Asia Times online

Nov 16, 1002

BOOK REVIEW
Globalizing poverty, IMF style
Globalization and its Discontents, by Joseph Stiglitz

Reviewed by Sreeram Chaulia

When left-wing economist Michael Chossudovsky released a devastating critique of international financial institutions in The Globalisation of Poverty (1997), it was quickly dismissed by many in the West as a propaganda tune of what British Prime Minister Tony Blair berates as the "riff-raff" who have caused trouble and violent street protests in Seattle, Prague, Nice, Gothenburg and Genoa. But what if a Nobel laureate, former economic adviser to the American White House and former chief economist of the World Bank publishes an even more powerful expose of the machinations of the Washington Consensus which has heaped unimagined misery and privation on developing countries? You sit up and take notice. Right?

More than that, after reading it, you can no longer be silenced as a "disguised Marxist" who doesn't understand market economics but rants away about alleged oppression of the poor. Stiglitz's book is a weapon, a well of information, which every global citizen must wade into, so that the next time the Czars of "market fundamentalism" try to muffle your voice, you have the answers and the right to hold them accountable for their deeds. Stiglitz's own aim in writing is to "improve the information that citizens have about what these institutions do, allowing those who are affected by the policies to have a greater say in their formulation". (Preface)

Market colonialism
The International Monetary Fund (IMF) and its sister organizations have taken several "wrong-headed actions" in the past decade based on the outworn presumption that markets, by themselves, lead to efficient outcomes, actions which "make the rich richer and the poor more impoverished - and increasingly angry". (p.xv) The benefits of globalization - removal of barriers to free trade and closer integration of national economies - under IMF supervision have gone disproportionately to the better off, pauperizing those at the bottom of society in every part of the world. From 1990 to 1998, the actual number of people living in poverty increased by more than 100 million, even though world income rose by 2.5 percent per annum. Promising to herald unprecedented prosperity, globalization has proceeded to usher in unprecedented poverty.

Not only has the IMF ruined livelihoods of many a common man, it has also failed in ensuring global economic stability by mismanaging crises in East Asia, Latin America and Eastern Europe. Collapsed currencies, weakened banking systems and indebted transition countries are the manifestations of one decade of market fundamentalism and naivete that laissez-faire works always, all the more ironic since J M Keynes envisaged the IMF in the 1940s under the belief that markets had imperfections which needed corrective government intervention. Stiglitz offers a deeper reason than IMF slavery to "textbook economics" for exacerbation of macroeconomic crises and poverty - "the institutions are not representative of the nations they serve, but rather are closely aligned with the commercial and financial interests of those in the advanced industrial countries". (p.20)

IMF resident country representatives are like "colonial rulers" who callously impose policies on poor nations from their luxury hotels, just as in modern hi-tech warfare, "dropping bombs from 50,000 feet ensures that one does not feel what one does". (p.24) When an advanced country like South Korea could not help but accept the severe fiscal stringency measures forced on it by the IMF in 1997-98, can Ethiopia or Nepal resist? Besides cutting off aid, the IMF uses its "bully pulpit" to discourage private financiers to invest in countries that do not follow its dictates, a form of economic blackmail that few can resist. The IMF is also highly undemocratic in practice, by dealing solely with finance ministers and central bank governors who represent dominant financial and corporate barons of their countries. "The idea that citizens in a borrowing country might also participate in policy was simply too much." (p.50) The IMF does not recognize the citizen's basic right to know about public policies that impact heavily on her or his life.

The IMF's lending and crisis management are always predicated on the mantra of rapid privatization, without worrying about necessary safety nets such as unemployment insurance or maintenance of pensions. "Eliminating the government enterprise may leave a huge gap - and even if eventually the private sector enters, there can be enormous suffering in the meanwhile" (p.55), suffering that the fund coldly terms "necessary pain" of adjustment. IMF-ruled privatization in the Ivory Coast, a sample for scores of other developing countries, destroyed jobs instead of creating new ones and inspired urban violence, increased crime, social and political unrest, and ultimately, a civil war. Stiglitz also pooh-poohs the claim that privatization guarantees a reduction in corruption, because the non-transparent manner in which politicians conduct it with the IMF nod ensures "briberization" on a much larger scale. Privatization of health, education and water supply on false IMF assurances that consumption and enrollment would not fall have also taken a heavy toll on the poor.

The IMF and the World Trade Organization contentions that more jobs will be created by trade liberalization and elimination of tariff protection have also not materialized, with sub-Saharan Africa's income declining by more than 2 percent after the implementation of GATT's Uruguay Round rules. Theories that without liberalization, foreign capital and investment will not come have been proven unfounded when China demonstrated that capital market liberalization was not needed to attract foreign direct investment. Indiscriminate financial sector liberalization led to the Argentine and Bolivian domestic banking sector being dominated by foreign-owned entities, contributing to macroeconomic instability and ultimately full-blown crises. The IMF has also pushed through its "colonial mentality" by insisting on foreign entrepreneurship to rectify domestic corporate malfeasance, most notably in Korea's microchip industry.

Stiglitz finds it incredible that the IMF, which poses to be the sole reservoir of "sound advice" to less developed countries, has no emphasis on employment, wages or land reform. All that the fund cares for is keeping inflation under check, budgetary deficits in range and exchange rates in order, while harping that in the long run poverty can be attacked through Hooverite economics. But then, Keynes is worth recalling - "In the long-run, we are all dead."

