stiglitz. globalization and its discontents 1

Globalization: Stiglitz's Case By Benjamin M. Friedman Globalization and Its Discontents

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Volume 49, Number 13 · August 15, 2002

Globalization: Stiglitz's Case

By Benjamin M. Friedman

Globalization and Its Discontents

by Joseph E. Stiglitz

Norton, 282 pp., $24.95

1.

The most pressing economic problem of our time is that so many of what we usually call "developing economies" are, in fact, not developing. It is shocking to most citizens of the industrialized Western democracies to realize that in Uganda, or Ethiopia, or Malawi, neither men nor women can expect to live even to age forty‐five. Or that in Sierra Leone 28 percent of all children die before reaching their fifth birthday. Or that in India more than half of all children are malnourished. Or that in Bangladesh just half of the adult men, and fewer than one fourth of adult women, can read and write.[1]

What is more troubling still, however, is to realize that many if not most of the world's poorest countries, where very low incomes and incompetent governments combine to create such appalling human tragedy, are making no progress—at least not on the economic front. Of the fifty countries where per capita incomes were lowest in 1990 (on average, just $1,450 per annum in today's US dollars, even after we allow for the huge differences in the cost of living in those countries and in the US), twenty‐three had lower average incomes in 1999 than they did in 1990. And of the twenty‐seven that managed to achieve at least some positive growth, the average rate of increase was only 2.7 percent per annum. At that rate it will take them another seventy‐nine years to reach the income level now enjoyed by Greece, the poorest member of the European Union.[2]

This sorry situation stands in sharp contrast to the buoyant optimism, both economic and political, of the early postwar period. The economic historian Alexander Gerschenkron's classic essay "Economic Backwardness in Historical Perspective" suggested that countries that were far behind the technological frontier of their day enjoyed a great advantage: they could simply imitate what had already proved successful elsewhere, without having to assume either the costs or the risks of innovating on their own. The economist and demographer Simon Kuznets, who went on to win a Nobel Prize, observed that economic inequalities


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often widen when a country first begins to industrialize, but argued that they then narrow again as development proceeds. Albert Hirschman, an economist and social thinker, put forward the hypothesis that, for a while, at the beginning of a country's economic development, the tolerance of its citizens for inequality increases, so that the temporary widening that troubled Kuznets need not be an insuperable obstacle. Throughout the countries that had been colonies of the great European empires, the view of the departing powers was that the newly installed democratic institutions and forms they were leaving behind would follow the path of the Western democracies. Political alliances, like the myriad regional pacts established during the Eisenhower‐Dulles era (SEATO, CENTO, and all the others), would help cement these gains in place.

Not surprisingly, the contrast between that earlier heady optimism and today's grimmer reality has led to a serious (and increasingly acrimonious) debate over two closely related questions. What, in retrospect, has caused the failure of so many countries to achieve the advances confidently predicted for them a generation ago? And what should they, and those abroad who sympathize with their plight and seek to help, do now?

Perhaps not since the worldwide depression of the 1930s have so many thinkers attacked a problem from such different perspectives: Have the non‐developing economies (to call them that) pursued the wrong domestic policies? Or have they been innocent victims of exploitation by the industrialized world? Is it futile to try to foster economic development without an appropriate social and political infrastructure, including what has come to be called the "rule of law" and perhaps also including political democracy as well? Or do these favorable institutional creations follow only after a sustained improvement in material standards of living is already underway? Would more foreign aid help? Or does direct assistance from abroad only create parallels on a national scale to the "welfare dependency" sometimes alleged in the US, dulling the incentive for countries to undertake difficult but needed reforms? How much blame lies with corruption in the nondeveloping countries' governments, often including the outright theft by government officials of a large fraction of whatever aid is received? And then there is the most controversial question of all: Is the "culture" of these countries—specifically in contrast to Western culture—simply not conducive to economic success?

One important concrete expression of the optimism with which thinking in the industrialized world addressed the challenge of economic development a generation and more ago, before these painful questions became prominent, was the creation of new multinational institutions to further various aspects of the broader development goal. The United Nations spawned a family of sub‐units to this end, most prominently the UN Development Program and the UN Conference on Trade and Development. The Food and Agriculture Organization (founded in 1945, but


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separately from the UN) and the World Health Organization (1948) had more specific mandates. The International Bank for Reconstruction and Development (commonly called the World Bank), established in 1944 mostly to help rebuild war‐torn Europe, soon shifted its attention to the developing world once that task was largely completed.

The International Monetary Fund (the IMF, or sometimes just the Fund) was a latecomer to the development field. Established in tandem with the World Bank in 1944, the IMF's original mission was to preserve stability in international financial markets by helping countries both to make economic adjustments when they encountered an imbalance of international payments and to maintain the value of their currency in what everyone assumed would be a permanent regime of fixed exchange rates.

By the early 1970s, however, the fixed exchange rate system proved untenable, and floating rates of one kind or another became the norm. Moreover, as the Western European economies gained strength while, at the same time, more and more developing countries entered the international trading and financial economy, it was increasingly the developing countries that ran into balance of payments problems or difficulties over their currencies and therefore turned to the IMF for assistance. As a result, over time the IMF became increasingly involved in the business of economic development. And as development has faltered in many countries—including many in which the IMF has played a significant part—the IMF's policies and actions have increasingly moved to the center of an ongoing, intense debate over who or what to blame for the failures of the past and what to do differently in the future.

Joseph E. Stiglitz, in Globalization and Its Discontents, offers his views both of what has gone wrong and of what to do differently. But the main focus of his book is who to blame. According to Stiglitz, the story of failed development does have a villain, and the villain is truly detestable: the villain is the IMF.

2.

Joseph Stiglitz is a Nobel Prize–winning economist, and he deserves to be. Over a long career, he has made incisive and highly valued contributions to the explanation of an astonishingly broad range of economic phenomena, including taxes, interest rates, consumer behavior, corporate finance, and much else. Especially among econ‐omists who are still of active working age, he ranks as a titan of the field. In recent years Stiglitz has also been an active participant in economic policymaking, first as a member and then as chairman of the US Council of Economic Advisers (in the Clinton administration), and then, from 1997 to 2000, as chief economist of the World Bank. As the numerous examples and personal recollections in this book make clear, his information and his impressions are in many cases firsthand.


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In Globalization and Its Discontents Stiglitz bases his argument for different economic policies squarely on the themes that his decades of theoretical work have emphasized: namely, what happens when people lack the key information that bears on the decisions they have to make, or when markets for important kinds of transactions are inadequate or don't exist, or when other institutions that standard economic thinking takes for granted are absent or flawed.

The implication of each of these absences or flaws is that free markets, left to their own devices, do not necessarily deliver the positive outcomes claimed for them by textbook economic reasoning that assumes that people have full information, can trade in complete and efficient markets, and can depend on satisfactory legal and other institutions. As Stiglitz nicely puts the point, "Recent advances in economic theory"—he is in part referring to his own work—"have shown that whenever information is imperfect and markets incomplete, which is to say always, and especially in developing countries, then the invisible hand works most imperfectly."

As a result, Stiglitz continues, governments can improve the outcome by well‐chosen interventions. (Whether any given government will actually choose its interventions well is another matter.) At the level of national economies, when families and firms seek to buy too little compared to what the economy can produce, governments can fight recessions and depressions by using expansionary monetary and fiscal policies to spur the demand for goods and services. At the microeconomic level, governments can regulate banks and other financial institutions to keep them sound. They can also use tax policy to steer investment into more productive industries and trade policies to allow new industries to mature to the point at which they can survive foreign competition. And governments can use a variety of devices, ranging from job creation to manpower training to welfare assistance, to put unemployed labor back to work and, at the same time, cushion the human hardship deriving from what—importantly, according to the theory of incomplete information, or markets, or institutions—is no one's fault.

