December 2, 1999
World Bank Economist Felt He Had to Silence Criticism or Quit
Outspoken Chief Economist Leaving World Bank (Nov. 25, 1999)
By LOUIS UCHITELLE
ASHINGTON -- 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
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
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
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."