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Joseph Stiglitz: Globalization and its discontents

In our personal lives we would never follow ideas blindly without seeking alternative advice. Yet countries all over the world were instructed to do just that. IMF, WTO and World Bank are institutions that are prescribing countries (mainly developing) how to behave.

Almost overnight globalization has become the most pressing issue of our time, something debuted from boardrooms to op-ed pages and in schools all over the world. Even when there are negative sides to globalization, there are often benefits. The biggest issue is that actual number of people living in poverty increased by almost 100 million, but total world income increased by average of 2.5 percent annually. Globalization failed to decrease poverty and increase stability. The Western countries pushed poor countries to eliminate trade barriers, but kept up their own barriers. Conditionality – the conditions that international lenders imposed in return for their assistance – was seen as cause of lowered national sovereignty.

Asian Development Bank argues for »competitive pluralism« whereby developing countries will be provided with alternative views of development strategies, including the »Asian model« – in which governments, while relying on markets, have taken an active role in creating, shaping and guiding markets.

IMF was founded on the belief that there was a need for collective action at the global level for economic stability. Today IMF typically provides funds only if countries engage in policies like cutting deficits, raising taxes, or raising interest rates that lead to a contraction of the economy. Many of the policies that the IMF pushed, in particular, premature capital market liberalization, have contributed to global instability.

Bretton Woods called for third institution on top of IMF and World Bank. WTO is different in a way that it does not set rules, it is more a forum in which trade negotiations go on.

The Keynesian orientation of the IMF, which emphasized market failures and the role of government in job creation, was replaced by the free market mantra of the 1980s, part of a new »Washington Consensus« – a consensus between the IMF, World Bank and the U.S. Treasury about the »right« policies for developing countries. Many of the ideas incorporated in the consensus were developed in response to the problems in Latin America. The IMF has made mistakes in all the areas it has been involved in: development, crisis management and in countries making transition from communism to capitalism. Successful economic programs require extreme care in sequencing – the order in which reforms occur – and pacing. Another problem in IMF approach is the problem of governance, who decided what they do. The decisions of any institution naturally reflect the perspectives and interests of those who make the decisions.

In many cases commercial interests and values have supersede concern for the environment, democracy, human rights and social justice. Globalization itself is neither good nor bad. With the continuing decline in transportation and communication costs and the reduction of man-made barriers to the flow of goods, services and capital, we have a process of »globalization« analogous to the earlier processes in which national economies were formed. We today have a system of them might be called global governance without global government. It’s time to change some of the rules governing the international economic order.

Author was working in World Bank as senior vice president. World Bank mission is about eradicating poverty, IMF is about maintaining global stability. IMF programs are typically dictated from Washington. Author role in WB as he saw it, was about what strategies might be most effective in promoting growth and reducing poverty; working with governments in the developing countries to put this strategies in place and doing everything he could within the developed countries to advance the interests and concerns of the developing world.

IMF approach

One example of IMF programs being misused is Ethiopia. Prime Minister Meles Zenawi was in dispute with IMF in 1997. The IMF has a distinct role in international assistance. It is supposed to review each recipient’s macroeconomic situation and make sure that the country is living within its means. The IMF is particularly concerned about inflation. IMF often seems to confuse means with ends. Ethiopia has two sources of revenue, taxes and foreign assistance. The IMF wanted Ethiopia to balance their budget in order not to need and foreign aid. Another issue they have was with how Ethiopia should spend their aid. Since they use it to early repay high interest foreign loans, this was not what IMF wanted. They also wanted Ethiopia to liberalize their financial markets, open them to competition from abroad and to divide its largest bank. Ethiopia had seen what happened with Kenya in 1993 and 1994 when it went down that path.

IMF is using one-size-fit-all approach and it doesn’t work. IMF’s market fundamentalism – demand always equals supply – is what causes them to make mistakes after mistakes, not seeing social context of problems. Main issue they are not seeing is unemployment. They see it as necessary pain countries need to take in order to stabilize their economies. While that may have been Keynes’s intent when he pushed for the establishment of the IMF, the institution does not now conceive of itself as a deficit financier, committed to maintaining economies at full employment. There are alternatives to IMF-style programs. Botswana is for author success story, since their government was able to keep political consensus.