Stiglitz complains that the IMF has done great damage through the economic policies it has prescribed that countries must follow in order to qualify for IMF loans, or for loans from banks and other private‐sector lenders that look to the IMF to indicate whether a borrower is creditworthy. The organization and its officials, he argues, have ignored the implications of incomplete information, inadequate markets, and unworkable institutions—all of which are especially characteristic of newly developing countries. As a result, Stiglitz argues, time and again the IMF has called for policies that conform to textbook economics but do not make sense for the countries to which the IMF is recommending them. Stiglitz seeks to show that the consequences of these misguided policies have been disastrous, not just according to abstract statistical measures but in real human suffering, in the countries that have followed them.


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Most of the specific policies that Stiglitz criticizes will be familiar to anyone who has paid even modest attention to the recent economic turmoil in the developing world (which for this purpose includes the former Soviet Union and the former Soviet satellite countries that are now unwinding their decades of Communist misrule):

Fiscal austerity. The most traditional and perhaps best‐known IMF policy recommendation is for a country to cut government spending or raise taxes, or both, to balance its budget and eliminate the need for government borrowing. The usual underlying presumption is that much government spending is wasteful anyway. Stiglitz charges that the IMF has reverted to Herbert Hoover's economics in imposing these policies on countries during deep recessions, when the deficit is mostly the result of an induced decline in revenues; he argues that cuts in spending or tax hikes only make the downturn worse. He also emphasizes the social cost of cutting back on various kinds of government programs—for example, eliminating food subsidies for the poor, which Indonesia did at the IMF's behest in 1998, only to be engulfed by food riots.

High interest rates. Many countries come to the IMF because they are having trouble maintaining the exchange value of their currencies. A standard IMF recommendation is high interest rates, which make deposits and other assets denominated in the currency more attractive to hold. Rapidly increasing prices—sometimes at the hyperinflation level—are also a familiar problem in the developing world, and tight monetary policy, implemented mostly through high interest rates, is again the standard corrective. Stiglitz argues that the high interest rates imposed on many countries by the IMF have worsened their economic downturns. They are intended to fight inflation that was not a serious problem to begin with; and they have forced the bankruptcy of countless otherwise productive companies that could not meet the suddenly increased cost of servicing their debts.

Trade liberalization. Everyone favors free trade—except many of the people who make things and sell them. Eliminating tariffs, quotas, subsidies, and other barriers to free trade usually has little to do directly with what has driven a country to seek an IMF loan; but the IMF usually recommends (in effect, requires) eliminating such barriers as a condition for receiving credit. The argument is the usual one, that in the long run free trade practiced by everyone benefits everyone: each country will arrive at the mixture of products that it can sell competitively by using its resources and skills efficiently. Stiglitz points out that today's industrialized countries did not practice free trade when they were first developing, and that even today they do so highly imperfectly. (Witness this year's increase in agricultural subsidies and new barriers to steel imports in the US.) He argues that forcing today's developing countries to liberalize their trade before they are ready mostly wipes out their domestic industry, which is not yet ready to compete.

Liberalizing Capital Markets. Many developing countries have weak banking systems and few opportunities for their citizens to save in other ways. As one of the conditions for extending a loan, the IMF often requires that the country's financial


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markets be open to participation by foreign‐owned institutions. The rationale is that foreign banks are sounder, and that they and other foreign investment firms will do a better job of mobilizing and allocating the country's savings. Stiglitz argues that the larger and more efficient foreign banks drive the local banks out of business; that the foreign institutions are much less interested in lending to the country's domestically owned businesses (except to the very largest of them); and that mobilizing savings is not a problem because many developing countries have the highest savings rates in the world anyway.

Privatization. Selling off government‐ owned enterprises—telephone companies, railroads, steel producers, and many more—has been a major initiative of the last two decades both in industrialized countries and in some parts of the developing world. One reason for doing so is the expectation that private management will do a better job of running these activities. Another is that many of these public companies should not be running at all, and only the government's desire to provide welfare disguised as jobs, or worse yet the opportunity for graft, keeps them going. Especially when countries that come to the IMF have a budget deficit, a standard recommendation nowadays is to sell public‐sector companies to private investors.

Stiglitz argues that many of these countries do not yet have financial systems capable of handling such transactions, or regulatory systems capable of preventing harmful behavior once the firms are privatized, or systems of corporate governance capable of monitoring the new managements. Especially in Russia and other parts of the former Soviet Union, he says, the result of premature privatization has been to give away the nation's assets to what amounts to a new criminal class.

Fear of default. A top priority of IMF policy, from the very beginning, has been to maintain wherever possible the fiction that countries do not default on their debts. As a formal matter, the IMF always gets repaid. And when banks can't collect what they're owed, they typically accept a "voluntary" restructuring of the country's debt. The problem with all this, Stiglitz argues, is that the new credit that the IMF extends, in order to avoid the appearance of default, often serves only to take off the hook the banks and other private lenders that have accepted high risk in exchange for a high return for lending to these countries in the first place. They want, he writes, to be rescued from the consequences of their own reckless credit policies. Stiglitz also argues that the end result is to saddle a developing country's taxpayers with the permanent burden of paying interest and principal on the new debts that pay off yesterday's mistakes.

Stiglitz's indictment of the IMF and its policies is more than just an itemized bill of particulars. His theme is that there is a coherence to this set of individual policies, that the failings of which he accuses the IMF are not just random mistakes. In his view these policies—what he labels the "Washington consensus"—add up to something that is unattractive, if not outright repugnant, in several different ways.


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First, Stiglitz repeatedly claims that the IMF's policies stem not from economic analysis and observation but from ideology—specifically, an ideological commitment to free markets and a concomitant antipathy to government. Again and again he accuses IMF officials of deliberately ignoring the "facts on the ground" in the countries to which they were offering recommendations. In part his complaint is that they did not understand, or at least did not take into account, his and other economists' theoretical work showing that unfettered markets do not necessarily deliver positive results when information or market structures or institutional infrastructure are incomplete.

More specifically, he argues that the IMF ignores the need for proper "sequencing." Liberalizing a country's trade makes sense when its industries have matured sufficiently to reach a competitive level, but not before. Privatizing government‐owned firms makes sense when adequate regulatory systems and corporate governance laws are in place, but not before. The IMF, he argues, deliberately ignores such factors, instead adopting a "cookie cutter" approach in which one set of policies is right for all countries regardless of their individual circumstances. But importantly, in his eyes, the underlying motivation is ideological: a belief in the superiority of free markets that he sees as, in effect, a form of religion, impervious to either counterarguments or counterevidence.

A further implication of this belief in the efficacy of free markets, according to Stiglitz, is that the IMF has abandoned its original Keynesian mission of helping countries to maintain full employment while they make the adjustments they need in their balances of payments; instead the IMF recommends policies that result in steeper downturns and more widespread joblessness. He does not argue, of course, that the IMF prefers serious recessions or unemployment per se. Rather it simply acts on the belief—seriously mistaken in his view—that allowing free markets to do their work will automatically take care of such problems. By extension, he argues, the IMF also does not act to promote economic growth (which helps to produce full employment). Again the claim is not that the IMF dislikes growth per se, but that it believes free markets are all that is needed to make growth happen.

As a further consequence of the misguided policies that follow from this "curious blend of ideology and bad economics," Stiglitz argues, the IMF itself is responsible for worsening—in some cases, for actually creating—the problems it claims to be fighting. By making countries maintain overvalued exchange rates that everyone knows will have to fall sooner or later, the IMF gives currency traders a one‐way bet and therefore encourages market speculation. By forcing countries that are in trouble to slash their imports, the IMF encourages the contagion of an economic downturn from one country to its neighbors. By making countries adopt high interest rates that stifle investment and bankrupt companies, the IMF encourages low confidence on the part of foreign lenders. At the same time, by repeatedly coming to these lenders' rescue, the IMF encourages lax credit standards.


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Second, and more darkly, the IMF, in Stiglitz's view, systematically acts in the interest of creditors, and of rich elites more generally, in preference to that of workers, peasants, and other poor people. He sees it as no accident that the IMF regularly provides money that goes to pay off loans made by banks and bondholders who are eager to accept the high interest rates that go along with assuming risk—while preaching the virtues of free markets as they do so—although they are equally eager to be rescued by governments and the IMF when risk turns into reality.

