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.

The Atlantic Monthly; October 2001; Thanks for Nothing;

Volume 288, No. 3; 36-40.