Globalization and Its Discontents by Joseph E. Stiglitz Norton, 282 pp., $24.95 THERE IS AN IMPORTANT BOOK to be written about the need to reexamine the international financial architecture that was erected long before currency traders in their twenties could push a button and move billions of dollars–or yen, or rupees, or pesos–across international borders in nanoseconds. And the man to write that book is the renowned economist Joseph Stiglitz. Alas, he hasn’t. Which is a pity, for to the task he set himself in his new book, “Globalization and Its Discontents,” Stiglitz brings an academic record and practical experience few can match: a full professor at Yale at age twenty-six; teaching stints at Oxford, Princeton, Stanford, and now Columbia; chairman of President Clinton’s Council of Economic Advisers; senior vice president and chief economist of the World Bank; and a winner of the Nobel Prize in economics. But instead of an analysis of economic consequences, “Globalization and Its Discontents” is a work by an author so overwrought that he almost equates the consequences of policy failures by the International Monetary Fund with the consequences of Nazi Germany’s final solution. Stiglitz told a Financial Times interviewer that he could not “sit idly by with this enormous suffering [presumably caused by the IMF] going on. One did think of other incidents when people sat silent when they should have spoken.” When asked what other incidents, Stiglitz replied, “Well, at a different order of magnitude, one thought about what happened in Germany.” A different order of magnitude, indeed. Stiglitz is right to rail against the willingness of the IMF to bail out friends and business associates of the likes of former Treasury secretary Robert Rubin and others who enter government and who influence subtly (and not so subtly) the “mind set” of the IMF’s policymakers and bureaucrats. But then, from arguing that the IMF reflects “the interests and ideology of the Western financial community,” Stiglitz moves to the accusation that key IMF personnel design policies that favor Wall Street in order to attract lucrative private-sector job offers. The widely respected Stanley Fischer, for instance, left his post as the second in command at the IMF to join “the vast financial firm” of Citigroup–which prompts Stiglitz to write: “One could only ask, Was Fischer being richly rewarded for having faithfully executed what he was told to do” by “the financial community?” “Of all the false inferences and innuendoes in the book,” mild-mannered Kenneth Rogoff, head of research at the IMF, responded, “this is the most outrageous.” The IMF, charges Stiglitz, is devoted to a one-size-fits-all solution to what he considers the very different problems faced by Asia after Thailand devalued its currency, by Russia during its transition from communism to its special form of cowboy capitalism, and by Argentina (the IMF’s “star student,” Stiglitz notes with wry satisfaction) when it became obvious that pegging its peso to the dollar could not survive the refusal of the national and regional governments to live within their means. This IMF solution begins with an austerity program that requires balancing the national budget either by raising taxes or cutting outlays. Economists have known that this is madness, says Stiglitz, ever since Herbert Hoover deployed these weapons–and thereby prolonged America’s Great Depression. The IMF anti-crisis kit also includes an insistence on the free movement of capital, markets open to imports, and a host of other tools designed to expose the client-country to globalization’s winds of change, even though these countries might not yet be ready to compete with the richer, industrialized nations. Finally, the IMF insists on its so-called “shock therapy”: the sudden relaxation of import and capital controls. This is a case of ideology trumping good sense and sound economics, according to Stiglitz, who prefers “the gradualist policies adopted by the Chinese.” These IMF policies constitute what Stiglitz characterizes as “the Washington Consensus,…a curious blend of ideology and bad economics, dogma that sometimes seemed to be thinly veiling special interests.” And the result is a failure to ensure that the benefits of globalization are shared “more equitably.” STIGLITZ MAKES CLEAR that he is not opposed to globalization, which “has the potential to enrich everyone in the world, particularly the poor.” But he is opposed to policies based on the “outworn presumption that markets, by themselves, lead to efficient outcomes.” And he is angry because the IMF enriches the already-rich and impoverishes the already-poor. IMF representatives rule from posh “five-star hotels in the capitals,” far from the villages whose farmers and weavers will be clobbered by its austerity programs that force client countries to curtail spending on health and education. In the case of Thailand, spending cut-backs increased the incidence of female prostitution and gutted “what had been one of the world’s most successful programs in fighting AIDS.” Here he is on to something. Economists are not bad at devising policies that in aggregate create wealth. But such policies create losers as well as winners, and economists are less good at getting the winners to cede some of their gains to the losers. Similarly, economists are reasonably good at generating policies that improve welfare in the long run. But they are less good at helping nations and individuals navigate the inevitable transition away from bad policies. So what is to be done? Stiglitz recommends fundamental reform of the governance of the IMF to downgrade the clout of the rich countries and the finance ministers that represent them (and the financial community). He wants to increase the voting rights of poorer countries, especially African nations. And he calls for greater transparency, for restricting the IMF to the role of crisis manager, for bankruptcy reforms, for better safety nets for the vulnerable, and for improved risk management. Most of all, he wants to change the “mind set” of the IMF so that it will recognize the limits of free markets in producing equitable solutions to economic problems: Sweden and several Asian nations have economic models that have “served them well” while “ensuring social justice.” He also demands greater receptivity by IMF bureaucrats to the possibility that the gradualism of China’s economic reform program might be superior to the shock therapy prescribed for, say, Russia. It is difficult to quarrel with much of this. Yes, an opening of minds to new ideas and contrarian thinking