8-9-2002

FMI v. BANCO MUNDIAL

K. Rogoff v.J. Stoglitz

An Open Letter¹
By Kenneth Rogoff,
Economic Counsellor and Director of Research,
International Monetary Fund

To Joseph Stiglitz,
Author of Globalization and Its Discontents
(New York: W.W. Norton & Company, June 2002)

Washington D.C., July 2, 2002

At the outset, I would like to stress that it has been a pleasure working closely with my World Bank colleagues—particularly my counterpart, Chief Economist Nick Stern—during my first year at the IMF. We regularly cross 19^th Street to exchange ideas on research, policy, and life. The relations between our two institutions are excellent—this is not at issue. Of course, to that effect, I think it is also important, before I begin, for me to quash rumors about the demolition of the former PEPCO building that stood right next to the IMF until a few days ago. No, it's absolutely not true that this was caused by a loose cannon planted within the World Bank.

Dear Joe:

Like you, I came to my position in Washington from the cloisters of a tenured position at a top-ranking American University. Like you, I came because I care. Unlike you, I am humbled by the World Bank and IMF staff I meet each day. I meet people who are deeply committed to bringing growth to the developing world and to alleviating poverty. I meet superb professionals who regularly work 80-hour weeks, who endure long separations from their families. Fund staff have been shot at in Bosnia, slaved for weeks without heat in the brutal Tajikistan winter, and have contracted deadly tropical diseases in Africa. These people are bright, energetic, and imaginative. Their dedication humbles me, but in your speeches, in your book, you feel free to carelessly slander them.²

Joe, you may not remember this, but in the late 1980s, I once enjoyed the privilege of being in the office next to yours for a semester. We young economists all looked up to you in awe. One of my favorite stories from that era is a lunch with you and our former colleague, Carl Shapiro, at which the two of you started discussing whether Paul Volcker merited your vote for a tenured appointment at Princeton. At one point, you turned to me and said, "Ken, you used to work for Volcker at the Fed. Tell me, is he really smart?" I responded something to the effect of "Well, he was arguably the greatest Federal Reserve Chairman of the twentieth century" To which you replied, "But is he smart like us?" I wasn't sure how to take it, since you were looking across at Carl, not me, when you said it.

My reason for telling this story is two-fold. First, perhaps the Fund staff who you once blanket-labeled as "third rate"—and I guess you meant to include World Bank staff in this judgment also—will feel better if they know they are in the same company as the great Paul Volcker. Second, it is emblematic of the supreme self-confidence you brought with you to Washington, where you were confronted with policy problems just a little bit more difficult than anything in our mathematical models. This confidence brims over in your new 282 page book. Indeed, I failed to detect a single instance where you, Joe Stiglitz, admit to having been even slightly wrong about a major real world problem. When the U.S. economy booms in the 1990s, you take some credit. But when anything goes wrong, it is because lesser mortals like Federal Reserve Chairman Greenspan or then-Treasury Secretary Rubin did not listen to your advice.

Let me make three substantive points. First, there are many ideas and lessons in your book with which we at the Fund would generally agree, though most of it is old hat. For example, we completely agree that there is a need for a dramatic change in how we handle situations where countries go bankrupt. IMF First Deputy Managing Director Anne Krueger—who you paint as a villainess for her 1980s efforts to promote trade liberalization in World Bank policy—has forcefully advocated a far reaching IMF proposal. At our Davos [World Economic Forum] panel in February you sharply criticized the whole idea. Here, however, you now want to take credit as having been the one to strongly advance it first. Your book is long on innuendo and short on footnotes. Can you document this particular claim?

Second, you put forth a blueprint for how you believe the IMF can radically improve its advice on macroeconomic policy. Your ideas are at best highly controversial, at worst, snake oil. This leads to my third and most important point. In your role as chief economist at the World Bank, you decided to become what you see as a heroic whistleblower, speaking out against macroeconomic policies adopted during the 1990s Asian crisis that you believed to be misguided. You were 100% sure of yourself, 100% sure that your policies were absolutely the right ones. In the middle of a global wave of speculative attacks, that you yourself labeled a crisis of confidence, you fueled the panic by undermining confidence in the very institutions you were working for. Did it ever occur to you for a moment that your actions might have hurt the poor and indigent people in Asia that you care about so deeply? Do you ever lose a night's sleep thinking that just maybe, Alan Greenspan, Larry Summers, Bob Rubin, and Stan Fischer had it right—and that your impulsive actions might have deepened the downturn or delayed—even for a day—the recovery we now see in Asia?

Let's look at Stiglitzian prescriptions for helping a distressed emerging market debtor, the ideas you put forth as superior to existing practice. Governments typically come to the IMF for financial assistance when they are having trouble finding buyers for their debt and when the value of their money is falling. The Stiglitzian prescription is to raise the profile of fiscal deficits, that is, to issue more debt and to print more money. You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government's debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF—no, make that we on the Planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace but, especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.

Joe, throughout your book, you condemn the IMF because everywhere it seems to be, countries are in trouble. Isn't this a little like observing that where there are epidemics, one tends to find more doctors?

You cloak yourself in the mantle of John Maynard Keynes, saying that the aim of your policies is to maintain full employment. We at the IMF care a lot about employment. But if a government has come to us, it is often precisely because it is in an unsustainable position, and we have to look not just at the next two weeks, but at the next two years and beyond. We certainly believe in the lessons of Keynes, but in a modern, nuanced way. For example, the post-1975 macroeconomics literature—which you say we are tone deaf to—emphasizes the importance of budget constraints across time. It does no good to pile on IMF debt as a very short-run fix if it makes the not-so-distant future drastically worse. By the way, in blatant contradiction to your assertion, IMF programs frequently allow for deficits, indeed they did so in the Asia crisis. If its initial battlefield medicine was wrong, the IMF reacted, learning from its mistakes, quickly reversing course.

No, instead of Keynes, I would cloak your theories in the mantle of Arthur Laffer and other extreme expositors of 1980s Reagan-style supply-side economics. Laffer believed that if the government would only cut tax rates, people would work harder, and total government revenues would rise. The Stiglitz-Laffer theory of crisis management holds that countries need not worry about expanding deficits, as in so doing, they will increase their debt service capacity more than proportionately. George Bush, Sr. once labeled these ideas "voodoo economics." He was right. I will concede, Joe, that real-world policy economics is complicated, and just maybe further research will prove you have a point. But what really puzzles me is how you could be so sure that you are 100 percent right, so sure that you were willing to "blow the whistle" in the middle of the crisis, sniping at the paramedics as they tended the wounded. Joe, the academic papers now coming out in top journals are increasingly supporting the interest defense policies of former First Deputy Managing Director Stan Fischer and the IMF that you, from your position at the World Bank, ignominiously sabotaged. Do you ever think that just maybe, Joe Stiglitz might have screwed up? That, just maybe, you were part of the problem and not part of the solution?

You say that the IMF is tone deaf and never listens to its critics. I know that is not true, because in my academic years, I was one of dozens of critics that the IMF bent over backwards to listen to. For example, during the 1980s, I was writing then-heretical papers on the moral hazard problem in IMF/World Bank lending, an issue that was echoed a decade later in the Meltzer report. Did the IMF shut out my views as potentially subversive to its interests? No, the IMF insisted on publishing my work in its flagship research publication Staff Papers. Later, in the 1990s, Stan Fischer twice invited me to discuss my views on fixed exchange rates and open capital markets (I warned of severe risks). In the end, Stan and I didn't agree on everything, but I will say that having entered his office 99 percent sure that I was right, I left somewhat humbled by the complexities of price stabilization in high-inflation countries. If only you had crossed over 19^th Street from the Bank to the Fund a little more often, Joe, maybe things would have turned out differently.

I don't have time here to do justice to some of your other offbeat policy prescriptions, but let me say this about the transition countries. You accuse the IMF of having "lost Russia." Your analysis of the transition in Russia reads like a paper in which a theorist abstracts from all the major problems, and focuses only on the couple he can handle. You neglect entirely the fact that when the IMF entered Russia, the country was not only in the middle of an economic crisis, it was in the middle of a social and political crisis as well.

Throughout your book, you betray an unrelenting belief in the pervasiveness of market failures, and a staunch conviction that governments can and will make things better. You call us "market fundamentalists." We do not believe that markets are always perfect, as you accuse. But we do believe there are many instances of government failure as well and that, on the whole, government failure is a far bigger problem than market failure in the developing world. Both World Bank President Jim Wolfensohn and IMF Managing Director Horst Köhler have frequently pointed to the fundamental importance of governance and institutions in development. Again, your alternative medicines, involving ever-more government intervention, are highly dubious in many real-world settings.

