Thanks for Nothing

Thanks for Nothing

 

                        A former chief economist at the World Bank offers a case study in how

                           heavy-handed interference can break what doesn't need fixing

                                                 

                                           by Joseph Stiglitz

                                                 

                       During the recent demonstrations in Seattle, Quebec City, and

                       elsewhere denouncing the International Monetary Fund and the

                       World Bank, the press tended to dismiss the protesters as

                       fringe reactionaries ignorant of the benefits of globalization. But

                       although no one condones the violence in Genoa, for example, it

                       would be wrong simply to reject many of the protesters' concerns. As

                       the chief economist at the World Bank from 1997 to 2000, I have

                       seen firsthand the dark side of globalization—how the liberalization of

                       capital markets, by allowing speculative money to pour in and out of a

                       country at a moment's whim, devastated East Asia; how so-called

                       structural-adjustment loans to some of the poorest countries in the

                       world "restructured" those countries' economies so as to eliminate

                       jobs but did not provide the means of creating new ones, leading to

                       widespread unemployment and cuts in basic services. The media and

                       the public have since become concerned about this dark side as

                       well—globalization without a human face, it is sometimes called.

 

                       However, the issue that is commonly debated—namely, whether we

                       should be "for" or "against" globalization—is not the salient one. As a

                       practical matter there is no retreating from globalization. The real issue

                       is the conduct of the international economic organizations that steer it.

                       If we continue with globalization as it has been managed in the past,

                       its agenda driven by the North for the North, reflecting the North's

                       ideologies and values, the future will not be bright. There will be a

                       backlash in the developing world and increasing conflict with the

                       developed world. There will be greater global instability and rising

                       doubts about the value of a market economy. Those doubts are

                       already reflected in a pervasive hostility toward the IMF in the Third

                       World: in Thailand and Korea, for example, ordinary citizens refer to

                       their countries' debilitating recessions as "the IMF." Yet well-managed

                       globalization has enormous potential for improving the lives of people

                       in poor countries.

 

                       Events in Ethiopia offer a case study of the ways in which

                       globalization can go awry, and they highlight the need for reform. In

                       March of 1997, barely a month into my job at the World Bank, I

                       went to Ethiopia to meet with Prime Minister Meles Zenawi. Meles

                       came to power in 1991, after a seventeen-year guerrilla war against a

                       bloody Marxist regime. His victory left him facing seemingly

                       intractable problems. Ethiopia, at the time a nation of 58 million

                       people, had a per capita income of around $100 a year. Droughts

                       had killed millions. Though he trained in medicine, Meles had studied

                       economics at the Open University, in England, and knew that only

                       major changes in economic policy could bring his country out of

                       poverty. During our discussions he showed a deeper and more subtle

                       understanding of economic principles (not to mention a greater

                       knowledge of the circumstances in his country) than many if not most

                       of the international economic bureaucrats I would deal with in the

                       succeeding three years.

 

                       These intellectual attributes were matched by integrity: Meles was

                       quick to investigate any accusations of corruption in his government.

                       He was committed to decentralization—to ensuring that the center did

                       not lose touch with the various regions.

 

                       At the time of my arrival Meles was engaged in a bitter dispute with

                       the International Monetary Fund, which had suspended its program in

                       his country. At stake was not just some $125 million of IMF money

                       but potentially hundreds of millions of dollars in World Bank loans as

                       well. Traditionally the World Bank is reluctant to lend money unless

                       the IMF certifies that the country in question has a solid

                       macro-economic framework. The provision is well intentioned: history

                       has shown that governments that cannot manage their overall

                       economy do not do a good job managing foreign aid.

 

                       The IMF is supposed to judge performance by results. Ethiopia's

                       results could not have been better. It had no inflation; in fact, prices

                       were falling. Output was growing steadily. Meles was demonstrating

                       that with the right policies even a poor country recovering from civil

                       war and famine can experience sustained economic growth. After

                       years of struggle and rebuilding, Ethiopia was beginning once again to

                       receive assistance from Western governments.

 

                       Judging by results, then, the IMF should have given Ethiopia an A+.

                       And there were other positive indicators, such as direct evidence of

                       the competence and commitment of the government. For instance, it

                       had cut back dramatically on military spending—a remarkable feat for

                       a government that had come to power by military means—in favor of

                       spending to fight poverty. This was precisely the kind of government

                       to which the international community should have been directing

                       assistance. Yet the IMF had suspended its aid. Why?

 

                       The Fund was worried, first, about the role of foreign aid in the

                       government's budget. A poor country like Ethiopia has two sources of

                       revenue—taxes and foreign assistance. The government's budget is

                       balanced as long as those revenues equal expenditures. This may

                       seem like elementary economics—but it is not IMF economics.

                       Although Ethiopia's budget was balanced, the Fund argued that the

                       country's budgetary position was untenable: what would happen if

                       foreign assistance suddenly dried up? Ethiopia should act immediately,

                       the Fund argued, to prevent the possibility of disaster. That meant

                       cutting spending or raising taxes—a difficult action in any country, but

                       especially in a desperately poor one.