Countries working with IMF in the beginning might have benefited from their economic experts, but today all of them also have their own economist. Financial power of IMF funds and especially their estimation of countries financial stability can have big influence in countries reputation on commercial markets. With that power IMF is sometimes dictating where the money goes and it usually goes to repay foreign commercial loans instead in countries development. Conditionality can cause problems, when conditions does not favor country development, but instead interests of financial communities.

World Bank tried to include governments of countries that they work with in whole process. IMF is not only not involving them, but they try to make their deals as secret as possible. Sometimes, the IMF program left the country just as impoverished but with more debt and an even richer ruling elite.

Washington Consensus was about: fiscal austerity, privatization and market liberalization. Countries cannot persistently run large deficits and sustained growth is not possible with hyperinflation. Some level of fiscal discipline is required. When trade liberalization – the lowering of tariffs and elimination of other protectionist measures – is done in the right way, there can be significant efficiency gains. IMF is assuming that market will meet every need, but government activities usually arise when markets fail.

In Cote d’Ivoire, the telephone company was privatized, as is so often the case, before either an adequate regulatory or competition framework was put into place. This privatization come, not just at the expense of consumers, but also at the expense of workers as well. Foreign owners may feel a greater obligation to their shareholders to maximize stock market value by reducing costs and less of an obligation to what they will refer to as an “over bloated labor force”. Privatization needs to be a part of a more comprehensive program. Timing and sequencing are everything. one of the most important concerns with privatization is corruption.

Trade liberalization is supposed to enhance a country’s income by forcing resources to move from less productive uses to more productive uses, utilizing comparative advantage. It takes capital and entrepreneurship to create new firms and jobs, and in developing countries there is often a shortage of the latter, due to lack of education and of the former, due to lack of bank financing.

In the most recent Uruguay Round of trade negotiations, the subject of trade in services was introduced. In the end, however markets were opened mainly for the services exported by the advanced countries – financial services and information technology – but not for maritime and construction services, where the developing countries might have been able to gain a toehold.

Pressure on developing countries was on de-regulation of money flows. That has led to potential quick draw of speculative money from country, when it gets into troubles. Short-term loans and contracts are usually no more than bets on exchange rate movements. Bankers prefer to lend to those who do not need their funds. Instability is not only bad for economic growth, but the costs of the instability are disproportionately borne by the poor.

Foreign investment is not one of the three main pillars of the Washington Consensus, but it is a key part of the new globalization. Sometimes strong foreign companies drove local business out of business. And when they clear competition, they use power of monopoly to drive prices up. A lot of time this is due to wrong pacing. It is the same with opening financial part of business. The challenge is not just to create sound banks, but also to create sound banks that provide credit for growth. In USA they have Community Reinvestment Act from 1977 that addresses this issue.

When money is going into wrong hands, even if this was supported by Western countries and International organizations like IMF, like this was a case with Indonesia and Pakistan, when corrupted practices are clear, debt still stays, since lenders push for repayments and don’t take their share of burden for giving money to wrong hands.

Perhaps of all the IMF’s blunders, it is the mistakes in sequencing and pacing, and the failure to be sensitive to the broader social context, that have received the most attention. Markets are not perfect. Information is not perfect, that is why regulation and government interventions are needed. This fundamental market approach ignores that for development to happen, transformation of society is needed. Education and systemic changes need time and resources and they need to be planned and executed. We recognize today that there is a “social contract” that binds citizens together with their governments. Part of this contract is also fairness in a way that poor are also included in gains of society. Washington Consensus is built on trickle-down approach, that gains on top will trickle down even to the poor. But perception that rising tide lifts all boat is not always true.

It is important not only to look at what the IMF puts on agenda, but what it leaves off. Stabilization is on agenda; job creation is off. Taxation and its adverse effects are on agenda; land reform is not. There is money to bail out banks, but not to pay for improved education and health services, let alone to bail out workers who are thrown out of their jobs as a result of the IMF’s macroeconomic mismanagement.