I haven't had time, Joe, to check all the facts in your book, but I do have some doubts. On page 112, you have Larry Summers (then Deputy U.S. Treasury Secretary) giving a "verbal" tongue lashing to former World Bank Vice-President Jean-Michel Severino. But, Joe, these two have never met. How many conversations do you report that never happened? You give an example where an IMF Staff report was issued prior to the country visit. Joe, this isn't done; I'd like to see your documentation. On page 208, you slander former IMF number two, Stan Fischer, implying that Citibank may have dangled a job offer in front of him in return for his cooperation in debt renegotiations. Joe, Stan Fischer is well known to be a person of unimpeachable integrity. Of all the false inferences and innuendos in this book, this is the most outrageous. I'd suggest you should pull this book off the shelves until this slander is corrected.

Joe, as an academic, you are a towering genius. Like your fellow Nobel Prize winner, John Nash, you have a "beautiful mind." As a policymaker, however, you were just a bit less impressive.

Other than that, I thought it was a pretty good book.

Sincerely yours,

Ken

¹ Used as opening remarks at a June 28 discussion of Mr. Stiglitz's book at the World Bank, organized by the World Bank's Infoshop
² For example: "It was not just that IMF policy might be regarded by softheaded liberals as inhumane. Even if one cared little for those who faced starvation, or the children whose growth had been stunted by malnutrition, it was simply bad economics." Joseph Stiglitz,Globalization and Its Discontents, p 119.

From the site of the IMF

IMF Economist Assails Author of Critical Book

By Paul Blustein
Washington Post Staff Writer
Tuesday, July 2, 2002; Page E01

Getting a rise out of the International Monetary Fund isn't easy. For years, as debate has raged over how best to aid countries in economic distress, the IMF has typically responded to its critics with bureaucratic detachment.

But now, after enduring extensive attacks on its performance during the Asian financial crisis and facing fresh turmoil in Latin America, the IMF appears to be reaching the boiling point -- as witnessed by a rhetorical assault unleashed Friday by Kenneth Rogoff, the fund's chief economist.

The target of Rogoff's ire was Joseph E. Stiglitz, the Nobel Prize-winning former chief economist of the World Bank and author of "Globalization and Its Discontents," a recently published bestseller that is harshly critical of the IMF. At a World Bank-sponsored launch of the book where Stiglitz and Rogoff were the featured speakers, jaws dropped among an audience of about 400, mostly PhDs from the fund and the bank, as Rogoff blasted Stiglitz in terms far more colorful than the jargon-laden language for which IMF economists are renowned.

Rogoff derided Stiglitz's ideas as "at best highly controversial, at worst, snake oil" and cracked that "we on the Planet Earth" recognize Stiglitz's policy prescriptions as likely to worsen countries' problems by fueling inflation. He also accused Stiglitz, who also served as chairman of President Clinton's Council of Economic Advisers in the mid-1990s, of overweening arrogance in his book.

"I failed to detect a single instance where you, Joe Stiglitz, admit to having been even slightly wrong about a major real world problem," Rogoff said, according to a text of his remarks obtained by The Washington Post. (The event was off the record; Post reporters did not attend the event.) "When the U.S. economy booms in the 1990s, you take some credit. But when anything goes wrong, it is because lesser mortals" such as Federal Reserve Board Chairman Alan Greenspan or former Treasury secretary Robert E. Rubin "did not listen to your advice."

Stiglitz did not respond directly to most of Rogoff's criticisms, but in the first question from the audience a World Bank economist emotionally accused Rogoff of having engaged in an inappropriate personal attack, eliciting a smattering of applause from other bank staffers.

The episode highlights the antagonism that has long festered between the IMF and World Bank staffs as they struggle with the increasingly urgent challenge of lifting developing countries from impoverishment and rescuing them from crises.

Often confused in the public mind, and attacked in the same breath by their critics, the fund and the bank are frequently at loggerheads (though almost always in private), in part because of their overlapping roles and competing agendas. The fund provides countries with short-term loans to tide them over during periods of economic turmoil, which often means that it insists on cutbacks in public spending to force governments to live within their means. That can conflict with the bank's long-term efforts to promote education, health and other programs aimed at reducing poverty.

Because the IMF generally prevails when the two institutions differ, many World Bank staffers are delighted to see Stiglitz "sock it to 'em" in his book, said one bank economist, adding: "People here feel, these [IMF] guys are so arrogant -- and who are they, after all the disasters in East Asia, Russia and now Argentina, to go around acting as if they're masters of the world?"

The book dwells at length on Stiglitz's criticism -- shared by some economists, though by no means all -- that the IMF erred grievously by demanding cutbacks in budget deficits and increases in interest rates by governments undergoing crises. Disputing the IMF's logic that higher interest rates and lower deficits help restore financial calm in a crisis-stricken country by making it more attractive for investors to keep their money there, Stiglitz contends that such policies cause recessions to worsen and thus increase the likelihood that investors will flee.

"It was not just that IMF policy might be regarded by softheaded liberals as inhumane," Stiglitz writes. "Even if one cared little for those who faced starvation, or the children whose growth would be stunted by malnutrition, it was simply bad economics."

IMF officials cited passages like that one -- which, they said, made them sound like uncaring monsters -- as justification for the severity of Rogoff's counterattack.

"You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government's debt, all that needs to be done is to increase the supply and it will sell like hotcakes," Rogoff said.

"We at the IMF -- no, make that we on the Planet Earth -- have considerable experience suggesting otherwise," he continued. "The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain . . . its fiscal deficits, things generally get worse instead of better."

Perhaps most offensive to the IMF was Stiglitz's implied criticism of Stanley Fischer, the IMF's widely admired deputy managing director during the late 1990s, for taking a high-ranking job at Citigroup. In his book, Stiglitz asks: "Was Fischer being richly rewarded" for executing policies that benefited financial firms like Citigroup at the expense of poor countries?

"Joe, the people in this room know Stan Fischer to be a person of unimpeachable integrity," Rogoff declared. "Of all the false inferences and innuendos in this book, this is the most outrageous."

Stiglitz later replied that he didn't mean to impugn Fischer's integrity but was simply trying to raise concerns about the appearance of conflict of interest.

The odd couple of global finance

By Ed Crooks

Published: July 5 2002 20:03 | Last Updated: July 5 2002 20:03

To their enemies, the International Monetary Fund and the World Bank are indistinguishable: twin faces of the hydra-headed monster of the "Washington consensus" dedicated to the defence of global capitalism and oppression of the poor.

But anyone who has read about last week's extraordinary diatribe by Kenneth Rogoff, the IMF director of research, against Joseph Stiglitz, the bank's former chief economist and 2001 Nobel prize-winner for economics, can only wonder: consensus? What consensus?

The dispute has lifted the curtain on a relationship that is in reality more like that of fractious siblings. The two institutions are too different to get along in harmony; too closely related to get out of each other's way.

The latest flare-up came on World Bank turf a week ago, when Mr Rogoff spoke to an audience mostly made up of bank and fund staff at a lunchtime debate to launch Prof Stiglitz's new book, Globalization and its Discontents.

In defiance of the confidence expressed by Nicholas Stern, Prof Stiglitz's successor as chief economist at the bank, that the debate would be "about issues, not personalities", Mr Rogoff launched a vituperative attack on Prof Stiglitz's character and record in office, particularly during the Asian financial crisis of 1997-98. "What really puzzles me is how you could be so sure that you are 100 per cent right, so sure that you were willing to 'blow the whistle' in the middle of the crisis, sniping at the paramedics as they tended the wounded," he said. "Do you ever think that just maybe, Joe Stiglitz might have screwed up?"

His attack, now available in full on the IMF's website, sounds intemperate, even excessive. Prof Stiglitz pronounced himself "dumbfounded" by the barrage of criticism, particularly unexpected from such a cerebral and mild-mannered man. But it reflected Mr Rogoff's sense, shared by many of his colleagues, that the IMF had been provoked beyond endurance. Eventually something had to snap.

Mr Stiglitz has been one of the IMF's harshest critics for years. He, too, has crossed the line dividing intellectual disagreement from personal conflict: he has described the IMF's staff as "third-rate". In his book, he writes that IMF economists "make themselves comfortable in five-star hotels in the capitals" in developing countries, and likens modern economic management to high-altitude bombing. "From one's luxury hotel, one can callously impose policies about which one would think twice if one knew the people whose lives one was destroying."

Both the fund and the bank are quick to point out that Prof Stiglitz is a long way from representing the World Bank's official position. Even while he worked there, his boss James Wolfensohn, the bank's president, observed: "I am always interested to see what Joe is saying on behalf of the bank."

But that is not to say that Prof Stiglitz is a maverick. Other bank officials still hold him in high regard, and he retains a formal link to the institution as a member of a panel of independent advisers to Mr Stern. He may make his points more strongly than his former colleagues, but there can be no doubt that he is reflecting widely shared and long-standing tensions, which at times have had serious consequences. Development campaigners believe that debt relief for the poorest countries was held up for years by wrangling between the fund and the bank.

The roots of their differences go back to the origins of the fund and the bank in the 1940s. Conceived together at Bretton Woods, they were given quite distinct objectives: the bank to support economic development, the fund to maintain the stability of the global economy. These two different objectives have given the two institutions very different cultures: disciplined crisis managers versus reflective idealists.

