Paul Krugman

While Stiglitz rarely mentioned the IMF by name, he very publicly attacked “the Washington consensus” that the IMF, backed by the United States Treasury Department, has tried to enforce around the world. The consensus is that poor countries that rely on IMF intervention are expected to adhere to a series of “structural adjustments” that are supposed to be implemented within three years. Those adjustments include balancing budgets (or run surpluses), cutting subsidies for food and other necessities, raising interest rates, privatizing as many functions as possible, reducing trade barriers, eliminating controls on foreign investment and focusing on increasing exports.

Stiglitz, a former Stanford professor who also served as chief of Clinton’s Council of Economic Advisors before taking the World Bank job, has argued that the IMF applies a one-size-fits-all solution in these countries without taking the country’s specific history and institutional development into account. What might work in the United States may not work in countries with much different political and economic cultures.

Stiglitz is particularly harsh on how the IMF acted in Russia after the fall of the Soviet Union. He called the reforms “an ideological, fundamental, root-and-branch approach to reform as opposed to an incremental, piecemeal, and adaptive approach.” He described the Western advisors — including the IMF — as “market Bolsheviks” who thought that simply because they had the right textbooks, they could instantaneously revolutionize society, much as the Bolsheviks in 1917. Also, “some economic cold-warriors seem to have seen themselves on a mission to level the ‘evil’ institutions of communism.” This approach — which elevated rapid privatization of state property above all other goals — halved Russia’s economic output in a decade, while China, pursuing a more incremental approach that emphasized competition more than privatization, doubled its output in the same period. While growth plummeted, inequality in Russia shot up, as the privileged few plundered the country, shipping capital out (through the Bank of New York, among other places) as the IMF was trickling money in.

“The failures of the reforms that were widely advocated go far deeper [than how the reforms were implemented in Russia] — to a misunderstanding of the very foundations of a market economy,” Stiglitz told a development economics conference last spring. “At least part of the problem was an excessive reliance on textbook models of economics.” Moreover, he said, “even the creation of a market economy should be viewed as a means to broader ends. It is not just the creation of a market economy that matters, but the improvement of living standards and the establishment of sustainable, equitable and democratic development.”

In Asia, Stiglitz blames much of the economic crisis on many countries’ decisions, strongly encouraged by the IMF and the United States, to open up their financial markets rapidly without proper regulation. Then partly because of shortcomings in the regulation of financial markets in such developed countries as Japan and the United States, too much short-term investment rushed in, then rushed out. The IMF demanded high interest rate, tight money policies, designed to lure those foreign investors back into Thailand, Indonesia and Korea. But those policies pushed fragile businesses into bankruptcy, wreaking havoc on what were flawed but still basically vibrant economies. Borrowers in these countries certainly made mistakes, Stiglitz said, but the lenders were just as much at fault. Moreover, the powerful rating agencies — like Moody’s — were doubly in error. Stiglitz argues that they failed to alert banks and investors to the increasingly risky financial condition of countries like Thailand, then after the crash turned around and exaggerated the risk of returning to those countries, simply to make themselves look less foolish.

“Many countries followed the dictums of liberalization, stabilization, and privatization, the central premises of the so-called Washington consensus, and still did not grow,” he told a United Nations conference late last year. Similarly most of the countries that have grown most successfully in the past quarter-century — in East Asia — rejected much of the Washington consensus, he noted.

Stiglitz has a different approach to economic development than many of the traditional macro-economist number crunchers. Development, he argues, involves the transformation of society, including such non-economic processes as improving the status of women, not just creation of pockets of wealth. Effective strategies to develop poor countries must have the support of the population and empower them. Imposing strict economic rules on countries, as the IMF does in its structural adjustment policies, “reinforces traditional hierarchical relationships” and creates a sense of impotence, Stiglitz claimed. People are more likely to accept and take part in reform “if there is a sense of equity, of fairness, about the development process,” Stiglitz said last year in Geneva. “By contrast,” he continued, taking a barely veiled shot at the IMF, “a decision to, say, eliminate food subsidies that is imposed from the outside, through an agreement between the ruling elite and an international agency, is not likely to be helpful in achieving a consensus — and thus in promoting a successful transformation.”

Occasionally, World Bank president James Wolfensohn either appears to rein in Stiglitz or distance himself slightly. (He recently referred to Stiglitz as a “free spirit.”) But most close observers think that the two men largely agree on broad outlines and that there is a real, if at times overstated, difference between the Bank and the IMF. The IMF defends its record but rarely attacks Stiglitz.

This is not the first time there has been tension: the IMF role has changed and greatly expanded since the 1970s and often encroached on the long-term development turf of the Bank. With their different histories, missions and constituencies within member governments, the two institutions should naturally disagree to some extent.

But over the past two decades the “Washington consensus” has prevailed and largely shut down debate, despite the hammering of citizen groups, environmentalists and advocates of the world’s poor against both the Bank and the IMF. Indeed, many of Stiglitz’s critiques also apply to the actual practices of the Bank. Despite its pledges to pay more attention to the poor, to the environment and to aspects of development other than growth, two-thirds of the Bank’s outstanding loans are in support of “structural adjustment” programs (though at times to cushion the harsh blows on the poor). Also, environmentalist and human rights groups are attacking two big Bank projects nearing final approval — a massive relocation of Chinese farmers into a fragile region designated an autonomous region for Tibetans and a huge oil pipeline from Chad through Cameroon that critics say will ravage rain forest and simply benefit corrupt elites in the two countries.

Experts say the increased debate may ultimately lead to a less monolithic approach to global economic reform. “The biggest significance [of the split between the IMF and the Bank] is the willingness of the Bank and Stiglitz to challenge the macroeconomic policies of the IMF,” observes Robert Naimann, a research associate at the Preamble Center, a progressive think tank in Washington. “They’ve been forced to debate, and that creates more space. It’s one thing when developing countries face the IMF alone, and people say there’s no alternative, and it’s another thing when there’s this wide open policy debate.”

Even Ian Vasquez, director of the Project on Global Economic Liberty at the ultra-free market Cato Institute, agrees that Stiglitz’s arguments have been “constructive.” “It shows how when you give an institution like the IMF so much influence it monopolizes development views,” he said, “and I don’t think that’s a good idea.” Likewise, even though Andrea Durbin, director of international programs at Friends of the Earth, thinks that Stiglitz hasn’t incorporated environmental issues enough into his model, she sees Stiglitz as a “revolutionary” and “anomaly” within the global banking circles. “What’s refreshing about Joseph Stiglitz is he calls it like he sees it,” Durbin said, “even when his own institution is going the wrong way. And that’s unusual for a man in his position.”

As the IMF and World Bank meet, government finance ministers and bank officials will be discussing such issues as debt relief for poor countries and dealing with bankers mad about a recent IMF decision to permit Ecuador to default on some debts. The wider debate that Stiglitz has opened on the meaning of development, the constructive role of government, the limits of the market and the need for democratic transformation will be addressed tangentially, at best. But the record of car crashes and false starts on the road to global economic well-being suggests that the engineers of both economic engines and highways need to listen to Stiglitz and other critics of the “Washington consensus,” then start considering some fundamentally different designs.