization”
(Public Affairs; $20), setting out his views and

his recommendations for
reform. Like Stiglitz, Soros supports globalization in

principle but is dismayed
at the narrow focus among policymakers on expanding

trade and industry. “International
trade and global financial markets are very

good at generating wealth,
but they cannot take care of other social needs, such

as the preservation of peace,
alleviation of poverty, protection of the

environment, labor conditions,
or human rights,” he maintains.

Soros’s book is clearly written,
but it doesn’t carry as much weight as

Stiglitz’s. As a leading
economic theorist and someone who has served in senior

government positions, Stiglitz
has a perspective on his subject which can hardly

be ignored. Within four
years of obtaining his Ph.D., from M.I.T., in 1967, he

had published more than
fifteen academic papers, several of which are now

regarded as seminal. He
has since established himself as an expert in many areas

of economics, including
finance, development, and the public sector.

The common theme running
through Stiglitz’s academic work is that markets often

don’t work in the simplistic
way that is taught in Econ. 101. Because of

complications like asymmetries
of information between buyers and sellers,

markets sometimes fail to
work at all, and the government has to step in. (It

was Stiglitz’s work on asymmetric
information that won him a Nobel Prize.) In

1993, when Stiglitz joined
the White House Council of Economic Advisers, at the

start of the Clinton Administration,
he naïvely thought he saw the chance to

“forge an economic policy
and philosophy that viewed the relationship between

government and markets as
complementary.” Instead, he found that “decisions were

often made because of ideology
and politics. As a result many wrong-headed

actions were taken.”

Stiglitz stayed at the council
for four years, eventually becoming its chairman.

In 1997, he moved a few
hundred yards along Pennsylvania Avenue to the World

Bank. The World Bank and
the I.M.F. had been founded at the end of the Second

World War to promote expansionary
Keynesian policies around the globe, with the

bank focussing on long-term
development and the fund on short-term crisis

management, but they long
ago converted to the tenets of what Stiglitz calls

free-market fundamentalism.
The I.M.F., in particular, seems to revel in its

role as enforcer of the
Washington Consensus. Since countries approach the

I.M.F. only when they are
desperate for money, the fund has a good deal of

leverage, which it uses
to force governments to cut budget deficits, raise

taxes, and close down or
sell off state enterprises. Though these reforms are

sometimes necessary, Stiglitz
maintains that the I.M.F.’s representatives are

often oblivious of the human
suffering they cause. “Modern high-tech warfare is

designed to remove physical
contact: dropping bombs from 50,000 feet ensures

that one does not ‘feel’
what one does,” he writes. “Modern economic management

is similar: from one’s
luxury hotel, one can callously impose policies about

which one would think
twice if one knew the people whose lives one was

destroying.”

The centerpiece of “Globalization
and Its Discontents” is a critical account of

the I.M.F.’s role in the
Asian financial crisis and the Russian transition. The

Asian crisis began in July,
1997, when Thailand devalued its currency, and it

quickly spread throughout
Southeast Asia, plunging the region into the deepest

recession it had seen for
decades. Stiglitz argues that the underlying cause of

the collapse was the misguided
financial liberalization that Washington had

urged upon the Asian countries
during the previous few years.

Countries like Singapore
and South Korea hardly needed economic advice from

anybody. Through a combination
of hard work, high savings rates, and extensive

government intervention,
they had turned themselves into universally admired

models for development.
Between 1950 and 1990, South Korea raised its gross

domestic product per capita
from ninety dollars to forty-four hundred dollars.

As part of the “Asian model”
of development, governments prevented foreign

investors (and domestic
residents) from moving money in and out of their

countries freely. These
restrictions helped prevent damaging swings in exchange

rates; they also kept out
American financial firms, which were eager to expand

in Asia. Beginning in the
early nineteen-nineties, the I.M.F. and the Treasury

Department encouraged the
Asians to remove the restriction on capital movements.