"I always compare the IMF to the Communist Party: a vanguard, very ideological, very top-down. When they make decisions, things really happen," says Justin Forsyth, policy director of Oxfam, who has dealt with both institutions for many years. "The World Bank is more complex, more like a university. Lots of different ideas are bubbling away, and you can never really be sure of the connection between the decision-making and the organisation."

As well as being less focused, the bank is also much bigger: it employs 10,000 people, nearly four times as many as the IMF.

Charles Wyplosz, of the Centre for Economic Policy Research, who has worked as a visiting scholar at the IMF, says the fund is like the Prussian army, the bank like the Mexican army. "IMF staff tend to think of themselves as smart and select, and to look down on World Bank people," he says. "And it is true that the IMF's recruitment is very homogenous: the staff tend to be economics PhDs from leading universities. The World Bank recruits a much wider range of people."

At the Rogoff/Stiglitz debate, the IMF gang in their dark suits could be easily distinguished from the bank crew in their shirtsleeves and chinos.

What turns these cultural differences into flashpoints is when the activities of the fund and bank conflict. It can be infuriating, for example, for a World Bank manager who has spent years trying to help small businesses in a developing country to be told that the IMF has recommended a sharp rise in interest rates or taxes that will force those businesses to close.

To make matters worse, since the 1970s, the dividing line between the two institutions' functions has become blurred. The IMF has taken on long-term lending to the poorest countries, and begun making policy recommendations on structural issues, such as social security systems. The World Bank, meanwhile, was heavily involved in the bail-outs for Mexico in 1995 and South Korea in 1997 and 1998.

Both institutions, located on opposite sides of Washington's 19th Street, insist that relations are much better than they were in Prof Stiglitz's day. Mr Stern and Mr Rogoff meet for coffee every week, if they can, and new structures are in place to improve co-ordination in the bank and fund's activities in the poorest countries. But there is clearly some way to go. When the World Bank broadcast the video recording of the Rogoff/Stiglitz debate to its staff on an internal network, the IMF wanted to do the same. But it turned out that their systems were incompatible.

Silencing Joseph Stiglitz
The World Bank cuts its ties to the economist who became an unlikely hero to world trade protesters.

By David Moberg

May 2, 2000 |  After World Bank chief economist Joseph Stiglitz quit his job last November in order to speak more openly about his disagreements with policies of the bank and the International Monetary Fund, the bank still retained the distinguished economist as a special advisor to president James D. Wolfensohn.

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.
salon.com | May 2, 2000

About the writer
David Moberg is a senior editor at In These Times.

Stiglitz: rebel with a cause
(Filed: 30/06/2002)

From pillar to pariah: Joe Stiglitz tells Liam Halligan why he's crusading against the 'hypocrisies' of the World Bank and IMF

What made you do it, Joe? What made you rock the boat?

Joe Stiglitz was heading for a very comfortable retirement. His CV reads like a young economist's wet-dream - Nobel Laureate, former chief economist of the World Bank and, before that, chairman of President Clinton's Council of Economic Advisors. Stiglitz is a heavyweight, who has sat at the very top tables of economic policy-making.

Ensconced at Columbia University in New York, the 59-year-old professor could have seen out his glittering career with the odd keynote speech and a little light teaching. He could, occasionally, have returned to theoretical pastures and developed further the mathematical models, so beloved of economists, which shot him to academic fame.

But he's done neither. Instead Stiglitz has set out on a soul-searching crusade to expose the alleged hypocrisies and limitations of the Western policy-making establishment - particularly the International Monetary Fund. His mission is to smash the "Washington consensus" he helped to create, that developing countries in crisis should be force-fed an IMF diet of fiscal austerity, privatisation and market liberalisation.

In a two-year frenzy of articles, chat-show appearances and now the publication of a book*, Stiglitz has sent the economics profession into a tailspin, making enemies of many former admirers.

"Sure I could have just sat there," he says. "But I grew up in the 60s, the civil rights era. My aim, as it was back then, is to use my intelligence to advance the debate. I couldn't just ignore everything I'd seen at the World Bank - after all, silence is a form of complicity."

Like most economists, Stiglitz was shocked by the 1999 Seattle riots - when anti-globalisation protesters high-jacked a World Trade Organisation summit. Unlike most economists, Stiglitz saw beyond the rabble rousers and grasped that Seattle undermined the free-market assumptions that had held sway since the fall of the Berlin Wall. He engaged with non-governmental organisations and church groups, many of which, while part of the demonstrations, deserve to be taken seriously on development issues.

"Before Seattle, economic summits were uneventful, full of technocrats discussing obscure subjects such as trade quotas and loan concessions," he says. "But now 16-year-old kids from the suburbs have strong opinions on esoteric treaties like Gatt [the General Agreement on Tariffs and Trade] and Nafta [the North American Free Trade Association]. It's incredible that summits now spark running street battles."

That's why last week's G8 summit took place in the remote Canadian mountain resort of Kananaskis. The venue was announced last year - at the conclusion of the Genoa summit, which saw such terrible riots that one protester died. Stiglitz scoffs at the G8 leaders hiding themselves away and questions the meeting's validity.

"The G8 membership is an historical accident and that's a real concern," he says. "A group of advanced industrial countries gets together, but does it reflect the new, globalized world? Where's China, for instance? And the developing countries?" Unprovoked, Stiglitz unleashes further heresies, attacking the G8's double-speak on trade.

"Western nations push poor countries to eliminate trade barriers while keeping their own in place, preventing the developing world from exporting agricultural goods or products such as aluminium. That deprives the poor of desperately needed income."

He singles out President Bush's steel tariffs, which he says will penalise efficient Asian producers. "I was so disappointed when Bush announced those - it's such bad leadership".

He may be from Gary, Indiana - a US steel town if ever there was one - but Stiglitz doesn't mince his words. "US steel is in trouble not from a surge of imports, but it's failed to adapt to change."

Stiglitz argues that globalisation has the power to do enormous good, but only if the developing world is allowed to embrace change on its terms.

"Globalisation means more people now live longer and better than ever before," he says. "Some in the West may regard low-paying jobs in a Nike factory as exploitation, but for many people that's a far better option than staying on the farm growing rice."

What really gets his goat is the undemocratic power wielded by the IMF - and, thus, by the US. "America has a veto on all IMF policies - that's untenable in a multilateral institution," he says. "The fund's one-size-fits-all policies, and its bail-outs (in Mexico, East Asia, Indonesia, Argentina) have often made crisis situations worse."

Stiglitz tells me about his efforts to convince the IMF to allow indebted countries to declare bankruptcy. A country that goes bankrupt has a chance to start again, he says, just like a business. But a country in limbo stays on the repayment treadmill and then gets a visit from the IMF - and that can lead to Draconian economic reforms.

"For about five years I've been pushing the fund to allow sovereign bankruptcies - and they're moving in the right direction," he says.

Anne Krueger, the deputy director of the IMF, has now drawn up a statutory mechanism for the more orderly restructuring of sovereign debt. But Stiglitz says this blueprint is flawed, requiring a permanent secretariat and an IMF veto. "The Fund still wants full control - they won't recognise that you cannot have a creditor in the role of bankruptcy judge," he says.

Stiglitz's most controversial utterance to date concerns Stan Fischer, Krueger's predecessor and himself an eminent economist. Stiglitz has pointed out that Fischer, on leaving the IMF, took up a well-paid job with Citigroup.

He is concerned that an impression may have been created that Fischer - and other former IMF staffers who have made the move to an investment bank - was rewarded by Citigroup for creating the kind of liberal market system in developing countries that provides valuable opportunities for Wall Street.

Reviewers of his book say Stiglitz gets very close to accusing Fischer of corruption, which proves that he must have totally lost his marbles. I put this to him.

"What I was trying to highlight is that standards we take for granted in the West concerning potential conflicts of interest when you change jobs do not seem to apply to international financial institutions like the IMF," he says.

Stiglitz has undertaken an honourable, but daunting task - to make economics, and the globalisation debate, more accessible. In doing so, he has taken on some formidable vested interests. Yes, he can sound self-righteous. And, yes, he's probably motivated in part by settling scores.

"The IMF is full of people who see the world through the eyes of the Western financial interests. But who provides the perspectives of workers, or others affected by the policies? Environment, health, education, are all taken into account when we make economic decisions in the US and other democracies - everyone comes to the table. Not so in the international arena."

He has taken the often moribund and arrogant development economics profession by the scruff of the neck and given it a good shake. Because of him a lot more taxpayers will know more about the international financial institutions they fund. For that, we should congratulate him, even if his former IMF colleagues will not.

