Silencing Joseph Stiglitz
The World Bank cuts its ties to the economist who became an unlikely hero to
world trade protesters.
Salon Magazine (05/02/00)
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BY DAVID MOBERG
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
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
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
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
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
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
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About the writer
David Moberg is a senior editor at In