Stiglitz viewed this policy
as an unnecessary sop to Wall Street, but the

Treasury Department overruled
his objections. By the middle of the

nineteen-nineties, South
Korea, Thailand, and most other Asian countries had

heeded Washington’s advice
and abolished controls on money flows. The result was

a speculative boom, with
foreign capital pouring into risky investments. For a

while, the region seemed
to be growing even faster than usual. But, once the

Thai crisis erupted, overseas
investors pulled out their money en masse, causing

financial markets to collapse.

The I.M.F. made the downturn
worse by ordering the stricken countries to raise

interest rates and balance
their budgets in order to restore the confidence of

investors. These austerity
policies had been designed for profligate countries

in Latin America, which
ran big budget deficits and printed too much money. Most

of the Asian countries,
by contrast, had balanced budgets, or even surpluses,

when the crisis struck.
The fact that monetary policy was being tightened during

a recession only spooked
investors more, and the conflagration spread to other

countries, including Malaysia
and Indonesia. Suharto’s government was forced to

cut food and fuel subsidies
in order to meet the I.M.F.’s fiscal targets, and

the subsequent riots ended
up bringing down the dictator. Mahathir bin Mohamad,

the Malaysian Prime Minister,
managed to escape Suharto’s fate only by ignoring

the I.M.F.’s advice. In
the face of bitter opposition from Washington, he

introduced laws that made
it difficult for Malaysians and foreign investors to

send their money abroad.
Far from destroying the Malaysian economy, as some

free-market economists had
predicted, these “capital controls” allowed the

country to recover more
quickly than most of its neighbors.

The Asian financial crisis
never came any closer to most Americans than the

business pages. Yet it was
so severe that some people in the region concluded

that the I.M.F. and the
American government had set out deliberately to weaken a

potential economic rival.
Stiglitz doesn’t go that far, but his judgment is

almost as damning: “The
I.M.F. was not participating in a conspiracy, but it was

reflecting the interests
and ideology of the Western financial community.”

Stiglitz’s analysis of what
happened in Russia will be more controversial. As he

details, the I.M.F. advanced
the country billions of dollars in loans to support

the “shock therapy” that
Boris Yeltsin’s government administered after the

collapse of the Soviet Union.
The therapy involved freeing prices, hawking

state-owned enterprises
to private investors at a discount, and trying to

maintain a strong currency.
Stiglitz argues that these policies were misguided,

and he marshals some depressing
statistics to support his case. Between 1940 and

1946, a period when Hitler’s
Army laid waste to Russia, total industrial

production in the Soviet
Union fell by about a quarter. Between 1990 and 1999,

Russian industrial production
fell by more than half. Though the economy has

recovered somewhat in the
past couple of years, the Russian gross domestic

product is still well below
where it was when the Berlin Wall came down. Poverty

rates are much higher, life
expectancy has fallen (almost unprecedented in a

developed country), and
much of Russia’s industry is in the hands of former

Communists and gangsters.
For Stiglitz, the Russians’ attempt to build

capitalism virtually overnight
was reminiscent of the Bolsheviks’ failed attempt

to impose Socialism after
November, 1917. Just as chaos forced Lenin to retreat

to the halfway station of
the “New Economic Policy,” the dramatic collapse of

the post-Soviet economy
forced the modern-day reformers to back off. In 1998,

the ruble collapsed (despite
another I.M.F. loan) and the Yeltsinites were

eventually replaced by a
former K.G.B. agent, Vladimir Putin.