*Globalisation and its Discontents, Joseph E Stiglitz. Allen Lane, £16.99

·  Liam Halligan is Economics Correspondent at Channel Four News

It's too soon to gloat

America's financial scandals won't bury the US model. But they do give us a chance to rethink globalisation

Jonathan Freedland
Wednesday July 3, 2002
The Guardian

It's like a scene from the latest first-class American TV import, Six Feet Under - a dark comedy set in a family-run undertaking business. Picture the coffin sealed and varnished, the final farewells uttered and the conveyer belt humming into motion, gliding the dear departed into the flames. Suddenly there is the sound of knocking and muffled cries. "Omigod!" the mourners collectively realise: the corpse is alive!

The reaction to the wave of financial scandals from the US has felt a little like that. Enron, WorldCom and Xerox's fudging of the numbers - "a billion here, a billion there", as President Bush so coolly put it - has had the left putting on its best black suit as it gets ready to bury American capitalism. They've been bidding goodbye to a system they reckon is in grave crisis and terminal decline. Cause of death: the exposure of some of America's starriest corporate names as hollow shams. And, they predict, if the US economy is on the skids then surely the big bogeyman - globalisation - cannot be far behind. Today, WorldCom; tomorrow international capitalism itself will lie in ruins!

Not so fast, as Hollywood might say. First, the American system is not ready for the embalming table just yet. Enron and its copycat debacles obviously represent a serious blow to the reputation of US business - but not a fatal one. This wave of scandals will trigger reform, not revolution. What comes next is not the unravelling of the whole game, but some long-overdue changes - few of which are likely to excite the May Day protest crowd.

So the Nobel laureate Joseph Stiglitz, author of Globalization and its Discontents and an intellectual pin-up to many in the anti-globalisation movement, foresees not some fiery meltdown but "increased sensitivity to conflicts of interest" around the US boardroom table. He predicts a separation of the accountancy and consultancy functions of single firms along with a demand for greater transparency: necessary moves, to be sure - but hardly likely to make the hearts of Seattle and Genoa veterans skip a beat.

Couldn't we set our sights a bit higher, and hope that the current spate of scandals might do for 21st-century US capitalism what the media's exposé of collusion in the American oil industry did at the start of the 20th? Might we not see a shift as dramatic as the 1911 "anti-trust" court decision which broke up Standard Oil, and stood for decades as a bulwark against cartel capitalism? No, warn those who know the system inside out. Perhaps if there were 10 more WorldComs, then America might return to that progressive capitalist tradition which reached its zenith in FDR's New Deal. But short of an epidemic, radicals should brace themselves for changes which look a lot like tinkering.

And if those hotly anticipating the death of US capitalism should hose themselves down, those looking forward to the defeat of globalisation ought to take an ice-cold bath. For one thing, the two are not the same. The Enron affair could have happened even if the American economy was entirely cut off from the rest of the world. Its origins lie in greed and the failings of US accountancy law rather than the contradictions of globalisation.

In other words, this easy equation of America and global capitalism may be a tad too simplistic: they are hardly synonymous terms. The problem, says Philippe Legrain, a former top official at the WTO, is that "globalisation has become a catch-all phrase for everything you don't like about modern life". That's why he has taken on what may seem a daunting task - writing the upcoming Open World, a take-no-prisoners, progressive's defence of globalisation.

Legrain wants us to unbundle all our confused ideas about the g-word and decide what it is, and what it isn't. For him, that means a belief in free trade and in strong institutions to manage it - without endorsing every move every international company makes.

So rather than seeing systemic flaws inherent in the very idea of global capitalism, we should approve of, say, Nike opening a factory in Vietnam: those Hanoi workers may get less than their counterparts in South Carolina, but they're earning way more than they used to in Vietnam. Foreign investment and know-how comes in; managers get trained; a developing country is no longer solely dependent on its own means to build itself up - now it has outside money to give it a leg up. And, by opening up its markets to foreigners, it gets direct benefits: cheaper Coca-Cola, for sure, but also cheaper wheat. It is, he says, a win-win.

Think of that as good globalisation: the only problem here, say Legrain and friends, is that there is not enough of it. Richer countries need to return the compliment and open up our own markets, letting developing countries sell us their food, textiles and steel. We need to make international trade a two-way street.

Which is not to say all globalisation is good. Free trade in goods and services may bring benefits but, the defenders admit, short-term influxes of capital - cash coming in one day, flowing out the next - are bad news, destabilising fragile economies. Poor countries need to protect themselves from that instability; capital controls may be the way.

The specifics are secondary. The key point is that the critics need to start making precisely these kinds of distinc tions - and then argue each one on its separate merits. Stiglitz admirably distinguishes between globalisation - which, he insists, can bring great benefits, spreading knowledge, improving life expectancy and quality of life - and the institutions which currently manage it. He is scathing about his former employer, the International Monetary Fund; but his remedy is reform of that specific body, rather than the abolition of international capitalism.

This seems a smart route for the anti-globalisation movement to travel: to move beyond the sterile debate about whether globalisation is good or bad, and decide what kind of globalisation it wants. You can understand its reluctance: right now it enjoys the perfect unity of a cause which knows what it's against but not what it's for. As Charles Leadbeater points out in another optimistic defence of globalisation, Up the Down Escalator: "The lack of an agreed programme is a huge strength...they do not have to set priorities or fall out over the terms of messy compromises."

But it's time to grow up, to recognise that anti-globalisation will not do even as a label. It's far too wide, embracing green ultras or anarchists on the left and Jean-Marie Le Pen on the right. And it is absurdly impossibilist. Globalisation is now a fact of life: this article can be read, hours after it's been written, from Sheffield to Shanghai, thanks to that ultimate tool of globalisation, the internet. To be against globalisation is to want to turn the clock back, to wish that the earth can be flat. But it also fails to discriminate, to distinguish between the liberating globalisation of, say, the net, and the menace of smash-and-grab capital flows.

So put away that black tie, quiet that funeral drum. The task for progressives is not to bury the modern world but - the same as it ever was - to change it.

j.freedland@guardian.co.uk

L’Espresso on line

Joseph Stiglitz
Poveri più poveri? La colpa è del Fondo
La catastrofe argentina. La crisi della Russia. Il disastro del Terzo mondo. Il Nobel Joseph Stiglitz contro Fmi, Banca mondiale e Usa

di Wlodek Goldkorn - da New York

Nei circoli della New York che conta, l'uomo del momento è un mite professore di economia della Columbia University. Si chiama Joseph Stiglitz, e nel 1993 aveva lasciato l'ovattato mondo accademico per verificare come funzionava l'universo della politica. Per quattro anni è stato consigliere di Bill Clinton alla Casa Bianca. Poi, nel 1997, è stato nominato vice presidente della Banca mondiale, incarico che ha lasciato nel 2001 per tornare a insegnare. Nello stesso anno ha vinto il premio Nobel per l'Economia.

Ora, Stiglitz ha deciso di rendere pubblica l'esperienza di questi sette anni in un libro intitolato "Globalization and its Discontents", che tradisce acume e grandi ambizioni. L'opera, che uscirà nelle librerie ai primi di giugno, contiene una radicale critica di come il processo della globalizzazione è stato gestito finora, un appello perché tutto cambi prima che sia troppo tardi, e una ricetta.

La globalizzazione, dice Stiglitz, ha portato benefici quasi solo a chi era già benestante. E questo non perché il processo di per sé sia sbagliato, ma perché le sue regole sono state dettate dal Fondo monetario internazionale (Fmi). Questa istituzione, nata nel 1944 a Bretton Woods per l'impulso di John Maynard Keynes, con lo scopo di debellare la povertà e aiutare i paesi in via di sviluppo, ha quindi tradito la sua missione originale. E ha ribaltato l'impostazione del grande economista britannico. Insomma l'Fmi, diretto da uomini di finanza, è oggi ostaggio del "fondamentalismo monetario".

I suoi dirigenti e ispettori sul campo sono interessati, sostiene Stiglitz, solo a bilanci e contabilità. Della vita quotidiana della gente, della disoccupazione, a loro non importa niente. D'altra parte le ricette sono spesso sbagliate: per fare alcuni esempi, per effetto delle politiche imposte dal Fondo il Pil della Russia è crollato del 40 per cento, in Argentina c'è stata la catastrofe dell'economia, in tutta l'America latina la gente è oggi più povera. E ancora, nei paesi in via di sviluppo non c'è sviluppo e cresce invece l'instabilità.

Errori di finanzieri che credono ciecamente in una dottrina errata? No, risponde Stiglitz. C'è disonestà. Le regole del Fondo monetario, ma anche di altre istituzioni come la Banca mondiale e l'Organizzazione mondiale per il commercio (Wto) si basano su doppi pesi e doppie misure.

Agli Stati Uniti (il principale colpevole degli scompensi della globalizzazione) e ai paesi ricchi si applicano metodi diversi di contabilità dei bilanci, dei deficit e dei debiti, che non a quelli poveri. Le barriere commerciali sono state abbattute nelle nazioni più povere ma gli Usa (e in parte l'Europa) continuano con politiche protezionistiche. E ancora, la liberalizzazione dei mercati di capitale ha reso impossibile qualsiasi politica economica mirata da parte dei governi dei paesi più deboli. Ha reso la loro moneta instabile, finendo per trasformare miliardi di essere umani in vittime degli speculatori e degli investitori dei paesi benestanti.

