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