Stiglitz also thinks it is no coincidence that food subsidies and other ways of cushioning the hardships suffered by the poor are among the first programs that the IMF tells countries to cut when they need to balance their budgets. He observes that IMF officials tend to meet only with finance ministers and central bank governors, as well as with bankers and investment bankers; they never meet with poor peasants or unemployed workers. He also notes that many IMF officials come to the Fund from jobs in the private financial sector, while others, after working at the IMF, go on to take jobs at banks or other financial firms.

Here again Stiglitz's point is that the IMF's mistakes are not random but the systematic consequence of its fundamental biases. His argument is as much about the policies the IMF doesn't recommend as the ones it does:

Stabilization is on the agenda; job creation is off. Taxation, and its adverse effects, are on the agenda; land reform is off. 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.

One specific example, land reform, sharply illustrates what he has in mind. As Stiglitz points out, in many developing countries a small group of families own much of the cultivated land. Agriculture is organized according to sharecropping, with tenant farmers keeping perhaps half, or less, of what they produce. Stiglitz argues,

The sharecropping system weakens incentives—where they share equally with the landowners, the effects are the same as a 50 percent tax on poor farmers. The IMF rails against high tax rates that are imposed against the rich, pointing out how they destroy incentives, but nary a word is spoken about these hidden taxes.... Land reform represents a fundamental change in the structure of society, one that those in the elite that populates the finance ministries, those with whom the international finance institutions interact, do not necessarily like.

Stiglitz considers, and rejects, the view that these and other choices are the result of a conspiracy between the IMF and powerful interests in the richer countries—a view that is increasingly popular among the anti‐globalization protesters who now appear at the IMF's (and the World Bank's) meetings. Stiglitz's view is that in recent decades the IMF "was not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community."


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Finally, Stiglitz sees the IMF's systematic biases as a reflection of a deeper moral failing:

The lack of concern about the poor was not just a matter of views of markets and government, views that said that markets would take care of everything and government would only make matters worse; it was also a matter of values.... While misguidedly working to preserve what it saw as the sanctity of the credit contract, the IMF was willing to tear apart the even more important social contract.

Throughout the book, the sense of moral outrage is evident.

3.

Do Stiglitz's criticisms hold up?

To begin, it is easy enough to accuse Stiglitz of selective memory. From reading Globalization and Its Discontents, one would never know that the IMF had ever done anything useful. Or that Stiglitz, and his colleagues first at the Council of Economic Advisers and then at the World Bank, had ever gotten anything wrong. Or that those against whom he often argued in the US government—especially at the Treasury, which he continually portrays as complicit in the IMF's misdeeds, but at the Federal Reserve System too—had ever gotten a question right. (In the book's sole mention of Alan Greenspan, Stiglitz accuses him of being excessively concerned with inflation to the exclusion of a vigorous expansion that could have otherwise taken place in the US during the Clinton years.)

One can also disagree with Stiglitz over the consequences of what the IMF plainly did, even including those policies it pursued that most people now agree proved counterproductive. By 2002 the Asian financial crisis of 1997–1998 is receding into the past. While some of the affected countries (most obviously Indonesia) still feel its effects, by now others have made solid recoveries. Stiglitz is right that they have not regained, and probably will not, the rates of growth they achieved before the crisis. But those rapid growth rates may well have been unsustainable in any case. Even in Russia, where per capita income remains well below what it was when the Soviet Union collapsed, and where the IMF pursued the policies toward which Stiglitz is the most scathing, the economic situation looks better today than it did when he was writing his book.

A more fundamental problem, as Stiglitz readily acknowledges, is that we cannot reliably know whether the consequences of the IMF's policies were worse than whatever the alternative would have been. Many longtime observers of the developing world will notice that Stiglitz rarely mentions economic policy mistakes that poor countries make on their own initiative. Nor does he pay much attention to the large‐scale corruption that is endemic in many developing economies—except in the case of corruption in Russia, where he argues that the privatization program


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pushed by the IMF opened the way for corruption on a historically unprecedented scale. He also never points out that the typical developing country spends far more on its military forces (to fight whom?) than it receives in foreign aid; yet it would seem necessary to take account of such wasteful expenditures, along with graft in all its forms, if one is to give a clear picture of why the nondeveloping economies are not succeeding.

It is surprising too, in light of his emphasis on the absence of adequate regulation and supervision of financial institutions in the developing world, that Stiglitz does not make more of the mistakes made by private‐sector businesses. For example, what made Korea vulnerable to the 1997–1998 Asian turmoil was that the country's business conglomerates (the "chaebols") had borrowed too heavily, and that the country's banks had financed these loans by borrowing in US dollars and relending in Korean won. True, banks abroad that were lending in dollars to the Korean banks may have become excessively confident that the IMF would bail them out if anything went wrong. But surely much of the fault lay with Korea's own businessmen and bankers. And once they had built their house of cards, how much damage would its inevitable collapse have caused if the IMF had simply stayed away?

Defenders of the IMF cannot claim that all went well after countries implemented the Fund's recommendations. But they would presumably argue that events would have turned out even worse on some alternative course. They would also presumably argue that of course they knew that information was imperfect, and markets incomplete, and institutions absent, in the countries that came to the IMF for assistance. The issue, to be argued on a case‐by‐case basis, is just what different set of actions might therefore have proved more beneficial.

Interestingly, there is also disagreement today over just how prevalent dire poverty is in the developing world—and, what is more important, whether poverty is increasing or decreasing. Stiglitz echoes the standard view that the number of people around the world living on less than $1 per day, or $2 per day, has been increasing in recent years. By contrast, his own colleague in the Columbia Economics Department, Xavier Sala‐i‐Martin, has recently published a study arguing just the opposite.[3] Sala‐i‐Martin's point is that for purposes of assessing whether someone is economically well off or miserable, what matters is not how many US dollars the person's income could buy in the foreign exchange market but what standard of living that income can support in the place where he or she lives. Because the currency values established in foreign exchange markets (and also the values that governments set officially for currencies for which there is no market) often do not accurately reflect purchasing power, the difference between the two measures of income is sometimes large.

In India, for example, the average person's income in rupees in 2000 translated into just $460 per year at the prevailing market exchange rate of 44 rupees per dollar.


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But because food, clothing, housing, and other consumer necessities are so much cheaper in India than in the US, the same amount of rupees was equivalent to an American income of nearly $2,400. Similarly, the average Chinese income in 2000 was $840 at the official yuan–dollar market exchange rate, but more than $3,900 if measured on a purchasing power equivalent basis.[4]

Even if we allow for these differences in the cost of living, the number of people in the world who live on the equivalent of $1 per day, or $2 per day, is still depressingly large: according to Sala‐i‐Martin's estimate, nearly 300 million, and not quite 1 billion, respectively. But this is far below the 1.2 billion and 2.8 billion figures that have become familiar in public discussion and are used by Stiglitz. More important, Stiglitz follows the more familiar view in saying that these totals are increasing, but Sala‐i‐Martin estimates that they are declining despite the rapid growth in world population. As a result, he finds, the proportion of people living on what amounts to $1 per day has fallen from 20 percent of the world's population a quarter‐century ago to just 5 percent today, while the $2‐per‐day poverty rate has fallen from 44 percent to 19 percent.

Much empirical research will have to be done and much analytical debate will have to take place before anyone can confidently decide which of these contrasting measurements is the more accurate. But it is worth pointing out that the major source of the decline in poverty over the last quarter‐century, according to Sala‐i‐Martin's calculation, is the dramatic reduction in poverty in China, the world's most populous country—and Stiglitz, too, praises China's performance as one of the developing world's great recent economic success stories. (In keeping with his central theme, he argues that China succeeded in reforming its economy and reducing its poverty because it ignored the IMF's advice to liberalize and privatize abruptly, and instead followed the gradualist approach, adapted to its own situation, which he favors.) To be sure, the plight of many developing countries, especially in sub‐Saharan Africa, remains dire, as Sala‐i‐Martin also points out, and it may well be deteriorating. But if attention is centered on people rather than countries, the great advances made in China, and to a lesser extent in India—which together account for nearly 38 percent of the world's population—necessarily represent a very significant improvement.

