|Silencing Joseph Stiglitz
The World Bank cuts its ties to the economist who became an unlikely
hero to world trade protesters.
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By David Moberg
May 2, 2000 | After World Bank chief economist Joseph Stiglitz quit
his job last November in order to speak more openly about his
disagreements with policies of the bank and the International Monetary
Fund, the bank still retained the distinguished economist as a special
advisor to president James D. Wolfensohn.
But Stiglitz's criticism finally proved too much for the powerful
global financial institutions, especially after they endured raucous
protests last month at their spring meetings. Last week, even as he
was traveling to drought-stricken Ethiopia on a bank mission and his
replacement had not yet taken office, the World Bank announced that he
would no longer serve as special advisor.
Defenders of the IMF and World Bank could denigrate the credentials of
some protesters, but it has been hard to attack the widely published
former Stanford professor who also served as chairman of President
Clinton's Council of Economic Advisors. His candor made him an
unlikely intellectual guru to the world trade protest movement. But
while his criticism enhanced the credibility of the protesters, it
also prompted new pressure -- some of it from the U.S. Treasury
Department -- to quiet him, he told Salon, even as the global
financial institutions were promising critics they would be more open
During his tenure at the World Bank, Stiglitz irritated many powerful
colleagues by publicly criticizing IMF moves and calling for more open
debate about global economic policies. Until recently the World Bank
and IMF had presented a united front to the world as they tried to
solve global economic problems. Often the IMF has helped troubled
countries with loans from World Bank funds that are tied to agreements
by those countries to take the IMF cure: cutting government budgets
and subsidies; privatizing public operations; raising interest rates;
opening national economies to foreign imports, corporations and
capital; and increasing exports of raw materials or goods made with
labor made even cheaper by these policies.
These policy packages made up the "Washington consensus" imposed by
the IMF with World Bank support for more than two decades -- despite
an unimpressive track record on nearly every count except reducing
inflation and budget deficits.
When Stiglitz announced last year that he was leaving the bank and
returning to academic life, there were rumors that he was pushed out
because he was too outspoken. "Pushed out would not be the way I'd put
it," he said, "But it was made very clear ... the way I put it was
that whenever you have institutional responsibilities, you have less
freedom to express yourself, especially clearly and forcefully. Part
of the culture within the institution and within finance ministries is
that the two institutions should not criticize each other."
The protests, which Stiglitz thought were "quite successful,"
challenged that pact of silence. News media coverage of the protests
"focused on the broader message: that what is at issue is a question
of values, of democratic processes, and how partly because of the
absence of democratic process, decisions were made that jeopardized
the livelihoods and even the lives of many of the world's poor."
Unfortunately, he said, the bank and IMF did not have a "totally
positive" response and became defensive and even less open, as
Stiglitz's removal confirms. "There was certainly no engagement on the
broad fundamental question about democratic process and whether there
was a balance of representation in the decision-making process -- of
financial interests vs. workers," Stiglitz said.
"What's remarkable, I see no indication of a grasp of that even as an
issue. A reaction one heard within the organization was very much that
'They're impugning our motives.'" Both organizations are accustomed to
impugning motives of governments and analyzing how incentives and
interests drive other people and institutions, but they "feel very
uncomfortable when that light is shined on them," Stiglitz said.
In the eyes of most protesters, the World Bank and IMF are
indivisible, but Stiglitz says they began to diverge after 1992. That
partly developed, he says, because the bank maintained staffs in
developing countries and listened to varied voices, "as opposed to the
person who stays in a five-star hotel for a few weeks, looking at some
data," a reference to the IMF. The IMF was mainly accountable to
finance ministers and central banks, both in turn closely linked to
major private financial institutions.
"Financial markets tend to be very secretive," Stiglitz said. "Central
banks aren't democratically accountable in most countries. The IMF
agenda has been to make them more independent and less democratically
accountable. You can debate the economic virtue of that policy, but it
affects the culture, and I would argue that for most countries it
hasn't [improved] variables that matter, like growth and stability."
The biggest mistake the IMF made in recent years was its handling of
the 1997 Asian crisis and the subsequent crises in countries like
Russia. First, the IMF had pressured the rapidly developing Asian
countries like Thailand and Korea to eliminate most controls over the
flow of capital into and out of the country. Speculative money flowed
in, often distorting the economy (into overbuilt real estate, for
example), then suddenly rushed out on rumors of economic problems,
plunging countries into crisis.