Di fronte a tale catastrofe («preannunciata, bastava dar retta alle ricerche accademiche»), Stiglitz propone un rimedio radicale come le sue critiche. Occorre uscire dall'«ortodossia del monetarismo», sostiene. E, soprattutto, cominciare a governare il processo della globalizzazione. In altre parole, bisogna tornare al vecchio caro metodo e allo spirito di Keynes. I maligni dicono che con il suo libro l'ambizioso e brillante Stiglitz si propone come il Keynes del Ventunesimo secolo.

30.05.2002                          

THE NATION

June 10, 2002

Rebel With a Cause

by EYAL PRESS

Joseph Stiglitz is--as usual--running late. It is nearing 2:30 pm on a sunny afternoon in New York City and Stiglitz, an economist at Columbia University, is standing on the corner of 103rd Street and West End Avenue trying desperately to hail a cab. He needs to get across town to the Guggenheim Museum, where in five minutes he is scheduled to deliver an address on the state of the global economy in the aftermath of September 11. Stiglitz has not prepared a speech--half an hour earlier, as we were talking over lunch, he had completely forgotten the event was today--but that is the least of his worries. For Stiglitz, getting to appointments on time is a challenge; finding something provocative to say once he gets there is not.

Over the past several years, Stiglitz, a celebrated theorist who was awarded the 2001 Nobel Prize in economics for his work on asymmetric information, has grown accustomed to being at the center of controversy. From 1997 to 2000, he served as senior vice president and chief economist at the World Bank--a title that did not stop him from publicly criticizing the bank's sister institution, the International Monetary Fund. In a series of speeches and articles that culminated in a scathing April 2000 essay in The New Republic, Stiglitz blasted the IMF for being every bit as secretive, undemocratic and indifferent to the poor as its critics claimed. Stiglitz's outspokenness, unprecedented for a high-ranking insider, infuriated top officials at the IMF and US Treasury Department, and eventually led James Wolfensohn, the World Bank's president, to inform him that he would have to mute his criticism or resign. Stiglitz chose to leave.

He has not, however, quieted down. Since trading in his job at the World Bank for a chair at Columbia, Stiglitz has stepped up his crusade to reshape the popular debate about globalization. At Columbia, he has launched an organization, the Initiative for Policy Dialogue, designed to furnish developing nations with alternative views on everything from trade policy to financial reform. His lectures on campus draw overflow audiences, and being purged from the World Bank seems only to have enhanced his mystique in the developing world. He is an adviser to several developing countries, including Serbia and Bulgaria, and he meets informally with the leaders of many more, often dispensing advice that puts him at odds with the IMF. He was recently flown down to Mexico at the invitation of that country's Foreign Ministry; afterward, he went to Ecuador to meet with leaders of that nation's central bank.

Stiglitz, 58, is hardly the first person to accuse the IMF of operating undemocratically and exacerbating Third World poverty. But he is by far the most prominent, and his emergence as a critic marks an important shift in the intellectual landscape. Only a few years ago, it was possible for pundits to claim that no mainstream economist, certainly nobody of Stiglitz's stature, took the criticism of free trade and globalization seriously. Such claims are no longer credible, for Stiglitz is part of a small but growing group of economists, sociologists and political scientists, among them Dani Rodrik of Harvard and Robert Wade of the London School of Economics, who not only take the critics seriously but warn that ignoring their concerns could have dire consequences. In his new book, Globalization and Its Discontents (Norton), Stiglitz argues that many of the complaints voiced by protesters in recent years--that IMF structural adjustment programs have caused widespread suffering; that free-trade agreements mainly benefit the rich; that privatization has proved disastrous in many countries--have a solid basis in fact. Unless the rules of global capitalism are radically altered, he warns, the gap between the world's rich and poor, and hence the social conditions that have fueled instability in places like Pakistan, will not go away anytime soon.

How did an economist who until recently enjoyed the trust of the world's most powerful financial authorities come to sympathize with their most ardent critics? Stiglitz's break with the World Bank has earned him a reputation in the business press and among policy elites as an enfant terrible inclined to stir up trouble wherever he goes. His academic peers, however, describe him in markedly different terms. "There is something innocently nice about Joe," says Jagdish Bhagwati, one of his colleagues in the economics department at Columbia. "He's a big puppy dog," says Barry Nalebuff, an economist at Yale who has written papers with him.

In person, Stiglitz indeed comes across as good-natured and agreeable. When we first met, he invited me to his house for dinner. When he spoke about his experiences at the World Bank, his voice betrayed not a trace of bitterness. With his scruffy gray beard and frequently disheveled appearance--he is famous for walking around shoeless, and has trouble keeping his shirt tucked in--Stiglitz looks like the typical absent-minded professor. He also acts like one. Most of our interviews began at least an hour later than originally scheduled, a pattern that Stiglitz appeared to take in stride, as though this were an inevitable part of being Joseph Stiglitz.

And yet beneath the mellow exterior lies a fiercely independent, and at times disputatious, thinker. As far back as high school, when he was a star on the debating team, Stiglitz displayed a taste for intellectual combat, and an occasionally acid tongue. Asked once what developing countries should do with the annual reports the IMF prepares on member nations, Stiglitz recommended "picking it up, saying 'thank you very much' and dropping it straight in the garbage can."

As a scholar, moreover, Stiglitz has been nothing if not iconoclastic, devoting much of his career to challenging one of the bedrock assumptions of neoclassical economics: that markets nearly always act perfectly on their own. Stiglitz has argued that because of asymmetric information--the fact that one party in an economic transaction often knows more than the other--inefficient outcomes are common, and therefore that government intervention is often warranted.

Stiglitz's skepticism about markets can be traced back to his childhood. The son of an insurance agent and a public school teacher, he grew up in Gary, Indiana, the same steel town that produced another Nobel Prize-winning economist, Paul Samuelson. His family was middle-class, but Stiglitz says the periodic layoffs and plant closings in Gary sensitized him at an early age to the bruising realities of a concept--cyclical unemployment--he would later study as a graduate student in the economics program at MIT.

Stiglitz enrolled at MIT in 1963. Five years later, at the age of 26, he was appointed a full professor of economics at Yale. Shortly thereafter, he was invited by the Rockefeller Foundation to go to Kenya. Witnessing the wrenching poverty in the slums of Nairobi sparked a lifelong interest in development policy. But Stiglitz noticed something else as well: In many developing countries, a seemingly inefficient system of farming--sharecropping--continued to predominate. From the standpoint of efficiency, this made no sense (sharecroppers have little incentive to work hard). It did make sense, however, if there was no other way for landlords to monitor workers' output. The problem, in other words, was imperfect information, affecting both their behavior and contractual relations. Over the next few decades, along with a growing school of economists including Berkeley's George Akerlof, he would produce rigorous mathematical models showing that asymmetric information was pervasive and made a measurable difference in everything from the way insurance companies operated to the way corporations treated their workers.

The author of a dozen books and several hundred prominent articles, Stiglitz has achieved eminence as a theorist that is not widely disputed. "If you had asked a broad number of economists before this year whether Joe would at some point win the Nobel Prize, literally 100 percent would have said yes," says Alan Blinder, an economist at Princeton. Where scholars disagree is in the policy prescriptions that should be drawn from Stiglitz's work. "There are people who would say information may be imperfect, but that government intervention to fix the problem will only make things worse," says Blinder.

For all his skepticism about laissez-faire economics, Stiglitz has never been known as a radical. He is a liberal with populist leanings, not a Marxist, and before coming to the World Bank had served as chairman of President Clinton's Council of Economic Advisers, not a job suited for hard-line critics of capitalism. Although he was aware of NGOs and activists who considered the IMF and World Bank neocolonial institutions, Stiglitz says he arrived at the World Bank full of optimism--some would say naïve optimism--about the positive role he could play in shaping development policy. "I didn't really take [the criticism] at face value," he says.

That would soon change. In March of 1997, barely a month into his job, Stiglitz flew to Addis Ababa to meet with a group of Ethiopian officials who had become embroiled in a bitter dispute with the IMF. Several months earlier the IMF had suspended Ethiopia's lending program after growing dissatisfied with the way its economy was being run. Stiglitz found the suspension baffling, for the Ethiopian economy appeared to be in good shape: Inflation was low, output was rising and, after decades of famine, the government had launched a rural development program focusing on the needs of the poor. The IMF, however, claimed that Ethiopia was too dependent on foreign aid, which could dry up and then cause a budget crisis, and had failed to meet certain conditions on its loans, such as deregulating its financial market.

Upon returning to Washington, Stiglitz pointed out that the Ethiopian government had resisted financial deregulation for good reason: In neighboring Kenya, the policy had led to higher interest rates, which devastated poor farmers. For several weeks, he waged an intense--and, in the end, successful--internal campaign to get the IMF program restored. But the experience left him deeply embittered. "I found the whole thing astonishing," he says. "Not just the policies but the way the IMF interacted with this country, basically just telling Ethiopia what to do regardless of what its leaders thought."