Stiglitz's attack on the IMF raises not just factual (and counterfactual) questions but substantive issues as well, particularly his argument that the IMF acts on behalf of banks and bondholders, and rich countries more generally, and therefore against the interests of the poor. To what extent is the IMF supposed to act as lending institutions ordinarily act? Stiglitz complains at length, and with many specific cases to cite, that the IMF violates countries' economic sovereignty when it requires them to carry out its policy recommendations as a condition for its granting credit. But don't responsible lenders normally impose such conditions on borrowers? Stiglitz never acknowledges that today the IMF faces serious criticism from many


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economists and politicians in the West on the ground that it makes loans with too few conditions, so that the borrowing countries often simply end up wasting the money.[5]

Or should the IMF think of itself not as a lending institution, acting as responsible lenders normally do, but instead as an institution charged solely with promoting the welfare of the borrowing countries, with waste of some credits to be expected? Some parts of Stiglitz's complaint are not so much about the IMF per se as about the absence of some form of international authority capable of imposing on citizens who are already relatively well off the burden of assisting their less fortunate fellow human beings elsewhere.

To be sure, the world's rich countries could simply agree among themselves to devote a much greater share of their own incomes to foreign aid (a frequently suggested standard is 1 percent of GDP), either out of a sense of moral obligation or in recognition that raising the incomes of poor countries would create benefits spilling over to the industrialized world as well. But in fact there is no such agreement. The foreign aid that most rich countries give is shrinking compared to their GDP, and the efficacy of such aid is increasingly being challenged anyway.

Even within countries with firmly established democratic governments, there is always debate about how generous such assistance should be and what form it should take. But a large part of what troubles Stiglitz and many others who share his views of inequality among countries is that there is not only no such agreement but also no effective mechanism—what he calls "systems of global governance"—for even choosing a policy in this important area and then making it stick. The earnest desire in some quarters for a more formal approach to international burden‐sharing, together with the equally sincere resistance to the idea among others, is nothing new. But it is worth recognizing explicitly that it is central to the question of inequality.

Moreover, the matter at issue is deeper than simply whether there should or should not be functioning institutions empowered to act, in effect, as a world government. What obligations the citizens of one country owe to citizens of another is a question that goes to the heart of what is involved in being a nation‐state and in acting as a responsible human being. Is it morally legitimate for US citizens to pay taxes to provide fellow Americans with a minimum standard of health care under Medicaid, or a minimum standard of nutrition through food stamps, that is far above what the average Angolan receives—and not at the same time be willing to pay the costs of bringing Angola, and the rest of the world's low‐income countries, up to that standard? Most Americans will readily answer yes. But as philosophers like John Rawls and Thomas Pogge have argued, wholly apart from the practical benefits that we might gain from alleviating human misery abroad, justifying in moral terms why we owe more to strangers who are close at hand than we owe to strangers who are far away turns out to be complicated and, in the end, extremely difficult.


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Many of the more practical economic elements of Stiglitz's argument are also issues of long standing. He makes a strong case for policies that favor gradualism over "shock therapy"; that put the emphasis not on what developing countries have in common but on how each is different; that place the concerns of the poor above those of creditors; that give maintaining full employment a higher priority than reducing inflation (at least when inflation is less than 20 percent a year); and that fight poverty and promote economic growth directly, rather than merely establish conditions under which economies will be likely to grow, and poverty to decline, on their own. There is serious debate over each element in this program. Stiglitz provides a powerful logical case, together with much by way of both broad‐based evidence and firsthand specifics, to support his side on each of these issues. But his objective is not to give a balanced assessment of the debate.

Stiglitz has presented, as effectively as it is possible to imagine anyone making it, his side of the argument, including the substantive case for the kind of economic development policies he favors as well as his more specific indictment of what the IMF has done and why. His book stands as a challenge. It is now important that someone else—if possible, someone who thinks and writes as clearly as Stiglitz does, and who understands the underlying economic theory as well as he does, and who has a firsthand command of the facts of recent experience comparable to his—take up this challenge by writing the best possible book laying out the other sides of the argument. What is needed is not just an attempt to answer Stiglitz's specific criticisms of the IMF but a book setting out the substantive case both for the specific policies and also for the general policy approach that the IMF has advocated.

Who might write such a book? The most obvious candidate is the former MIT economist Stanley Fischer, who throughout the years that Stiglitz's analysis covers was the IMF's first deputy managing director—that is, the Fund's second‐highest ranking official, but for most observers, the person who, far more than anyone else, actually set the direction of the organization's policies. Another is my Harvard colleague (now president of the university) Lawrence Summers, who served as the US deputy treasury secretary, and then secretary, during these years. Supporters of the IMF in the academic world, like MIT's Rudiger Dornbusch, may lack the firsthand "who said what to whom" knowledge that comes from high‐level public service, but they are clear‐thinking economists and powerful advocates nonetheless. In the absence of such an answer, however, Stiglitz's book will surely claim a large place on the public stage. It certainly stands as the most forceful argument that has yet been made against the IMF and its policies.

Notes

[1] Data from the 1999/2000 World Development Report, Table 2.


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[2] These are my calculations based on data in the 2001 World Development Indicators; 1999 is the latest year for which full data are available. Some countries that are presumably poor enough to be in the "lowest‐income fifty"—for example, Afghanistan—are excluded because per capita income data are not available for them.

[3] "The Disturbing 'Rise' of Global Income Inequality," National Bureau of Economic Research Working Paper No. w8904, April 2002.

[4] Data from the 2002 World Development Report, Table 1.

[5] Surprisingly, Stiglitz is not consistent in his own treatment of the question of what conditions are appropriate for loans. He repeatedly castigates the IMF for imposing its officials' views over those of government officials in debtor countries. But he boasts about how the World Bank, where he worked, forced Russia to accept stringent conditions in order to receive a loan.

Letters

November 21, 2002: Thomas W. Pogge, What Is Poverty?

Review of Joseph E. Stiglitz’s Globalization and its Discontents

(W.W. Norton, New York and London)

Joe Stiglitz has written an important book. It should be read by anyone interested in

economic development, public policy in an era of globalization, and the political economy

of decision making in international organizations. It is part memoir, part manifest, and part

criticism of the International Monetary Fund (IMF). As a memoir, it is entertaining and

informative. It tells the story of how Professor Stiglitz went to Washington, and did not

like it there. He found out that politics was the main sport played inside the beltway, and

that ideology was often more important than rigorous intellectual debate. Worse yet, he got

little respect. People in high places did not always want to listen to him, and when they

did, they often ignored his advice.

As a manifest, the book is powerful. One does not have to agree with everything

Stiglitz has to say, to recognize that many of his ideas are important and deserve to

be discussed seriously. As a result of the debate generated by the book, some policies

that have become readily accepted in Washington are likely to be revised in the

future.

The book is at its weakest when it comes to the criticism of the IMF. And this is not

only because of what Stiglitz has to say; it is mostly because of how he says it. The

tone is overly hostile and aggressive, and he misses no opportunity to insult the IMF

staff. According to Stiglitz, ‘‘intellectual consistency has never been the hall-mark of

the IMF,’’ and the staff systematically practices ‘‘bad economics.’’ His characterizations

of IMF economists and policies are unfair and, in many cases, self-serving. I believe

that the book would have been more effective had Stiglitz chosen a more temperate

style.

1. The main argument

The main tenet of the book is simple, and goes something like this: pro-global-

ization policies have the potential of doing a lot of good, if undertaken properly and if

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they incorporate the characteristics of each individual country. Countries should

embrace globalization on their own terms, taking into account their own history,

culture, and traditions. However, if poorly designed—or if a cookie-cutter approach is

followed—pro-globalization policies are likely to be costly. They will increase

instability, make countries more vulnerable to external shocks, reduce growth, and

increase poverty.