IMF approach to growth is not doing anything for the poor. They feel voiceless. Regarding workers, they stand on the side of flexible workforce. Which can be translated to lower wages and bigger job uncertainty.

East Asia Crisis

1997 crash of Thai baht was introduction into biggest crisis since Big Depression. Some countries in this region were successful because they didn’t follow politics that was dictated by Washington Consensus. They were called East Asia Miracle. Their approach was to close technology and knowledge gap and improve living for all. But when crisis hit, it was quite a shock for everybody. Malaysia was brave enough to fight IMF, fighting to keep inflation rates low and to put brakes on rapid flow of speculative money out of the country. South Korea on the other hand was under strong pressure from foreign lenders when rumors started that they are in problems in 1997. Indonesia and Thailand followed with problems, not being able to fight against bets on their currency devaluation. But problems of one country expanded to their neighbors, since word is more and more connected and very soon almost all emerging markets were in problems. Contractionary policies in one country not only depressed that country’s economy but had adverse effects on its neighbor. Beggar-thy-neighbor.

Author believes that capital account liberalization was the single most important factor leading to the crisis. Throughout the world, speculative real estate lending is major source of economic instability. This type of lending give rise to bubbles.

When estimating vulnerability of East Asia, mistakes of IMF for pushing to fast capital and financial market liberalization, were the ones that led to this new vulnerability. One of the mistakes was for them looking at actual deficit and not structural one (the one that would be there if economy would operate at full employment). And believing that economy that is going into depression should have balanced budget. Intellectual consistency has never been the hallmark of the IMF.

IMF policy was to raise interest rates in country, so that it would become more interesting for foreign investment. Capital flow into country would help support the exchange rate and thus stabilize the currency. But that led to companies not being able to service debts, going bankrupt and that led to banks with a lot of non-performing loans.

But IMF didn’t want help. Japan offered 100 billion USD to create Asian Monetary Fund, but IMF said no. three years later, Chang Mai Initiative was created as more modest version of Asian Monetary Fund. East Asia Crisis was first financial crisis.

Banking system not only lend money, they also have a credit history of their customers, something that is hard to build. IMF was pushing for closure of weak banks and push for their improved capitalization. But if you don’t put money in as capital, ratio capital towards loans can also increase with calling in loans, that led to companies not being able to service loans and decline of companies. Indonesia was such example where under pressures of IMF banks were closed. S. Korea didn’t follow that path and recapitalized their main banks.

IMF was also not concerned with company restructuring. Author view is that the government should play an active role in pushing this financial restructuring, ensuring that there were real owners. Once ownership issues were resolved, the new owners should set about the task of deciding the issues of real restructuring. The IMF took the opposite view. That active approach was taken by governments of Korea and Malaysia but not in Thailand. The problem with the IMF’s mistakes is that they are likely to be long-lasting.

Author was working with Malaysia to convert the capital controls into an exit tax. There was little evidence that the capital controls discouraged foreign investors. Foreign investment actually increased.

China was also case, where they took their own way and they realize that they should balance macro stability and microeconomy. China recognized the links between economics and political and social stability.

Around the world, very little new investment is financed by raising new equity (selling shares of stock in a company). Indeed, the only countries with widely diversified share ownership are the United States, Japan and the United Kingdom, all of which have strong legal systems and strong shareholder protections. Firms around the world must rely on debt. But debt is inherently risky. IMF policies lead to less efficient resource allocation, particularly capital allocation, which is the scarcest resource in developing countries.

Alternative strategy to IMF approach could be built on premises of full employment, monetary and fiscal policy, importance of financial restructuring, maintaining the flow of finance. Key part of corporate restructuring would entail the implementation of a special bankruptcy provision aimed at the quick resolution of distress resulting from the macroeconomic disturbances.


Russia experienced a burst of growth after 1998, based on high oil prices and the benefits of the devaluation which the IMF so long opposed. Transition from communism to a market economy was more than just an economic experiment: it was a transformation of societies and of social and political structures. Russia needed both resource redeployment and the wholesale creation of market institutions. In old-fashioned economics textbooks for market economy you need: prices, private property and profit, but don’t forget about institutions.