Is Stiglitz overstating the
case against the I.M.F. here? The proponents of

shock therapy, such as the
Harvard economist Andrei Shleifer, who advised the

Russian government during
the mid-nineteen-nineties, argued that moving rapidly

was the only way to prevent
a Communist resurgence, and that the policy wasn’t

enforced vigorously enough.
Instead of consistently promoting radical change,

Yeltsin vacillated, one
moment supporting reformers like Anatoly Chubais, the

next moment backing conservatives
like Viktor Chernomyrdin. Whatever the merits

of such political considerations,
though, the strictly economic case for the

shock therapy is underwhelming.
Indeed, there is now a consensus among

economists that it is a
mistake to try to create a market economy without first

developing the institutions
necessary for capitalism to function properly, such

as enforceable laws and
a working tax system. Under Putin, the Russian

government is now concentrating
on building just that sort of infrastructure,

and the results are encouraging.
Even the I.M.F. has come to acknowledge the

wisdom of this strategy;
almost everyone agrees that there is no shortcut to

building a modern economy.

Stiglitz commends the gradual
approach that China and Poland have taken toward

liberalizing their economies.
In Poland, one of the best-performing economies in

Eastern Europe in recent
years, the government rejected a key element of the

Washington Consensus: rapid
privatization. Instead of rushing to sell off state

enterprises, the Poles concentrated
on creating a modern legal system and a

social safety net. Only
then did they allow private investors to take over banks

and the like. In China,
too, the government left most of the big state-owned

firms in place, but it created
new firms alongside them by allowing villages and

towns to set up their own
enterprises, often in partnership with foreign

companies. During the nineteen-nineties,
China’s G.D.P. grew at an average

annual rate of about ten
per cent, and its poverty rate dropped dramatically.

“The contrast between what
happened in China and what has happened in countries

like Russia, which bowed
to I.M.F. ideology, could not be starker,” Stiglitz

writes. “In case after case,
it seemed that China, a newcomer to market

economies, was more sensitive
to the incentive effects of its policy decisions

than the I.M.F. was to its.”

“Globalization and Its Discontents”
does have some disappointing omissions,

especially concerning the
author’s own experiences. In the Clinton

Administration, Stiglitz
clashed frequently with Lawrence Summers, the Harvard

economist who served in
the Treasury Department and eventually became the

Secretary of the Treasury.
Summers was far more sympathetic to the Washington

Consensus than Stiglitz
was, and he worked closely with the I.M.F. According to

some people in Washington,
Summers forced Stiglitz out of the World Bank by

demanding his departure
as the price of supporting the reappointment of James

Wolfensohn as the institution’s
president. Yet, apart from a few derogatory

references to Summers’s
role in specific policy debates, Stiglitz makes no

mention of their rivalry,
or of the circumstances surrounding his resignation

from the World Bank.

All of this raises the inevitable
question of how much of the book is

score-settling. It will
not escape I.M.F. officials that Stiglitz is overly

reluctant to criticize the
governments of developing countries for making bad

policies, which have done
at least as much as the I.M.F. to keep poor people

poor. And he surely understates
the difficulties facing the I.M.F. when it goes

into a country where the
stock market and the currency are both plummeting.

What’s more, I.M.F.-led
bailouts can sometimes work, as they did in Mexico.

Still, there is no disputing
Stiglitz and Soros’s central point that global

capitalism has outgrown
its institutional framework. Both authors suggest

reforms that might go some
way toward remedying this situation. First and

foremost, they advocate
restructuring the international institutions, so that

they are more democratic
and effective. The I.M.F.’s voting structure dates back

decades and makes no
sense˜the Netherlands has about as many votes as China has.

Stiglitz also recommends
improving banking supervision, changing the

international bankruptcy
laws, reducing the number of I.M.F. bailouts, and

increasing the amount of
aid and debt relief that developing countries receive,

especially those in Africa.
Soros, for his part, thinks international aid should

be increased and that the
World Trade Organization ought to take more account of

issues like workers’ rights,
health and safety, and the environment.

One can debate the particulars
of reform but not the need for it. “Without

reform, the backlash that
has already started will mount and discontent with

globalization will grow,”
Stiglitz writes. “This will be a tragedy for all of

us, and especially for the
billions who might otherwise have benefited.”