No sooner had the Ethiopia dispute been settled than the 1997 Asian financial crisis struck--and the tension between Stiglitz and the IMF deepened. To Stiglitz, the crisis, which began with the collapse of the Thai currency and soon spread to Malaysia, Korea, Indonesia and the Philippines, highlighted the danger of lifting constraints on short-term capital flows, a policy that both the IMF and US Treasury Department had enthusiastically promoted in the 1990s. Throughout Asia, governments that had followed their advice were reeling as investors whisked billions of dollars in speculative capital out of their countries overnight. Some nations that had maintained capital controls, such as India and Chile, avoided such problems while enjoying robust growth.

Stiglitz was not the only economist to question the orthodox view: In a widely cited article in Foreign Affairs, Jagdish Bhagwati, a prominent free-trader, blasted the "Wall Street-Treasury Complex," which had pushed unfettered capital flows for its own enrichment. But while Stiglitz expressed his views in more measured tones, being an insider made them far more explosive. In late 1997 the London Economist ran an article contrasting Stiglitz's position with that of the IMF and Treasury Department. The article, he would later learn, prompted an irate telephone call from Lawrence Summers, then Deputy Treasury Secretary, now president of Harvard, to James Wolfensohn. (Summers may have been especially angry because the article pointed out that he, too, had questioned the wisdom of liberalization before joining the Treasury Department, only to reverse course.)

Stiglitz had still not said anything directly critical of the IMF. When the IMF called on South Korea and other crisis-wracked nations to raise interest rates and cut spending as conditions for receiving loans, however, his frustration reached the boiling point. The IMF claimed these austerity measures would stabilize local currencies and restore investor confidence (not coincidentally, many of these investors might also be bailed out). But in meetings with top IMF officials, Stiglitz pointed out that most East Asian nations already had balanced budgets and high interest rates. Adopting austerity measures could spur massive unemployment and bankruptcy; Western nations facing recessions would never consider such policies. In response, Stiglitz says, IMF officials told him countries needed to "feel the pain" in order to recover.

Stiglitz did not wait long to strike back. In a speech delivered in January 1998 in Helsinki, he declared that the solutions to the problems facing developing countries "will not be found in the Washington Consensus," whose rigid insistence on fighting inflation and "getting government out of the way" had failed to foster egalitarian development. At a press conference several months later, Stiglitz denounced the IMF's response to the Asian crisis as an abject failure. "Who is paying the price?... Workers who are going to be put out of jobs." Unemployment indeed increased fourfold in Korea, threefold in Thailand and tenfold in Indonesia, where cuts in food subsidies sparked riots.

Today, of course, most of the affected countries have recovered, leading the IMF's defenders to argue that in the end, its prescriptions worked. "In the countries where IMF guidance was followed promptly and without fail, recovery was faster," argues MIT's Rudiger Dornbusch. Not so, counters Stiglitz: A study by Dani Rodrik found that nations that defied the IMF and kept interest rates low, such as Malaysia, recovered more quickly than those that heeded its advice, such as Indonesia.

To some degree, the mounting criticism from Stiglitz and other quarters has had an impact. IMF officials recently acknowledged the potential risks of capital market liberalization, and both the IMF and World Bank have begun speaking more openly about debt relief and poverty reduction. But while the rhetoric has changed, Stiglitz maintains that a doctrinaire ideology of "free-market fundamentalism" continues to shape policy. The IMF and World Bank are pushing developing countries to privatize their pension systems, for example, which is highly controversial in the First World. The IMF demanded fiscal austerity in Argentina, where unemployment had reached 20 percent and, in December, sparked riots that led to the government's collapse. It preaches the gospel of free trade to developing countries--even though most Western countries built their economies by protecting certain industries and continue to subsidize some domestic producers. The blind push to privatize and deregulate has not only failed to fuel sustainable development, Stiglitz contends, but reflects an idealized vision of how markets function that neither economic theory nor concrete experience supports.

Such statements have made Stiglitz a hero to critics of globalization, some of whom believe institutions like the World Bank and IMF should simply be abolished. Stiglitz himself, however, believes these institutions should be reformed, not eliminated. He also believes the spread of global capitalism has enormous potential to benefit the poor. As an example of a country that has successfully integrated into the global marketplace--but in a manner that defies the conventional wisdom of the Washington Consensus--Stiglitz points to China. China has adopted privatization and lowered trade barriers, he argues, but in a gradual manner that has prevented the social fabric from being torn apart in the process. With little advice from the IMF, it has achieved high growth rates while reducing poverty. In a series of papers presented while he was the World Bank's chief economist, Stiglitz pointedly contrasted this record with that of Russia, which, following a decade of "shock therapy" and IMF reforms, has seen poverty rise from 2 percent to 50 percent and life expectancy plummet.

Stiglitz's interpretation is an important corrective to the standard free-market view (which portrays China, misleadingly, as a model student of Western economic reform). Some critics of globalization, however, believe a more measured assessment of China is warranted. "Stiglitz is certainly right to point to China as a country that has refused to follow IMF dogma yet achieved fast growth," says John Cavanagh of the Institute for Policy Studies. "But China is an environmental nightmare. It is a country that systematically represses human rights and workers' rights. To people in the global justice movement, it is not the blueprint of a successful society."

Stiglitz's optimism about China, says Cavanagh, underscores the limitations of his critique of globalization. "Stiglitz is part of a school of economists who have begun to question some of the central precepts of globalization," he says, "but not the overall framework." Stiglitz does, in fact, take pains to ground his critique of the Washington Consensus in conventional economic terms, emphasizing that even by standard measures, such as growth, the IMF's prescriptions have often failed.

On the other hand, as Cavanagh acknowledges, Stiglitz has done more to damage the IMF's reputation than any other living economist. And he has not limited his criticism to discrete events such as the Asian financial crisis. While at the World Bank, Stiglitz delivered a series of prominent speeches arguing that growth should not be the sole measure of success, and that developing countries should be able to decide for themselves which policies to adopt. It is a theme he elaborates in his new book, in which he argues that a central goal of development policy should be to benefit and empower the poor.

In retrospect, the only thing Stiglitz seems to regret about his tenure at the World Bank is that he did not speak out sooner. "It took me a while to realize that there was no interest in having a debate about these policies. It was, 'This is how we do things and that is it.' When it became clear to me that some of these things were surely wrong, it seemed derelict not to speak out."

Not surprisingly, those on the receiving end of Stiglitz's criticisms hold a different view. "There was plenty of internal debate" about policy, says Stanley Fischer of the IMF. "But to have vociferous public criticism from someone inside the institution--it was surprising and strange."

Says World Bank president Wolfensohn, "Joe's character is to go straight out.... Institutionally, it's important that when we are projecting the decided view of the institution, we all stick together."

Notwithstanding such pressure, a growing number of people within the World Bank seem to be questioning the official wisdom--and to be paying the price. In June 2000 the economist Ravi Kanbur resigned from the bank after reportedly feeling pressure to tone down the emphasis on poverty reduction in the annual World Development Report. More recently, the World Bank launched a disciplinary investigation into the conduct of William Easterly, a staff economist who had published an editorial in the London Financial Times (based on his book, The Elusive Quest for Growth) that questioned the effectiveness of IMF and World Bank development assistance projects in the postwar era. "The World Bank is like a church--it has a dogma," says David Ellerman, another staff economist, who recently published an editorial in a World Bank newsletter calling for greater tolerance for dissenting opinions. "The problem is that we are dealing with some of the most complex issues facing mankind."

Now that he is no longer bound by institutional constraints, Stiglitz is speaking his mind more than ever. His message is at once simple and incendiary. As he declared recently before a packed hall at Columbia's School of International and Public Affairs, "Countries have to own their development strategies.... Development is not just the accumulation of capital--it is about a transformation of society, a change in ways of thinking. That can't come if countries have everything dictated to them."

Stiglitz was there to talk about his new organization, the Initiative for Policy Dialogue, through which he hopes to do nothing less than end the World Bank and IMF's fifty-year monopoly on development policy. The IPD will, among other things, bring together task forces of economists to outline alternative approaches to a range of policy questions (trade, macroeconomic policy, pension reform). It will also oversee country dialogues, in which economists, policy-makers and members of civil society from developing countries will debate strategies and ideas. Such dialogues have already taken place in Serbia, Vietnam, Ethiopia and the Philippines.

Though ambitious, there is something amorphous about the IPD's mission. The organization does not, for example, put forward a clear-cut, alternative blueprint to the policies of the Washington Consensus. There are also questions about whether Stiglitz, whose lack of management skills was notorious at the World Bank, is capable of running such an organization effectively.