There are two lines of thought about transitions: shock therapy and gradualist. Shock therapy was mainly supported by IMF and Treasury and as such prevailed in most countries.

Mistakes in Russia started already in 1992, with quick release of prices. This set-in motion inflation, more hyperinflation. This was followed with increase in interest rates. Reform strategy didn’t work, GDP was falling. Privatization without proper framework establish class of oligarchs and businessmen, that bought public resources for fraction of their worth. Russia was country with abundance of natural resources, but its government was poor.

With such a situation speculator started to bet against ruble. IMF helped Russia with 22.6 million USD injection. This showed their double standards, when Kenya was denied its loans due to corruption, but Russia where issue was much bigger was supported from IMF. But the money was not enough. Ruble crush. And dollars actually went to oligarchs for them to take them out of the country.

Russia has gotten the worst of all possible worlds. An enormous decline in output and an enormous increase in inequality. This was connected with IMF pushing for privatization, without focus on how it was done. In Russia and other countries, the lack of laws and ensuring good corporate governance meant that those who could get control of a corporation had an incentive to steal assets from the minority shareholders. The result of giving away its rich natural resources before it had in place a system to collect natural resource taxes was that a few friends and associates of Yeltsin became billionaires, but the country was unable to pay pensioners their 15 USD a month pension. The most egregious example of bad privatization was the loans-for-share program. Many of these private banks belonged to friends of the government. The government defaulted on its loans; the private banks took over companies in what might be viewed as a sham sale and a few oligarchs became instant billionaires.

Market economies entail a host of economic relationship – exchanges. Many of these exchanges involve matters of trust. Economists often refer to the glue that holds society together as “social capital”. The erosion of social capital is an almost anarchic theft by all from all.

Some believe that international community looked away from corruption in Russia in order for Yeltsin to be reelected. The July 1998 bailout was just as much a bailout of Western banks that stood to lose billions of dollars (and eventually did lose billions) as it was a bailout of Russia. Wall Street regards inflation as the worst thing in the world: it erodes the real value of what is owned to creditors. To financiers, unemployment is far less of a concern.

In 1994 price of aluminum plummeted. In response to the fall in price, U.S. aluminum producers accused Russia of dumping aluminum. American authorities made decision based on input from American companies dealing with aluminum. They off course try to keep competition out. Alcoa was pushing for cartel working in order to protect American interests. Author fight against this kind of reply. But State department influenced by Rubin made another call. The aluminum case was not the first, nor would it be the last instance, where special interests dominated over national and global goal of a successful transition.

With examples like that Russia lesson of economics was free market for everybody, but sometimes played by the rules of the stronger. Russia should use their natural resources and they don’t need foreign money. But they should start collecting taxes and they should take care of middle class.

The Russians were far better at manipulating Western institutions than the Westerners were at understanding Russia.

Other roads to the market

Poland and China took another road to the market than one advocated by Washington Consensus. Poland didn’t take fast approach to privatization and they didn’t fight inflation for any price. This gradual approach to privatization enables them to do restructuring first.

China reforms began in agriculture and with partial privatization. Then they expand it to whole economy. One of the main questions was how to move from distorted to market prices. They use two-tier price system. Anything that was produced in excess can be sold under free market prices. In its quest for both stability and growth, China put creating competition, new enterprises and jobs, before privatization and restructuring existing enterprises.

Examples like Hungary, Poland and Slovenia showed that gradualist approach is more efficient than radical (shock therapy) approach in countries like Russia or Czech Republic.

IMF agendas

The Fund believes it is fulfilling the task assigned to it: promoting global stability, helping developing countries in transition achieve not only stability but also growth. They believe that poverty is an issue for World Bank. The IMF view is similar to the view of financial community. IMF is many times treating symptoms rather than disease. Pouring money in, just helps speculators since they benefited from the money government was losing. Because of the lack of coherent and persuasive theory of contagion, the IMF has spread the disease rather than contained it.