would benefit the IMF. Sure, austerity produces pain. Certainly, it would be a good thing to share the burdens and benefits of globalization more widely. Of course, there might be more than one path to economic reform and sustained growth. That’s the easy part. The harder part, and the part to which any serious student of economic policy must wish Stiglitz had devoted more of his energy, is to come up with something better. Consider Stiglitz’s allegation that IMF programs trail economic disaster in their wakes, with East Asia the most notable example. Stiglitz argues that the region’s straitened circumstances following the flight of capital and the 1997 financial crisis stemmed largely from the IMF’s inapt insistence on austerity, liberalization, and freedom of capital to exit the scene of the East Asian economic accident. But can we be certain that the IMF prescription failed to revive the patient? As a recent article in the Economist put it, “five years on, the most striking thing is how well many [East Asian] countries are doing, despite a stuttering global economy. . . . The International Monetary Fund, which failed miserably to foresee the crisis, deserves some credit.” STIGLITZ WOULD CONTEND that such praise fails to consider the distributional consequences of IMF reforms and that reliance on “trickle down” is not the most efficient way to ameliorate the plight of lower-income groups in developing countries. But would redistributionist programs of the sort that he espouses do any better, especially as they might be applied by the not-entirely democratic regimes and not-entirely selfless leaders that rule these nations? Might such efforts–which refuse to wait for the benefits of economic development to trickle down to the poor–end by aborting wealth-creating growth? And might the maintenance of controls on the repatriation of capital not serve as a warning to investors that any capital they commit to these countries is at great risk? Consider, as well, Stiglitz’s contention that the austerity programs suggested by the IMF hit the poor hardest. Regimes required to tighten their belts in return for IMF financial support, we are told, cut funds for education, health, and other social services, thereby providing no safety net for those hardest hit by the opening of their markets to international competition. That is probably true, although we are offered no analysis of the budgets of these nations to sustain those charges. But unfortunate and often inhumane choices of where to spend available resources cannot be laid solely at the door of the IMF. The leaders of developing countries rarely find themselves short of arms, private jets, Swiss bank accounts, or palaces, even during periods of IMF-prompted austerity. Nor are they notably long on empathy with their less well-off countrymen. It is far from clear that the IMF policies, rather than home-grown villains, are the cause of the problems of the world’s poor, especially in Africa, the one part of the world where poverty is not decreasing. Which brings us to Stiglitz’s proposal for increased representation of African nations in the councils of the IMF. There can be no denying that in a perfect world it would be sensible to confer more power on the recipients of IMF assistance so that the funds might be deployed more effectively. But we don’t live in that world. Ours is one in which kleptocratic African regimes impoverish their nations with a combination of misrule, military adventures, and policies that discourage inward investment. These atrocities can hardly be laid at the door of the IMF. Stiglitz is right, of course, that the industrialized world does not come to the policy table with clean hands. Barriers erected by the rich countries to the importation of the products of these poor countries, and farm subsidies such as those long in force in the European Union and now reinstituted in the United States, devastate the farmers of developing countries and demonstrate the hypocrisy of advanced nations that speak in glowing terms of the benefits of globalization and the free movement of goods, capital, and people. THE COMBINATION of incompetent-to-crooked regimes in many developing countries and uncaring-to-hypocritical Western governments forms the kind of hard reality Stiglitz once famously incorporated into economic theory to make it comport more fully with the world we live in now. But in this instance, he seems incapable of giving us guidance. There must be something better than reorganizing the IMF so that we can turn questions of optimally efficient agricultural reform over to Zimbabwe’s Robert Mugabe. Underlying Stiglitz’s complaints is the conviction that activist governments can contribute to social justice. Only the most ideological libertarian would deny that there is a role for government in creating and monitoring the conditions for a more humane society: establishing the rule of law, maintaining open and competitive markets, protecting property rights, providing an adequate supply of public goods such as education, and redistributing income to the deserving poor. But only the most purblind interventionist can ignore the massive human suffering often created by well-intentioned efforts to replace the decisions of markets with those of government ministers incapable of developing practical interventions that actually help the poor. In the end, the flaw in Stiglitz’s attack on the IMF is his refusal to consider the costs associated with the programs he is proposing. “Gradualism” in the introduction of reforms can easily develop into enduring protectionism. Preventing capital flight by permitting borrowing countries to imprison foreign capital or tax its owners if they choose to repatriate their money can discourage future crucial foreign investment. And prolonging the transition of developing countries to market economies can have costs that exceed the benefits. Now that Stiglitz has returned to the academy–and says that by virtue of disgorging this book he no longer is eligible for “a lot of lucrative consulting”–perhaps he will use his time to reflect on the possibility that government failure might in some instances overwhelm the market failure it is designed to correct, that moral hazard is a problem to be considered when bailing out not only private-sector investors but governments, and that not all the people who would be involved in overruling market forces are as well intentioned and as clever as he. Irwin M. Stelzer is director of regulatory studies at the Hudson Institute, U.S. columnist for the Sunday Times (London), and a contributing editor to The Weekly Standard.