 

                       An argument against long-term reliance on foreign aid may be

                       superficially appealing, but in reality it dictated that Ethiopia's

                       expenditures could be paid for only by tax revenues. That is a

                       fundamentally unsound policy: it means that foreign aid does not lead

                       to more schools or health clinics. Instead the money is, in effect,

                       simply added to reserves. Surely this was not the intention of the

                       international donor community. Surely donors wanted to see those

                       new schools and health clinics built in Ethiopia. Meles put the matter

                       to me passionately: he said that he had not fought so hard for

                       seventeen years to be told by some bureaucrat that he could not

                       actually provide improved services for his people once he had

                       persuaded donors to pay for them.

 

                       I cannot adequately describe the emotional force of his words or the

                       impact they had on me. I had taken the World Bank job with one

                       mission in mind—to work to reduce poverty in the poorest countries

                       of the world. I had known that the economics would be difficult, but I

                       had not fathomed the depth of the bureaucratic and political problems

                       imposed by the IMF.

 

                       Meles provided an economically sound response to the IMF's

                       concerns about the stability of foreign aid: flexible spending. Building

                       schools and clinics does not require long-term commitments. If

                       donors provided money to build schools, Ethiopia would build

                       schools; if they stopped providing funds (as they had for a while),

                       Ethiopia would stop building schools. But the IMF would not be

                       swayed.

 

                       The IMF had other bones to pick with Meles. In 1996 Ethiopia

                       repaid a U.S. bank loan early, using some of its reserves. The

                       transaction made perfect sense. In spite of the solid nature of its

                       collateral (an airplane), Ethiopia was paying a far higher interest

                       rate on its loan than it was receiving on reserves. But the United

                       States and the IMF objected. They were bothered not by the logic of

                       the strategy but by the fact that Ethiopia had undertaken this course

                       without consulting the IMF. The IMF used this failure to consult as

                       one of the grounds for suspending its program. But why should a

                       sovereign country—one whose policies had convincingly

                       demonstrated its capability—have to ask permission of the IMF for

                       every action it undertakes?

 

                       Another point of contention related to financial markets. Even after

                       the United States experienced the ruinous consequences of financial

                       deregulation, in the form of the savings-and-loan debacle, the IMF

                       preached the gospel of rapid deregulation around the world, to

                       countries far less able to withstand its negative consequences. Earlier

                       deregulation in Kenya had led to soaring interest rates there. Meles

                       sensibly resisted such a move in Ethiopia. But the IMF continued to

                       insist on deregulation, and not even a panel of scholars I assembled,

                       most of whom supported Meles's position, could budge the

                       organization.

 

                       These episodes highlight two troubling aspects of the IMF's

                       characteristic behavior. The first concerns secrecy. Because so many

                       of its decisions are reached behind closed doors, the IMF leaves itself

                       open to suspicions that power politics, special interests, or other

                       agendas unrelated to its stated purposes are at play. For example,

                       some critics questioned whether it was just a coincidence that

                       Ethiopia's early repayment deprived a U.S. bank of a high-interest,

                       secure-collateral loan on which it was making large profits and that

                       the United States was the country most vociferously protesting. A

                       second, closely linked aspect concerns the subordination of matters of

                       substance to matters of process. The processes themselves, with the

                       numerous conditions that are often attached, not only infringe on

                       national sovereignty but also tend to undermine democracy.

 

                       I returned to Washington from Ethiopia gravely upset by what I had

                       seen. During the following weeks I convinced the World Bank that

                       the IMF's position made no sense, and the Bank tripled its lending to

                       Ethiopia. In the ensuing years the country has been beset by political

                       problems and war. It is impossible to know whether some of its

                       travails could have been avoided or mitigated if aid had been more

                       forthcoming.

 

                       The debate over globalization has already had an impact: the IMF's

                       rhetoric, and in some instances its actions, have changed. The IMF

                       talks more about poverty and participation than it used to. Last year it

                       finally offered a number of poor countries meaningful debt relief. Still,

                       these are only beginnings.

 

                       The biggest problems afflicting the IMF and other instruments of

                       globalization concern governance. At the United Nations five

                       countries can exercise veto power. In the IMF only one—the United

                       States—can do so. At both the IMF and the World Bank voting

                       rights are allocated not according to population but according to

                       economic power, and the various countries' representatives are

                       typically finance ministers or members of central banks, not officials

                       with broader outlooks and concerns. Most of the debate about

                       reforming the international economic architecture has occurred within

                       these same small, elite circles. The voices of those most affected by

                       globalization are barely audible in discussions about how the table

                       should be reshaped and who should have a seat at it.

 

                               What do you think? Discuss this article in Post & Riposte.

 

                                                        

 

                       Copyright © 2001 by The Atlantic Monthly Group. All rights reserved.

 

The Atlantic Monthly; October 2001; Thanks for Nothing;

 Volume 288,  No.  3; 36-40.