Keynes had a coherent theory; the downturn in one country leads that country to import less, and this hurts its neighbors. The sum of all deficits in the world must add up to the sum of all surpluses.

How the IMF handles bankruptcy represents still another arena where the Fund’s approach is plagued with intellectual inconsistencies. The creditors, anticipating an IMF bailout have weakened incentives to ensure that the borrowers will be able to repay.

The same is with IMF interventions to support the exchange rate. This make it less necessary for firms to buy insurance, exacerbating in the future the very problem the intervention was supposed to address.

The change in mandate and objectives of Fund, while it may have been quiet, was hardly subtle: from serving global economic interests to serving the interests of global finance. Even if IMF has not become G-7 bill collector, they make sure that G-7 lenders got repaid. This is one of the reasons why they fight against bankruptcy and standstills, since that meant that lenders will not be repaid. The hard truth is that every loan has both a borrower and a lender. If the loan is inherently bad, the lender is as much at fault as the borrower.

The way ahead

Globalization today is not working for many of the world’s poor. It is not working for the environment. It is not working for the stability of the global economy. The problem is not with globalization, but with how it has been managed.

In times of international crises, government leaders like to feel there is someone in charge, that an international agency is doing something. Today, the IMF fills that role.

The world is a complicated place. Each group in society focus on a part of the reality that affects it the most. Workers worry about jobs and wages, financiers about interest rates and being repaid. In public policy debates, few argue openly in terms of their own self-interest. Everything is couched in terms of general interest.

Governments can and has played an essential role not only in mitigating market failures but also in ensuring social justice. Assumptions underlying market fundamentalism do not hold in developed economies, let alone in developing countries. Privatization accompanied by regulation, corporate restructuring and strong corporate governance has led to higher growth. Opposition to globalization in many parts of the world is not to globalization per se – to the new sources of funds for growth or to the new exports markets – but to the particular set of doctrines, the Washington Consensus policies that the international financial institutions have imposed.

There are areas where international institutions should be involved since global collective action is desirable or even necessary. Environment, health issues, war containment are also important, not only financial issues. The approach of IMF can be problematic, since they will always pursue interest of the ones, they feel accountable to. And workers don’t sit on the board of IMF. With WTO is the voice of trade ministers, not environment protectors.

The most fundamental change that that is required to make globalization work in the way that is should is a change in government. Such changes are not going to be easy. The United States is unlikely to give up its effective veto at the IMF.

WTO and IMF both like to work in secrecy. That sometimes undermines democracy and for sure undermines transparency. At IMF ideology often replaced economic science. It was mainly the ideology of financial community. One important distinction between ideology and science is that science recognizes the limitations on what one knows. The IMF never asked why its models systematically underestimated the depth of recessions – or why its policies are systematically excessively contractionary.

The idea is that Fund will focus only on crisis management and not in development of the economies in transition. Since Fund today also work on collection of economic statistic and surveillance that can be a source of some conflict of interest.

Key reforms of international financial system required are:

  • Acceptance of the dangers of capital market liberalization and that short-term capital flows impose huge externalities.
  • Bankruptcy reforms and standstills.
  • Less reliance on bailouts.
  • Improved banking regulation – both design and implementation.
  • Improved risk management.
  • Improved safety nets.
  • Improved response to crises.

There needs to be a restoration of balance: the concerns of workers and small businesses have to be balanced with the concerns of creditors. Responses to future financial crises will have to be placed within a social and political context. Development should not be based on resources and capital only, but also on transformation of society. One of the possible tools that should be used is debt forgiveness. Reforming WTO is about more balanced trade deals – including developing countries interests and environment issues. The pace of global integration matters: a more gradual process means that traditional institutions and norms, rather than being overwhelmed, can adapt and respond to the new challenges.

It is not easy to change how things are done. Bureaucracies, like people, fall into bad habits and adapting to change can be painful. But the international institutions must undertake the perhaps painful change that will enable them to play the role they should be playing to make globalization work and work not just for the well-off and the industrial countries, but for the poor and the developing nations.

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