ilencing Joseph Stiglitz

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)

                   - - - - - - - - - - - -

                   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

                   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



                   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

                   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.

          | May 2, 2000


                   - - - - - - - - - - - -


                   About the writer

                   David Moberg is a senior editor at In

                   These Times.