The problem, according to Stiglitz, is that globalization has not been pushed

carefully, or fairly. On the contrary, liberalization policies have been implemented too

fast, in the wrong order, and often using inadequate—or plainly wrong—economic

analysis. As a consequence, he argues, we now face terrible results, including

increases in destitution and social conflict, and generalized frustration. The culprits

are the IMF and its ‘‘market fundamentalists,’’ the ‘‘Washington Consensus,’’ and the

US Treasury.

Stiglitz believes that in the early 1990s, the IMF, the World Bank and the US

Treasury launched a conspiracy of sorts to run worldwide economic reform—this is the

infamous ‘‘Washington Consensus.’’ This view, however, is overly simplistic and

ignores the evolution of reform thinking during the last two decades. In the 1980s

and early 1990s, policy makers in many developing nations were moving faster than

the multilaterals or the Treasury. In Argentina, Chile, and Mexico, for example, the

reforms were the result of a ‘‘national consensus’’ that was more imaginative, daring

and far-reaching than anything bureaucrats in Washington were willing to accept at that

time. It is well known, for example, that the IMF was initially critical of Chile’s social

security reform, it opposed Argentina’s currency board, and it was highly skeptical of

Mexico’s trade-opening strategy during the mid-1980s. If anything, the original

emphasis on how to undertake economic reform came from a group of developing

countries’ economists—many of them from Latin America—and not from the ranks of

the multilaterals.

Three interrelated policy issues are at the center of Stiglitz’s criticism of global-

ization. (1) In designing reform packages during the 1990s, crucial aspects of the

sequencing and pace of reform were ignored. As a result, in many countries, reform

was implemented too fast—Stiglitz prefers gradualism—and in the wrong order. (2)

Advocating (and imposing) capital account liberalization was a huge mistake. And (3),

the IMF response to crises—and in particular to the East Asian crisis—was a disaster

that made things worse rather than better. In particular, imposing fiscal austerity and

raising interest rates were terrible mistakes that cost the East Asian countries several

points in terms of growth. Not surprisingly, given his theoretical writings during the last

35 years, Stiglitz frames his criticism around the insights of the theory of asymmetric

information.

Stiglitz claims that if things had been done differently, that is, if they had been

done his way, the outcome in terms of social conditions would have been significantly

better. At times, I found his arguments to be persuasive. At other times, however, I

had trouble believing what I was reading, and I had to ask myself if he was being

serious. This was the case, for example, when I read—in pp. 129 and 231—that the

2002 Argentine crisis could have been avoided by following a more expansive fiscal

policy!

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2. The sequencing and pace of reform and capital account liberalization

Stiglitz repeatedly argues that for economic liberalization to succeed, it is essential that

reform be implemented at the right speed and in the right sequence (see, for example, pp.

73–78). This is a very important principle, and Stiglitz is right in emphasizing it. I believe

that Stiglitz is particularly on target when he argues that opening the capital account too

soon is likely to generate serious dislocations.

This emphasis on speed and sequencing is not new in policy discussions, however. In

fact, since the beginning of the economics profession, it has been dealt with over and over

again. Adam Smith, for example, argued in The Wealth of Nations that determining the

appropriate sequencing was a difficult issue that involved, primarily, political consider-

ations (see the Cannan Edition, Book IV, Chapter VII, Part III, p. 121). Moreover, Smith

supported gradualism—just as Stiglitz does—on the grounds that cold-turkey liberaliza-

tion would result in a significant increase in unemployment.

In the early 1980s, the World Bank became particularly interested in understanding

issues related to sequencing and speed of reform. Papers were commissioned, conferences

were organized, and different country experiences were explored. As a result of the

discussion surrounding this work, a consensus of sorts developed on the sequencing and

speed of reform. The most important elements of this consensus included: (1) trade

liberalization should be gradual and buttressed with substantial foreign aid; (2) an effort

should be made to minimize the unemployment consequences of reform; (3) in countries

with very high inflation, fiscal imbalances should be dealt with very early on in the reform

process; (4) financial reform requires the creation of modern supervisory and regulatory

agencies; and (5), the capital account should be liberalized at the very end of the process,

and only once the economy has been able to expand successfully its export sector. Of

course, not everyone agreed with all of these recommendations, but most people did. In

particular, people at the IMF did not object to these general principles. For example, Jacob

Frenkel, who was to become the IMF’s Economic Counselor, argued in a mid-1980s

article in the IMF Staff Papers that the capital account should, indeed, be opened towards

the end of the reform process.

Sometime during the early 1990s, this received wisdom on sequencing and speed began

to be challenged. Increasingly, people in Washington began to call for simultaneous and

very fast reforms. Many argued that politically, this was the only way to move forward.

Otherwise, the argument went; reform opponents would successfully block liberalization

efforts. I remember being introduced to this view by an economist turned politician,

Vaclav Klaus. When I met him in Prague in 1991, he said: ‘‘Oh, you are the ‘sequencing’

professor. . .’’ and then he added, ‘‘you got it all wrong. There is not such a thing as an

optimal sequence. We should do as much as we can, as fast as we can.’’ When I asked him

what were the bases of his recommendation, he simply said, ‘‘politics, politics. . .’’ In the

book, Stiglitz is critical of Klaus’s ‘‘rapid and simultaneous’’ reform strategy, but his

criticism fails to address the political economy concerns that at the time worried Klaus and

other pioneer reformers in Central and Eastern Europe.

In 1992, and in response to what was perceived as US pressure to lift controls on

international capital movements, Yung Chul Park from Korea University organized a

conference on capital account liberalization. Most participants agreed that following an

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appropriate sequencing was vital for the success of liberalization. There was also broad

support for the idea that a premature opening of the capital account could entail serious

danger for the country in question (see S. Edwards (Ed.). Capital Controls, Exchange

Rates and Monetary Policy in the World Economy, Cambridge University Press, 1995). In

a paper presented at this conference, Robert Mundell captured succinctly the views of most

participants. The following quote is illustrative: ‘‘unfortunately. . .there are some negative

externalities [of an early capital account liberalization]. One is that the borrowing goes into

consumption rather than into investment, permitting the capital-importing country to live

beyond its means. . .without any offset in future output with which to service the loans.

Even if the liabilities are entirely in private hands, the government may feel compelled to

transform the unrepayable debt into sovereign debt rather than allow execution of

mortgages or other collateral’’ (p. 20).

At the 1992 Seoul conference on capital liberalization, one of the few dissenters was the

late Manuel Guitian, then a senior official at the IMF, who argued in favor of moving quickly

towards capital account convertibility. Yet, in stark contrast to Stiglitz’s characterization of

the IMF leadership, there was no dogma or arrogance in Guitian’s position. He listened to

others’ arguments, provided counter-arguments, and carefully listened to the counter

counter-arguments. I believe that Guitian’s paper—suggestively titled ‘‘Capital Account

Liberalization: Bringing Policy in Line with Reality’’—is one of the first written pieces that

documents the IMF’s change in views regarding sequencing and capital account convert-

ibility. After discussing the evolution of international financial markets, and expressing

reservations about the ‘‘capital-account-last’’ sequencing recommendation, Guitian sum-

marized his views as follows: ‘‘There does not seem to be an a priori reason why the two

accounts [current and capital] could not be opened up simultaneously. . .[A] strong case canbe made in support of rapid and decisive liberalization in capital transactions’’ (pp. 85–86).

Starting in 1995, more and more countries began to relax their controls on capital

mobility. In doing this, however, they tended to follow different strategies and paths.

While some countries only relaxed bank lending, others only allowed long-term capital

movements, and yet others—such as Chile—used market-based mechanisms to slow down

the rate at which capital was flowing into the economy. Many countries, however, did not

need any prodding from the IMF or the US to open their capital account. Indonesia and

Mexico—just to mention two important cases—had a long tradition of free capital

mobility, which preceded the events discussed in this book, and never had any intention

of following a different policy.

