December 2, 1999

World Bank Economist Felt He Had to Silence Criticism or Quit

Related Article
  • Outspoken Chief Economist Leaving World Bank (Nov. 25, 1999)

    WASHINGTON -- For Joseph Stiglitz, the choice was stark: Either silence his criticism of global economic policies as practiced in Washington or resign as chief economist at the World Bank. He resigned, and in doing so focused attention on the uncertain role of academic economists in positions of power.

    As Stiglitz sees it, Washington has failed to keep pace with the latest thinking on sustaining growth in developing nations. There is an "intellectual gap between what we know," he said in an interview, "and what is still practiced" at the Treasury Department and the International Monetary Fund.

    Yet there is an inherent tension in Stiglitz's position. As the World Bank's chief economist, he has had a seat at the policy-making table. The World Bank, in effect, has helped to make the decisions that Stiglitz criticizes, an unusual role for an insider. Nevertheless, James Wolfensohn, the bank's president, openly supported Stiglitz in his views until October, when he criticized him once publicly.

    Stiglitz's dissents generated an unusual amount of debate over the proper policies for the global economy, particularly after much of Asia, joined later by Russia, Brazil and other developing countries, plunged into turmoil shortly after Wolfensohn and Stiglitz joined the World Bank.

    "It has become obvious to me that it would be difficult to continue to speak out as forcefully and publicly as I have on a variety of issues and still remain as chief economist," Stiglitz said. "Rather than muzzle myself, or be muzzled, I decided to leave."

    His premature departure, announced last Wednesday and effective on Jan. 1, removes from Washington the most outspoken critic of the practices that the big industrial nations favor in their relations with the developing world. Those practices emphasize open markets, unrestricted borrowing from foreign lenders, rapid privatization, balanced budgets, a minimal government role and various austerity measures when crises strike.

    Stiglitz, who has been the leader in developing theories that challenge standard economic policy, also emphasizes open markets. But he argues that markets on their own frequently fall short of the promised prosperity, and a little government intervention can usually improve the outcome.

    Treasury and the IMF, for example, insisted that the East Asian countries in difficulty raise interest rates to restore investor confidence. Higher rates scare investors, Stiglitz replied, and produce recessions that are more damaging than if governments held rates down.

    Controls on short-term lending from abroad became another point of contention. Stiglitz argues that developing countries should limit such loans to avoid the massive defaults and devaluations that can occur when foreign lenders lose confidence and demand repayment, precipitating a crisis. But even after that happened in East Asia, policy-makers frowned on setting limits on short-term lending, although they are more open to the practice now.

    "The Stiglitz group represents one of the most important innovations in economics in the last 100 years," said Kenneth Arrow of Stanford University, who has altered his own views as a result of the Stiglitz influence. His early research, emphasizing the efficiency of a laissez-faire market system, had helped him to win a Nobel prize in economics.

    But Stiglitz's style is another matter. It raises the question, in Arrow's mind, of what an economist who takes a job in Washington should do when his expertise tells him that policy decisions are bad economics. Should he go public, or should he confine his disagreement to closed door discussions with other officials and then, once the decision is made, remain silent?

    The 56-year-old Stiglitz, who came to Washington from Stanford , is the most prominent example in this decade of the outspoken approach. Two other top economists in government represent the opposite style, publicly endorsing official policy and indeed formulating much of it. They are Lawrence Summers, the treasury secretary who came to Washington from Harvard University, and Stanley Fischer, the IMF's first deputy managing director, formerly of the Massachusetts Institute of Technology.

    Both sent word through aides that they were not available to comment. Among economists, speculation had circulated for weeks that Summers had pressured Wolfensohn to silence Stiglitz. Amid official denials of any such behind-the-scenes moves, Stiglitz said that he had come to the conclusion that he could no longer continue to speak out bluntly and also remain at the World Bank.

    "In a sense, there was a question of personal and professional integrity," Stiglitz said. "Remaining silent when people were pursuing wrong ideas would have been a form of complicity."

    Arrow, while intellectually leaning toward Stiglitz's views, has mixed feeling about his public dissents. "You certainly want debate and you cannot always have it behind closed doors," he said. "But you cannot do one policy and have the world on notice that you might switch to another. It is very hard to define the rules of this game."

    Olivier Blanchard, an MIT economist, is more definite. "Much of the content of the Stiglitz message, the role and the complexity of institutions needed to make markets work, is something that most of us feel at ease with," he said. "But the style has some of us unhappy. The issue is not lose the message, but do it in a way that is more productive politically. That is an aspect that Joe has ignored."

    Not surprisingly, Stiglitz disagrees. Less visible, more diplomatic dissent is suitable, he says, when there is time for gradual change. But "it became very clear to me that working from the inside was not leading to responses at the speed at which responses were needed," he said. And when dealing with policies "as misguided as I believe these policies were, you have to either speak out or resign."

    Whatever his reasons, Stiglitz's departure from the World Bank came sooner than he had anticipated. His appointment as chief economist would have come up for renewal in February and he had said that he intended to remain in Washington at least until his youngest child graduates from high school next June. He plans now to join a Washington think tank in January -- he has not decided which one -- and return to Stanford in the fall.

    He will not sever all his ties with the World Bank. Wolfensohn has asked him to head a search committee for a new chief economist. Wolfensohn praised Stiglitz last week for moving the bank away from the market-oriented "Washington consensus." Indeed, with Wolfensohn's support, Stiglitz had gone public with criticism of official policy far more than he had while working for President Clinton as a member of his Council of Economic Advisers and then as the council's chairman.

    But last fall, for the first time, Wolfensohn criticized his chief economist publicly, stating that Stiglitz's views on Russian privatization were "not wholly correct."

    With encouragement from the West, Stiglitz says, Russia privatized state companies too rapidly, counting on market forces to discipline their behavior. But laws and institutions were needed first to prevent powerful shareholders from channeling corporate wealth into their own pockets.

    Stiglitz's solution fits his modus operandi: economically sound but politically difficult. The Russian government, he says, should re-acquire the companies, just as the American government takes control of a failed bank or seizes corporate assets for nonpayment of taxes. The privatization process could then be restarted, he said, "but gradually and in the proper sequence."

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