If the IPD's agenda seems nebulous, however, that's in part because its founder does not really believe in blueprints. The whole problem with the Washington Consensus, Stiglitz argues, is that it represents "cookie-cutter" economics: a uniform set of prescriptions imposed regardless of history, social conditions, institutional factors, information asymmetries. In a forthcoming essay on the ethics of serving as an economic adviser, Stiglitz argues that rather than prescribe solutions, economists should emphasize choices, underscoring the risks and trade-offs of pursuing various alternatives. As a rallying point for activists, promoting dialogue and highlighting alternatives may seem frustratingly murky. Yet there is also something potentially radical about it. At bottom, it is an argument for an end to unilateral rule by global elites, and for greater democracy in economic decision-making. It also puts the lie to the notion that in a global marketplace, there is only one true road to prosperity.

As Stiglitz notes, during the 1990s the number of people living in extreme poverty (less than $2 per day) increased by nearly 100 million. Other studies show that in places like Latin America, the policies of the Washington Consensus have not even succeeded in promoting growth, much less in reducing inequality. The events of September 11 bring home the fact that addressing such issues is important for security reasons as well as for moral ones. The point has not been lost on Stiglitz. "Clearly, terrorists can be people like bin Laden who come from upper-income families," he told me. "Nevertheless, abject poverty and economies without jobs for males between the ages of 18 and 30 are particularly good breeding grounds for extremism. Solving the economic problems doesn't eliminate the risk of terrorism, but not solving them surely enhances it."

June 9, 2002

An Ivory Tower Embrace of Views in the Streets

By ALAN COWELL

For several years now, a fractious debate about the role of the big financial institutions in the globalized economy has encircled the world's policy makers, moving from the initial grumblings of the often-unheeded developing world through the street protests of Seattle and elsewhere and on to a much broader agenda.

With "Globalization and Its Discontents" (W. W. Norton, $24.95), Joseph E. Stiglitz, a Nobel laureate in economic science in 2001, has taken the discussion a step further. He shows just how much the protesters' misgivings about and outright hostility toward some of those institutions have moved from the fringes into influential, mainstream thinking.

Professor Stiglitz, a former top economic adviser in the Clinton administration and chief economist at the World Bank, is now an economics professor at Columbia. He has long been associated, of course, with the economics of growth and development in the third world. With this accessible, provocative and highly readable study, he brings an insider's insights into the crises of the 1990's and beyond, from East Asia to Russia and on to Argentina.

His central thesis is simple — that the "market fundamentalism" of the International Monetary Fund, with its insistence that markets themselves will achieve a balance between supply and demand, furthering growth and development, is fundamentally flawed. The I.M.F.'s prescriptions in times of economic crisis, he writes, have caused far more human suffering than they have resolved economic problems.

Globalization has been badly managed, he contends, colliding head-on with some of the nostrums of the I.M.F. and what is sometimes called the Washington Consensus. Those include the idea that poverty is eased by the trickle-down effect of prosperity for the elite and that governments should not get in the way of the markets.

He goes further, embracing ideas once thought the exclusive preserve of the street protesters: the I.M.F. and the United States Treasury Department, he contends, pursue the interests of the big investment banks rather than the poor most directly affected by their macroeconomic solutions to crises like those in East Asia and Russia. Indeed, those interests seem intertwined in the very personalities who exerted such enormous influence as globalization emerged as the dominant force of the 1990's.

After all, he says, did not Robert E. Rubin, the former United States Treasury secretary, hail from Goldman, Sachs and move on to Citigroup after his spell in Washington? Did not Stanley Fischer, the former No. 2 executive at the I.M.F., go directly from that job to a well-paid position at Citigroup?

"One could only ask: Was Fischer being richly rewarded for having faithfully executed what he was told to do?" Professor Stiglitz writes.

The World Trade Organization, too, Professor Stiglitz asserts, promotes the interests of the developed world. The developing world, he says, still labors under unfair rules that restrict access to richer nations that preach trade liberalization but keep their own markets closed.

That is a hypocrisy, he says, that extends to the readiness of the global institutions to bail out their "client" states, differentiating between the strategically significant and the rest. "The I.M.F. is a political institution," he writes, saying the fund was ready to ignore runaway corruption in Russia to rescue Boris N. Yeltsin while suspending aid to Kenya on grounds of corruption.

Of course, it would be disingenuous to ignore Professor Stiglitz's own background as chief economist at the World Bank for almost three years, from 1997 to early 2000. In this study, the bank is spared the searing indictment that Professor Stiglitz reserves for the I.M.F. Yet the two are sister organizations, set up together after World War II. And much as he inveighs against what he calls the I.M.F.'s hard-nosed approach to economic crisis, the World Bank itself withholds loans to developing countries that fail to secure the I.M.F.'s imprimatur on their economic performance.

To that extent, the World Bank itself creates part of the pressure, particularly on developing countries, to accept those same I.M.F. prescriptions that Professor Stiglitz finds so distasteful. Often enough, however, officials of the two institutions behave more as rivals than as colleagues.

Not surprisingly, part of the book's purpose seems to be an attempt to ensure that events during his World Bank tenure do not besmirch his own reputation. In the process, one suspects that some score-settling may well be in play.

Significantly, though, Professor Stiglitz dismisses any illusion that the protesters on the streets of Prague, Seattle or Genoa were some kind of lunatic fringe whose arguments will disappear easily. "For decades the cries of the poor in Africa and in developing countries in other parts of the world have been largely unheard in the West," he writes, and it was only the street protesters "who have put the need for reform on the agenda of the developed world."

Once the issue is on the agenda, of course, the discussion moves on to reform issues that have absorbed some strategic thinkers since the late 1990's. Part of his message reflects his argument that the global financial institutions have drifted away from the Keynesian principles on which they were founded. The I.M.F.'s "market fundamentalism" — placing much faith in freewheeling markets — has not worked, he contends, as much as the economic policies of nations like Malaysia, where government intervention provided protection from the worst of the East Asia crisis.

The countries that have benefited most from globalization, he writes, "have been those that took charge of their own destiny and recognized the role government can play in development rather than relying on the notion of a self-regulating market that would fix its own problems." Equally, though, he says that far greater openness and democratic responsiveness are long overdue, both in the governments of developing countries and in the secretive global institutions where decisions are routinely made in private.

 
As much as anything else, Professor Stiglitz says, all countries should have a clear picture of what development is supposed to achieve. "It is not about bringing in Prada and Benetton, Ralph Lauren or Louis Vuitton for the urban rich, leaving the rural poor in their misery," he says. Development, he says, "is about transforming societies, improving the lives of the poor, enabling everyone to have a chance at success and access to health care and education."

Judged from that viewpoint, the record of globalization has been patchy to date.

And, Professor Stiglitz says, "if globalization continues to be conducted in the way that it has been in the past, if we continue to fail to learn from our mistakes, globalization will not only not succeed in promoting development but will continue to create poverty and instability."  

Jun. 30, 01:00 EDT

Africa suffers, West chants mantra of trade, not aid

Linda McQuaig

WITH THE world leaders packed up and gone, we can now ponder whether Africans will get fed and how the summit will affect Jean Chrétien's profile.

All this is stuff we can relate to. The protesters, on the other hand, seem more perplexing. To begin with, their behaviour doesn't fit with the standard model, where everyone is simply out to maximize their own self-interest.

How to explain the fact that thousands of people across the country took part in demonstrations last week to champion debt relief for Africa, without even receiving handsome retainers or improving their chances of getting into an MBA program? All this concern for others seems hard to fathom.

Clearly, it would be a lot more comfortable for everyone here if these young people would just do something normal — like shop. Why can't they behave like regular folks and put their energies instead into, say, getting a fancier gas barbecue for the cottage?

It's tempting perhaps to conclude that those engaging in snake-dancing without pay or taking off their clothes without the prospect of a porno film deal must be confused — about their lives and about the issues. G-8 leaders and other global economy enthusiasts are hoping we'll conclude that.

But it's worth noting that much of what the protesters say jibes with what an intellectual superstar like Nobel Prize winning economist Joseph Stiglitz has to say. And, interestingly, when Stiglitz said these things in the late '90s, it didn't go down any better with the world's ruling elite. He soon found himself dumped from the prestigious position of chief economist at the World Bank. (So even if they dispense with the green hair and balaclavas, protesters shouldn't count on much of a hearing from the G-8 crowd.)

Stiglitz has no green hair, and when I interviewed him last year, he was in the back of a very mainstream stretch limo (on his way to meet then finance minister Paul Martin, who had sought his opinions.)

What Stiglitz and the protesters have in common, though, is a distrust of the economic model that the G8 leaders — and the vast bureaucracies of the IMF and the World Bank that answer to them — have been imposing on the world in the past two decades, in the name of "globalization."

To listen to a lot of commentators last week, the problem has been that the West has selflessly squandered billions on Africans without demanding a proper accounting (perhaps Arthur Andersen could have helped out), and rendering them dependent. In this version of events, Africa is akin to the legendary beer-slugging welfare mom who can't make anything of her life because she's so hooked on hand-outs.

This is a comforting thought for the West. People are dying over there despite our generosity. What's needed is a little tough love on our part. Trade, not aid.