But agreeing that sequencing is important is not the same as saying that capital controls

should never be lifted. A difficult and important policy issue—and one that Stiglitz does

not really tackle in this book—is how and when to remove impediments to capital flows.

Recent research that uses new and improved measures on the degree of capital mobility

suggests that a freer capital account has a positive effect on long run growth in countries

that have surpassed a certain stage in the development process, and have strong institutions

and domestic capital markets. Also, there is some evidence suggesting that price-based and

transparent mechanisms, such as the flexible tax on short-term inflows used by Chile

during much of the 1990s, work relatively well as a transitional device. It allows for some

capital mobility and discourages short-term speculative monies; at the same time, it avoids

arbitrary decisions by bureaucrats. However, as I have argued elsewhere, even Chile-style

Book reviews 255

capital controls have costs, and they did not spare Chile from contagion or macro

instability during the second half of the 1990s.

3. Crisis management in East Asia

Stiglitz is particularly critical of the way in which the IMF handled the East Asian

crisis. In his view, major mistakes included (1) closing down, in the middle of a financial

panic, a number of banks in Indonesia; (2) bailing out private and mostly foreign creditors;

(3) not allowing the imposition of capital controls on outflows; and (4) imposing tight

fiscal policies and high interest rates. He claims that the experiences of China and India,

two countries that did not suffer a crisis, and of Malaysia—which did not follow the IMF’s

advice, and recovered quickly—support his views. This argument is highly unpersuasive,

however. Anyone mildly informed knows that there are many reasons why India and

China have not faced a crisis, and attributing this to the presence of capital controls is

overly simplistic, if not plainly wrong. The case of Malaysia is a bit more complicated. It

has recovered fast—although not as fast as South Korea—but it is not clear if this recovery

has been the result of the imposition of capital controls. What is clear, however, is that

Malaysia surprised many observers by tightening controls only temporarily; after approx-

imately a year, and once the economy had stabilized, the controls were lifted just as Dr.

Mahatir had originally announced.

What makes Malaysia’s case particularly interesting is that historically the temporary

use of controls is quite unique. The historical norm is closer to what happened in Latin

America during the 1980s debt crisis, when what was supposed to be a temporary

tightening of controls, became a long-term feature of the regional economies. Moreover, in

Latin America, the stricter controls on capital outflows did not encourage the restructuring

of the domestic economies, nor did they result in orderly reforms. The opposite, in fact,

happened. In country after country politicians experimented with populist policies that at

the end of the road deepened the crisis.

Two of Stiglitz’s criticisms are right on target: closing banks in the midst of a panic is a

major mistake. Also, massive bailouts are costly and ineffective. A number of people have

long recognized this, and the recent proposal by Anne Krueger, the IMF’s First Deputy

Managing Director, is a positive development in an effort to implement an effective

standstills framework.

Stiglitz’ most severe criticism refers to the IMF’s fiscal and interest rate policies. He

argues that the East Asian crisis called for expansionary and not, as the IMF insisted,

contractionary fiscal policies. In his view, by imposing fiscal retrenchment, the IMF made

a serious recession even deeper. Worse yet, the IMF-mandated increases in interest rates

generated a string of bankruptcies that deepened the confidence crisis and further

contributed to the slowdown. Stiglitz’s position, however, does not have—at least, not

yet—much empirical support, and fails to recognize how severe the situation had become

by late 1997. These were not, as he argues, ‘‘severe downturns’’ that required textbook-

type counter-cyclical fiscal policies; these were major currency crises. And a key feature

of currency crises is that the public drastically reduces its demand for government

securities and domestic money, turning to safer assets, especially foreign exchange. This

Book reviews256

constrains what governments in crisis countries can do: with a declining demand for

government securities—by both local and foreign investors—it is very difficult to run a

more expansionary fiscal policy unless the deficit is monetized. Moreover, if the decline in

the demand for domestic money is not brought to an end, the price of foreign exchange

will jump drastically—greatly overshooting its equilibrium level—and inflation will

increase significantly. If foreign currency denominated debt is high—as was the case in

a number of the East Asian countries—the weakening of the currency will result in a

significantly higher debt burden and further bankruptcies.

The first order of business in a major currency crisis is to re-establish confidence. While

massive and recurrent bankruptcies do not contribute towards achieving this goal, neither

do large deficits translated into money printing, or rapidly depreciating exchange rates. At

the end of the road, the issue is one of trade-offs, and the key question is by how much to

let the exchange rate depreciate, and by how much—and for how long—to increase

interest rates. The answer depends in part on the government’s objectives. If the authorities

want to avoid default and runaway inflation—clear key objectives of every East Asian

government—letting the exchange rate run amok is highly risky. Under most circum-

stances, pumping in liquidity when the demand for money is shrinking, and issuing

government debt when government securities are being dumped, is unlikely to restore

confidence or avoid an inflationary explosion.

4. Concluding remarks

I finish where I began: This is an important book that deserves to be read and discussed

widely. At the end of the road, however, I was left with a sense of emptiness. I have no doubt

that Stiglitz is sincere, and that he is truly pained by what he believes are major problems

with globalization. However, he is also rather naı̈ve. And it is this naivete, and not the

stridency of the delivery, what at the end makes this book fail. Stiglitz has too much

confidence on the ability of governments to do the right thing, and he exaggerates greatly the

extent of market failures. The agenda should be to improve institutions and incentives; to

promote competition and efficiency; to implement policies that raise productivity; to truly

help the poor and the destitute; to put an end to corruption and abuse; and to make sure that

globalization becomes a fair process, where the industrial countries also dismantle their

protective barriers. The agenda should not be to bring back bureaucrats, xenophobic auto-

crats, and corrupt politicians to run the economy. We have been there, and it does not work.

Sebastian Edwards

University of California,

Los Angeles, CA, USA

National Bureau of Economic Research, Cambridge, USA

E-mail address: [email protected]

9 September 2002

PII: S0304 -3878 (02 )00097 -4

Book reviews 257

Journal of Libertarian StudiesVolume 18, no. 1 (Winter 2004), pp. 89–98

2004 Ludwig von Mises Institutewww.mises.org

89

BOOK REVIEWSEdited by N. Stephan Kinsella*

JOSEPH E. STIGLITZ. GLOBALIZATION AND ITS DISCONTENTS.NEW YORK: W.W. NORTON, 2002. PP. xxii + 282.

Globalization and its Discontents is an enjoyable and thought-provoking book. It is probably the most readable, well-argued, andsubtle attack against globalization in the past few years. Although theauthor fights, in a rather dogmatic style with some shades of arrogance,against what he believes to be devious free-market attitudes, his proseis simple and accessible to a wide audience. But it is also deceptive.While the author emphasizes time and again that he is not levelingan attack against market principles and globalization in general, headvocates Keynesian policymaking (money printing and deficit spend-ing) on virtually every page.

It is an enjoyable book for the reader in search of the perfect world,and it suits the well-meaning anti-globalist who believes that sinceindividuals make mistakes, it is wiser to give other individuals theright to interfere. Put differently, Stiglitz strongly believes that badpolicymaking can be reduced by enlightened policymaking, both na-tionally and on a global scale. And that when international economicagencies do not behave properly, they must be reformed, made moretransparent and accountable, and less dependent on special interests.

The author believes that national leaders, by and large, pursue thewell-being of their peoples. He also believes that international agencies,like the IMF and the World Bank, must ensure that global phenomenamaintain a “human face,” and that national politicians be supported bysomebody in charge when something goes wrong. Indeed, it is hardto see much economics in these conclusions (see in particular the final

*General Counsel, Applied Optoelectronics, Inc. To submit reviews for thissection, visit www.stephankinsella.com/jls.

Journal of Libertarian Studies 18, no. 1 (Winter 2004)

90

chapter of the book). Some readers might also question its logic. Asthe following pages will explain, these doubts are justified.