The original policy prescription was a mistake born purely out of
ideology, Stiglitz said. "There never was economic evidence in favor
of capital market liberalization," he said. "There still isn't. It
increases risk and doesn't increase growth. You'd think [defenders of
liberalization] would say to me by now, 'You haven't read these 10
studies,' but they haven't, because there's not even one. There isn't
the intellectual basis that you would have thought required for a
major change in international rules. It was all based on ideology."
Then, when the crisis hit, the IMF insisted on balancing budgets,
cutting subsidies and all the other "Washington consensus" policies,
even though most of these countries had high savings rates, thriving
economies and relatively balanced budgets before the crisis. These
policies simply plunged the economies deeper into depression,
bankrupting businesses and throwing millions of workers out of jobs.
Stiglitz compared it to President Herbert Hoover's insistence on
balancing the budget as the Depression swept across the
country. "Clearly people make errors in the face of pressure, but some
of those errors are hard to understand because they seem so
obvious. For example, if you close 16 banks and announce that other
banks may be closing, then you shouldn't seem surprised when there's a
run on the banks, or if you have an economy going into depression,
with people losing jobs and wages falling, and then food and fuel
subsidies to the poor are cut, you shouldn't be surprised there's a
riot." But the IMF did both in Indonesia.
Some costly IMF mistakes seem just silly and perverse. In Ethiopia,
Stiglitz said, the IMF would not allow the government to count foreign
aid as revenue in calculating whether the budget was balanced. That
meant poor Ethiopia effectively had to run a big budget surplus, which
further depressed the economy.
The IMF reasoned that aid was too unreliable to include, but Stiglitz
said, "We at the World Bank showed it was more stable than tax
revenue. If you followed the IMF analysis, you wouldn't include any
revenue in the budget. The appropriate response is flexibility of
expenditures: If you get money to build a new school, you build it."
While such IMF obtuseness irritated Stiglitz, it fueled intense anger
and hostility toward the IMF and World Bank among Ethiopians who
couldn't build the schools they needed.
Other costly mistakes reflect different interests between developing
countries and the international financial institutions -- the old
adage that where someone stands on an issue depends on where he
sits. For example, many IMF policies during the Asia crisis may not
have seemed like mistakes to representatives of finance ministers, who
are in turn closely tied to bankers.
"From their point of view the first priority was not maintaining the
Thai gross domestic product at the highest level, as it would be if I
were the chief economist of Thailand," Stiglitz said. "They put more
priority on creditors getting repaid." Real and implicit contracts
with workers were broken with impunity, but despite the centrality of
bankruptcy in modern capitalism, the IMF considered every debt
contract to foreign lenders inviolable.
Stiglitz applauds the demonstrators' calls for greater citizen and
worker involvement in global economic decisions. The emphasis on
participation, he notes, is not merely abstract. For example, the
Nobel Prize-winning economist Amartya Sen demonstrated that famines do
not occur in democratic countries because poor people have a way of
forcing governments to share scarce resources.
The new attention to previously obscure institutions like the IMF and
World Bank is all to the good, Stiglitz believes. He sees a growing
political consensus on restraining the IMF from long-range development
lending -- a view of many protesters that even ultra-conservative
Sen. Phil Gramm, R-Texas, endorsed last Friday. He is also pleased at
what he sees as growing support for increasing direct aid to poor
countries, which is needed to supplement lending.
But such aid will only work well if the two institutions abandon the
"structural adjustment" policies that they have typically imposed as
conditions for loans, and Stiglitz is less confident that they are
willing to make such a change. "Many developing countries need
assistance because they're poor," Stiglitz said. "'Structural adjust'
suggests they're out of kilter, that they need a nose job. My point is
they're poor and need more money to be less poor. If the IMF gets out
of lending to developing countries, then the bank will be freer to
move ahead in this direction."
Stiglitz is encouraged that world attention is now focused on the
previously obscure decisions of the bank and IMF. "If there were more
opportunity for discussion, there would be more scrutiny, and people
would say, 'We don't believe in those policies,' or ask 'Whose
interest is served by these policies, who is bearing the risk, what is
happening to the poor?'" Stiglitz said. "We're getting more discussion
today, but very little inside the institutions."
But Stiglitz's termination as a bank advisor last week not only muted
that internal discussion, but also sent a warning signal to other
dissidents who seek more open debate on the future of the global
salon.com | May 2, 2000
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About the writer
David Moberg is a senior editor at In These Times.