But Stiglitz — who witnessed things close up, from inside the Washington power circle — presents the West's role as far less benign. It turns out that these no-strings-attached hand-outs never existed. Stiglitz notes that we routinely force developing countries to accept a rigid set of conditions aimed at weakening their governments and opening their markets for Western penetration, even though all successful economies — including the U.S. and the celebrated east Asian tigers — got started with some mix of strong government and protected markets.

It wasn't surprising, then, that when a group of African leaders came forward with their own aid package, known as NEPAD, they adhered to this open-market formula, knowing who they were appealing to. (No point in pitching abstinence to a room full of priests.)

Stiglitz says IMF experts regularly make decisions about what's best for Third World countries while experiencing little more than the room service and pool facilities at the local first-class hotel. Many IMF economists, he suggests, seem to regard themselves as "shouldering Rudyard Kipling's white man's burden."

The results haven't been good. After two decades of being subjected to this open-market, weak-government model, no country has worked itself out of the debt that brought it to the IMF and World Bank in the first place, according to the Washington-based Jubilee USA Network.

Of course, the same two decades produced great wealth, particularly for a tiny elite in the West who now finance an industry of think-tanks to convince everyone else that "globalization" is beneficial and, even if it isn't, it's inevitable, so get used to it.

Meanwhile, at country clubs and golf courses throughout North America, there seems to be much certainty that Africa could do fine if it just faced up to the fact that what it needs is more trade and less aid. And there's similar conviction that if those young protesters would just think a little more clearly, someday they could all be driving BMWs.

Linda McQuaig is a Toronto-based author and political commentator.

IMF Advocates Trade and Aid as Solutions to Poverty
A Letter to the Editor
By Graham Hacche
Deputy Director, External Relations Department
IMF
The Toronto Star
July 9, 2002

Linda McQuaig writes that "a lot of commentators" are pointing to the ineffectiveness of aid in Africa, which she views as a convenient excuse for the slogan "trade, not aid" (June 30). It is unclear exactly to whom she is referring, but she cannot tar the IMF with this brush. She and Professor Stiglitz do not have a monopoly on compassion, as she seems to suggest, and it is becoming increasingly well understood that Stiglitz is an unreliable source of information on the IMF. In fact, the IMF has always been clear that both trade and aid are needed.

On aid, there is a growing consensus, responding to many advocates including IMF Managing Director Horst Köhler and his predecessors, on the need to boost global aid flows. The campaign seems to be having some effect, as some countries have been edging up their aid commitments—though much more is needed.

But increased aid alone is not sufficient. Proponents of trade as an engine of economic growth and poverty reduction are not just asking for greater efforts by Africa and other poor countries, as McQuaig insinuates. They are also calling—more loudly—on industrial countries to open their markets to the products of poor countries, notably agriculture and textiles. This will require politically difficult cutbacks in subsidies to farmers in the industrial countries, but it is a very effective way to help poor nations. What is more, people in the industrial countries themselves stand to benefit from cheaper imports and lower government spending.

To further set the story straight, contrary to Professor Stiglitz's imaginative views quoted by McQuaig, a major part of IMF policy advice and technical assistance is aimed at strengthening governments' capabilities in economic management. But there are limits to what governments can and should do, and the IMF recommends that governments enable and promote productive private sector activity, within an environment of appropriate regulations. This is far removed from the "weak-government" model referred to by McQuaig.

IMF EXTERNAL RELATIONS DEPARTMENT

From IMF Internet Site

 Calling the wrong shots?

Jul 9th 2002
From The Economist Global Agenda

The continuing crisis in Argentina has brought the work of the International Monetary Fund under close scrutiny. Critics of the Fund argue that its prescriptions are often wrong, exacerbating rather than alleviating economic problems in emerging market economies

HINDSIGHT is a wonderful thing. It is especially useful when analysing international financial crises. Only long after the pressure of the moment is it possible properly to work out what happened, and why; whether the crisis was preventable in the first place; and whether, once disaster struck, those involved took the right steps. Mistakes are inevitable when decisions are taken under pressure—so a scapegoat is very useful. Enter the International Monetary Fund (IMF).

The economic and financial collapse in Argentina at the turn of the year has brought the IMF’s handling of crises under renewed scrutiny. The Argentine government, struggling with political paralysis at home, has attacked the IMF for its refusal to provide additional help. President Eduardo Duhalde, the fifth man to hold the job since December, blames the American government—the Fund’s principal paymaster—for its failure to understand the depths of the crisis in his country. He and other Latin American leaders have started to talk about the risk of contagion if Argentina fails to get more help from the Fund.

The mention of contagion is enough to sound alarm bells. Those involved in the financial meltdown which spread rapidly through many Asian economies after the devaluation of the Thai baht in July 1997 know how frightening a full-blown international crisis can be. So do those with even longer memories going back to the third-world debt-crisis of the early 1980s. Add in the Mexican “tequila” crisis of 1994, and the Russian debt default in 1998. It’s a long list, and in every one the IMF played a pivotal role. Even now, new clouds are gathering over Turkey, with a political crisis threatening to derail the IMF programme put in place last year.

What’s puzzling to the casual observer this time is the reluctance of the IMF to come up with a rescue package for the shattered Argentine economy. The Fund’s negotiators have deliberately adopted a tough line, insisting on important economic and financial reforms as a precondition for further help. Some critics have accused the Fund of coming up with new conditions each time the Argentine government fulfils a previously-demanded set of reforms.

Indeed, the Fund’s critics are having a field day. Joseph Stiglitz, a Nobel prize-winning economist, and previously chief economist at the IMF’s sister institution, the World Bank, has launched a fierce attack on the Fund’s policies. In essence, his newly-published book, which is also vituperative about key IMF figures, accuses the Fund of being the puppet of Washington and Wall Street, prescribing policies wholly inappropriate to emerging-market economies in trouble. Mr Stiglitz’s tirade has struck a chord with many opposed to what became known as the Washington consensus and with many who, unlike Mr Stiglitz, see globalisation as a negative, destructive force.

The normally reticent IMF has leapt to its own defence. Mr Stiglitz himself has been the target of some pretty forceful—and personal—counterattacks from senior Fund staffers. But the IMF’s defence goes beyond an attack on Mr Stiglitz’s veracity or the coherence of his ideas. In essence, the IMF’s defenders are saying, that they have done their best in uncertain circumstances, and tried to learn from their mistakes.

Take the crisis in Argentina. The plight of an economy in its fourth year of recession, with unemployment at near 25%, a banking system in collapse and many people’s savings both devalued and inaccessible, is bound to arouse sympathy. It is easy to accuse the Fund of hard-heartedness. It is also easy to criticise the IMF, as several economists have, for being too generous to Argentina in the past. The $8-billion rescue package it provided in August last year was a costly mistake: it simply postponed what was, by then, an inevitable crisis, caused by the fixed peg between the peso and the dollar. It was obvious to many observers at the time that the longer the government tried to keep the currency peg, the worse would be the eventual pain. So it proved. Some economists think the Fund has consistently been much too slow to modify its views on exchange-rate policies, both in the light of policy experience and of economic research.

There do seem to be institutional impediments to policy modification. The IMF has a reputation among some outside critics (including members of the World Bank) for being too dogmatic and rigid. It is difficult, though, to push through economic reform in recipient countries if the impression is of policy made on the hoof. In Argentina’s case, the IMF endorsed, but did not impose, the currency peg. And behind-the-scenes efforts were made during 2001 to persuade the Argentine government to abandon the peg—to no avail.

Of course, the IMF is used to the role of scapegoat. Governments in trouble find it useful to have an outside agency to blame, especially when unpopular policies are needed to deliver necessary economic reform. This is not a new phenomenon: when Britain was the largest Fund debtor in 1976, the British government used IMF requirements as the excuse to push through painful public spending cuts.

The British experience is relevant for another reason. The Fund’s prescription at the time was based on economic data which subsequently turned out to have exaggerated the extent of the crisis. Decisions had to be made on the basis of unreliable data from a sophisticated industrial economy: government statistics in emerging-market economies are often even more unreliable, making the IMF’s job that much more difficult.

The Fund has made mistakes and it does try to learn from them, though perhaps not always as quickly as it should. Exchange-rate policy is one area where lessons have been taken to heart. Another is conditionality: the Fund was heavily criticised in the late 1990s for imposing far too many, and too detailed, conditions on its debtor countries. Some Fund staffers were defensive about these charges, but Horst Köhler, who took over as managing director in 2000, has made this a central plank of policy: fewer conditions are more effective, he says.

The IMF has also, somewhat belatedly, tried to come up with proposals for reforming the international financial architecture—something that was seen as urgent at the time of the Asian crisis. The aim is to make crises easier to spot, and to find ways of preventing them. Such work is important. But crises of one sort or another, usually from unexpected directions, seem almost inevitable in a complex global economy with so many national governments pursuing independent policies. A rapid policy response from the IMF, often in circumstances of uncertainty and doubt, will be needed again. Count on it.