The foreword to the book sets the pace. While taking good care toinform the possibly unaware reader about his fundamental contribu-tions to economic science, Professor Stiglitz, the 2001 Nobel Laureate,reveals that he became interested in real-world matters in 1993 whenhe joined the Clinton administration. He later continued his career atthe World Bank where he was chief economist and senior vice presi-dent. The author claims that this book is the result of those eye-openingexperiences, during which he found out that decision-making processesare often influenced by politics and ideology. He further realized thatglobalization without governance often leads to devastating results,especially on Less Developed Countries (LDCs).

Surprisingly, however, the core argument of the book is not theanalysis of the causal link between ideology, politics, and economicperformance in a globalized world. Rather, the author keeps concen-trating on bad policymaking carried out both by Western nationalgovernments and by international organizations. He posits a directcausal link between globalization and bad policymaking, and con-cludes by suggesting suitable rules for global economic management.According to Stiglitz, these rules should be fairness and consensus,and they should be designed through a democratic process so as toguarantee social justice and meet the needs of everybody.

His thesis is not developed in a theoretically consistent framework.Instead, the author offers a list of case studies in bad economics andpolicymaking by the IMF and the U.S. Treasury. The next paragraphswill therefore reconsider the main issues raised by Stiglitz, highlighthis most important arguments, and underscore some factual and meth-odological puzzles, these being in fact equivalent to a number ofimplicit assumptions.

POLITICALLY CORRECT MISCONCEPTIONSABOUT FREE MARKET ECONOMICS

Although much of the text (for instance, the first chapter) focuseson poverty and globalization, Stiglitz does not state explicitly that pov-erty is the consequence of globalization. On the contrary, in chapternine, he states clearly that the origin of all problems is the way global-ization has been managed, rather than globalization per se. In particu-lar, he feels that since mainstream economists became the managersof the globalization process, people have been betrayed, especially in

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LDCs. He adds that globalization policies and institutions—includingthe IMF and U.S. government—provoked a number of shocks that ledentire countries to major crises and disasters. Thus, Western global-izers should take the blame for such failures, since they made emptypromises and forced many LDCs to undertake suicidal steps towardliberalization.

As a matter of fact, Stiglitz never really defines what he meansby the term “globalization.” From a free-market perspective, glob-alization refers to the freedom to choose among opportunities avail-able on a global scale: Buyers are free to maximize their purchasingpower, and sellers are free to compete in order to satisfy consumers’needs and remunerate the scarce resources they use. In other words,globalization stands for a world of opportunities opened to buyers andthe end of privileges for sellers. It is, therefore, manifest that global-ization is an improvement for those who are allowed to choose, andfor those who can successfully satisfy buyers’ needs. But it is irrele-vant for those who cannot choose—where more-or-less altruistic poli-cymakers decide on their behalf—and it is even harmful for those whoenjoy normative privileges.

However, none of the above characterizes Stiglitz’s thought. Onecan guess that from his standpoint, globalization is little more than apromise generated by free-market fundamentalists—this being a syn-onym for neoclassical scholars, experts, and selected bureaucrats. Con-sistent with this view, whenever a country failed to grow after its rul-ers were exposed to neoclassical advisors, globalization is assumedto have been aborted. Once this rather bizarre definition of globaliza-tion is accepted, his book can be perceived as an instructive guide tothe misdeeds of neoclassical scholarship and the alibis it has providedto widespread criminal behavior. His account of the Russian crisis(chapter five) is a good example.

However, the argument runs into trouble when the author suggeststhat the solution to neoclassical policymaking is some kind of paternal-istic Third Way managed by caring and altruistic politicians devotedto achieving full employment. In particular, he ignores the possibilityof having made a mistake by equating globalization with neoclassicalthinking. And he seems to be totally unaware of the fact that the al-ternative to mainstream economics is not enlightened and expandedgovernance structures, but rather, to echo Mises’s wording, freedomto choose and discard. These oversights characterize both the author’sinterpretations of the crises and his view about what could have beendone instead.


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These decisive misunderstandings are apparent from the veryfirst pages. While acknowledging that free capital movements andfree trade have enhanced living standards in vast areas of the world,Stiglitz remarks that during the age of globalization, the poverty gaphas not been reduced. He forgets to tell the reader that most LDCs,where living standards are stagnating and people keep dying becauseof poverty and civil wars, have hardly been touched by globalizationor, more generally, by economic freedom. Accusing globalizationfor aborted economic growth in Africa since the end of colonialismis not only trite and inaccurate, it is ridiculous.

As for destabilization, Stiglitz seems to be the victim of his ownunderstanding of the free-market process. One does not need a doctor-ate to know that free-market economics is about preventing policy-makers from interfering in peaceful activities voluntarily undertakenby individuals. And it does not take much to see that if market forcesare set free, but policymakers do not withdraw and privileges do notdisappear, the system sooner or later breaks down. Still, the bookignores these basics, and actually eliminates the whole question byassuming with apparent casualness that there are many different formsof free markets (chapter nine).

Finally, the book falls in line with the well-known mantra wherebyall the evils of the developing world are the consequence of presentor past Western behavior. For instance, in Stiglitz’s view, Westernglobalizers forced LDCs to reduce their trade barriers and de factocreated huge trade deficits while destroying fragile production struc-tures. That is not just a terminological question or a somersault inlogic; it is bad economics. One wonders what happened to exchangerates. Free trade (and globalization) is a game whereby you cannothave losers, such as import-competing industries, without also havingwinners, such as exporters. Put differently, you can’t have importsunless you have exports to pay for them. Maybe exchange rates didnot depreciate enough because they were fixed and the local currencywas not convertible, or perhaps because foreign aid made sure thatcheap imports could flow in.

Whatever the correct answer is, globalization has nothing to dowith fixed exchange rates and inconvertible currencies. And if the Westis guilty of providing too much aid to the leaders of poor countries, asis probably true, Stiglitz should say so. But he doesn’t. Indeed, whenhe mentions the evils of fixed exchange rates, the author attributes themto the inconsistencies of the globalizers. Surely, Western protectionism

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hasn’t made life easy for third world countries, but protectionism isthe opposite of globalization. It is wrong to claim that the best pol-icy against protectionism is central planning with a human face orenlightened governance.

CASE STUDIES

After having suggested that globalization is the result of badpolicymaking enforced by the IMF and, to a lesser extent, by theWorld Bank and the WTO (chapter one), the rest of the book is, byand large, a sequence of anecdotes and case studies. On one side,Stiglitz describes the blind bureaucrats from the IMF, the repentedbut weak employees of the World Bank, and the greedy Americanestablishment that fought communism but forgot about democracy.On the other side, we meet the author himself, who modestly explainshow he abandoned the academic world in order to solve America’seconomic problems and, having done that, decided to move on tosolve world poverty. As the reader soon finds out, the author faceddisappointment, but fought hard and almost single-handedly to stopIMF colonialism.

Stiglitz’s cases are persuasive, but somewhat irrelevant and decep-tive. They are beside the point, since it is a gross mistake to considerneoclassical constructivism as a synonym for globalization. They aredeceptive, for although it is undeniable that advocating capital-marketsliberalization in, say, Ethiopia, may harm domestic banks if they areunable to offer good enough credit conditions to borrowers, it is wrongto conclude that farmers suffer as a result. Unfortunately, this rhe-torical strategy is a recurrent feature of the book.

Stiglitz offers various counterexamples to the development strate-gies recommended by the IMF. In particular, his implicit thesis isthat countries that turned down IMF advice did well. One case isBotswana (chapter two) which, incidentally, ranks relatively high (andhigher than Ethiopia) in the Index of Economic Freedom. Anothercase is China (chapter three). It would be hard to deny that Botswanawas right in rejecting IMF policymaking and constraints, or that thepolitical power of China was no match for any IMF bureaucrat. Butthe Botswana case does not demonstrate that the country’s successeswere due to socialist planning, enhanced regulation, protectionism, orexpansion in the bureaucracy. Nor would one claim that the Chineseleaders succeeded because they introduced further regulation and cen-tralized planning in the past two decades.


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Indeed, Stiglitz does not do it, either. As mentioned earlier, henever says that globalization per se is bad. He simply states that open-ing up may be beneficial if some preliminary conditions are met, andthat good governments can do desirable things. He hastily concludesthat whenever free-market blueprints failed, the explanations lie withWestern economic and political interference, starting with the IMFand U.S. Government, which forced good politicians to open up tooquickly. As a result, civil servants became corrupt, jobs were destroyed,and easy imports, foreign bankers, and high interest rates choked de-velopment. Finally, social tensions erupted, in some cases leading tocivil wars.

POLICIES

The economics of IMF policymaking occupies most of the book,since the author frequently deals with privatization, liberalization, for-eign direct investment, social tensions, and poverty. A review is notthe right place to discuss in detail the fragility of neoclassical econom-ics in these areas, which is the main goal of the author throughoutthe book. It may be enough to underscore Stiglitz’s main ponts. First,he argues, although too much government intervention is bad, thereare plenty of good things a government can do if properly enlightenedand informed, presumably by reformed international agencies. Second,the market does not yield perfect results, so free-market economicsis wrong unless proper institutions are in place, fairness enforced, andfull employment guaranteed. Third, the IMF was originally createdto get things right by following Keynesian guidelines, but was soonseduced by the dream of the invisible hand. Rather than accomplish-ing its original and true mission, it ended up colluding with Westernfinancial capitalism and pressure groups.

Once again, the reader is offered various examples:

• free trade, where imports are paid through foreign aid andexchange rates are irrelevant;

• free capital markets, which would undermine much-neededsubsidies and expose debtors to the consequences of bad rep-utations or bad borrowing decisions; and

• price liberalization, which would be unfair to inefficient orbadly located producers.

The argument is further developed in chapters four to seven, inwhich the Southeast Asian and the Russian crises are explored in detail,

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and where the virtues of gradual Keynesian transitions are opposedto the evils of IMF-style shock therapies. At this stage, Stiglitz’s ap-proach should no longer surprise the reader. Let us consider the Asiancase. In his view, Southeast Asia’s economies were doing fine until theWest forced them to open up their capital markets, destroy the miracle,and cause what the author defines as the most dramatic economiccrisis since the Great Depression.

However, some caution is in order. Although Stiglitz singles outIndonesia, Korea, and Thailand to illustrate the catastrophe, the well-informed reader cannot help remembering that in 2002, five yearsafter the 1997 crisis blew up, real GDP in those three countries wasrespectively 99%, 124%, and 105% of its pre-crisis level. As for thealleged domino effect, real GDP in developing Asia in 2002 was 33%higher than just before the crisis.1

Never mind the figures. Stiglitz is quite right in saying that the IMFshould have kept out of the whole story, but he is wrong in saying thatthose countries were in good shape prior to IMF intervention, and thatthe IMF precipitated the crisis. Indeed, why would speculators attackthese countries if they were in such healthy conditions to begin with?The truth of the matter is that globalization exposed economic dis-tortions and malfunctions, but the IMF delayed the moment whenthe distortions were exposed. The redistributive patchwork advo-cated by Stiglitz may appear to help temporarily, but they are merewindow dressing, and can hardly fix a sick system, as the Asian crisisdemonstrates. It is deplorable that the IMF played the window-dressinggame first, and then provided funds to bail out selected lenders.

Instead, the author accuses the IMF of having served Westernfinancial interests and having disregarded fairness, although the readerwill look in vain for a clear definition of fairness. He will find just ahint in chapters three and seven, where Stiglitz refers to fairness asone of the key elements of the social contract—the other being fullemployment. The author does not bother to explain by whom andwhere this contract was signed, nor does he clarify what was written init. Nonetheless, it is clear to him that governments broke the contractby not pursuing fairness, so violent attitudes by the residents were al-most legitimized. Put differently, he is persuaded that income transfersare one of the fundamental human rights, rather than being an abuse

1International Monetary Fund, World Economic Outlook (Sept. 2003), sta-tistical appendix: “Output.”


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by some at the expense of others. The IMF and the Washington con-sensus are therefore guilty, since they forced national governments torenege upon the social contracts.

GENERAL ISSUES

As a matter of fact, if the reader forgets about the author’s flightsinto morality, the main problem with the book appears to be its title,which should have been related to the economics and politics of inter-national agencies (the IMF in particular) and of the U.S. government,rather than to globalization. Once again, Stiglitz says very little aboutglobalization, and what he says rests on questionable foundations.Globalization is about deregulation and low taxation. These are notquite the same thing as active central banking, fixed exchange rates,and high taxation, which are the core components of many IMF poli-cies and macro-rescue plans in the past three decades.

As has been argued above, the author neglects the distinction, anddevelops three main theses. First, international agencies have done apoor job by trying to enforce neoclassical recipes. They have aggra-vated the economic conditions in many LDCs, and raised bad feelingsagainst anything coming from the West, and from the U.S. in particu-lar. Second, despite their past misdeeds, international agencies per seare not a bad idea. Their primary goal should, however, be restrictedto the provision of sound information and unconditional aid. Third,opening up (globalization) should not be rejected in principle, butdecisions about its timing, depth, and features should be a matter foreach national government to decide, especially when politicians are ofgood quality, and they demonstrate an ability to preserve consensus.

From a policymaking viewpoint, Stiglitz does not consistently ad-vocate a worldwide governance scheme for globalization. Global gov-ernance by enlightened and compassionate international bodies isdesirable, in his opinion, but each government should also be free toact as it judges appropriate. As for the meaning of the expression “goodgovernment,” he recommends fairness as the primary criterion to betaken into account for any development policy (chapter three). Nev-ertheless, one is left wondering about who decides what is fair, andwhether Stiglitz would be willing to accept the notion of fairness thatmany national governments have enforced in the past decades, irre-spective of IMF intervention.

Consistent with his assumption about fairness, Stiglitz considersprivatization and liberalization attractive, but only if they guarantee

Book Reviews

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extra jobs at fair conditions. Hence, his thesis in favour of conditionalglobalization and of policies aimed at spreading the costs if anythingundesirable happens—including bad lending and investment. There-fore, bad entrepreneurs should not be allowed to fail, but should berescued through money printing. After all, he argues, a little inflationis preferable to widespread poverty and civil war. It is not a new the-sis, and we leave it to the reader to evaluate the extent to which moneyprinting can solve the problems of faulty management and bad govern-ment, and whether it can provide suitable incentives for entrepreneu-rial activities or fairness to those layers of the population who cannotprotect themselves against inflation.

ONE CONCLUDING REMARK

This book illustrates and contributes significantly to one grossmisconception about globalization: Globalization does not identifypolicies, neither from neoclassical nor from Keynesian quarters. Wedo not know how people want to behave, what kind of safeguards theyprefer to have, or how much they are willing to pay for them. Free-market globalizers have nothing to say about that, and believe thatnobody has. This justifies Professor Stiglitz when he correctly criticizesIMF policymaking and inconsistencies (chapter eight), and it alsoexplains why he is in trouble when he suggests recipes that go beyondgeneric, but nevertheless treacherous, notions such as fairness andsocial consensus, almost bordering on demagoguery. See for instancechapter eight, where he confronts the legitimacy of property rightswith that of the social contract.

Instead, globalization is about the freedom to opt out of the pro-posed policies. As the Russian case demonstrates, a market systemrests on widely accepted behavioral rules. Stiglitz deserves credit forpointing out that Western consultants have contributed to suffocatingor destroying those rules. He also deserves credit for hinting thatthose consultants also helped centralized policy-making retain itscoercive power so that rent-seeking and collusion with the policy-maker continued to be the winning strategy (chapter seven). Of course,it is hardly surprising that under such conditions, alternative systemshave not come to the surface, but it is puzzling to see that the authorbelieves this to be the essence or the consequence of globalization.On the contrary, globalization in Russia and in some other countriesof the Soviet Empire was never the name of the game. Put differently,Stiglitz succeeds in showing the game and excels in describing it (see


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chapters six and seven), but equally frequently fails to call it by itsproper name: neoclassical constructivism.

ENRICO COLOMBATTO

University of [email protected]

stiglitz. globalization and its discontents 1

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