Bungling in East Asia
The IMF-ordered excessive financial and capital market liberalization was the single most important cause for the onset of the East Asian downturn in late 1997. Several East Asian governments feared "hot" speculative money that came in with liberalized capital markets, but except Malaysia, none could afford to "risk the wrath of the IMF" and chart a different course. Once the crisis began, instead of admitting its foolish mistakes, the IMF charged individual countries with corruption and failing to take necessary reforms seriously. This blame game exacerbated the stampede of capital out and put countries of the region, which in the first place had high domestic savings and did not need additional foreign investment, on the razor's edge.

Austerity measures were quickly shoved down East Asia's throat as the crisis swelled, without realizing that "the problem was not excess demand but insufficient demand". (p.104) The fund and its godfather, the US Treasury, failed to recognize the important trade interactions among countries in the region, and continued to prescribe contractionary policies that worsened the contagion from Thailand to Indonesia, Korea, Malaysia and Japan. IMF bureaucrats strangled economies by raising interest rates up 50 times, making the recession even worse, especially hurting small businesses, workers and the marginalized. When Japan proposed a stimulus package through a new Asian Monetary Fund, the IMF promptly squelched the idea as a threat to its turf. It "did not want competition in its own domain". (p.112)

In the guise of "financial restructuring", the IMF then overlooked the importance of keeping credit flowing by laying down that all banks in the crisis-ridden economies shut down or quickly meet impossible capital adequacy ratios. Good economics would have required bankruptcy and standstill agreements, but the IMF's "bank run" and exorbitant interest rates forced shutdowns, leaving firms without enough working capital to maintain production, let alone expand. Corporate restructuring was successful in Korea and Malaysia, where governments took an active role, but languished in Thailand, where the IMF's word was supreme. Indonesia followed IMF advice and cut food and fuel subsidies for the poor, only to see riots break out the very next day. Mahathir Mohamad's Malaysia, with a track record of ethnic riots, did not take the doctor's advice and fared far better. Ironically, Malaysia was thoroughly criticized by the international financial community and the IMF, though it was the most successful in emerging from recession.

Sending Russia into a tailspin
Throughout the 1990s, Boris Yeltsin was encouraged by Western aides and economic institutions that "if the Russian people were allowed to choose, they would not choose the 'correct' economic model", and therefore all market reforms were enacted by decree, circumventing the Duma. It was a crude Bolshevik-style shock therapy transition that went horribly wrong.

The IMF was a major advocate of maintaining Russia's overvalued currency during its 1998 crisis. It supported the artificial exchange rate at a high level by pumping in billions of dollars of loans, only to allow Wall Street financiers and the mafia oligarchs to take out their investments and loans and crush the economy. Encouraging opening up of capital accounts facilitated a rush of money out of the country. Russia was also induced to make more foreign borrowing, leading the government to suspend its debt payments in August 1998. "By lending Russia money for a doomed cause, IMF policies led Russia into deeper debt, with nothing to show for it." (p.151) Having told Russia that trade liberalization was necessary for a successful transition, the US Treasury and the IMF shut the door to Russian aluminum and uranium exports with the self-centered motto: "Trade is good but imports are bad."

The outcome of the fiasco was that while only 2 percent of Russians lived under poverty in 1989, by late 1998, the number soared to 23.8 percent. Russia today has levels of income inequality comparable with the worst in the world. IMF infatuation with privatization without concomitant competition and anti-trust policies has engendered the rise of monopolies and cartels managed by crony capitalists. "A few friends and associates of Yeltsin became billionaires, but the country was unable to pay pensioners their $15 a month pension." (p.159) The poor today consume fewer calories of food and energy even though World Bank economists boast that Mercedes car traffic jams are far too frequent in Moscow!

Poland, the most successful of the former Easter Bloc transitions, has credited its performance to explicit rejection of the doctrines of the Washington Consensus. China's gradualist approach to transition avoided the pitfalls that marked the shock therapies of Russia and other Eastern European countries under IMF tutelage. The way ahead, according to Stiglitz, is for each country to determine what is best in light of its peculiarity and to refuse IMF bullying and "one size fits all" remedies.

Reforming the sham reformers
The IMF is a public institution created to address failures in the market, which is strangely run by powers that have a high level of confidence in markets and little confidence in public institutions. By not accepting market failures and the right of governments to intervene, the IMF has shown a failure to justify its own existence. Meant to solve problems of instability and crisis, today the IMF has become part of the problem. It has moved from "serving global economic interests to serving the interests of global finance". (p.207) The IMF is essentially an institution pursuing policies that are in the interests of creditors, as was blatantly unveiled when Wall Streeters placed bets on the size of the IMF's new bailout package for recovering their latest loans made to Russia. Billions went to corporate and financial bailouts in Indonesia, leaving nothing for those forced into unemployment. IMF autocracy has brought matters to such a head that "the world feels it is being deprived of making its own choices". (p.221) Workers thrown out of jobs due to IMF programs have no seat at the table in Washington or country capitals.

Abandoning globalization is neither feasible nor desirable to Stiglitz, who strongly thinks that the problem is with the way it is being implemented. The potential benefits of globalization can be realized only through caring about the environment, making sure that the poor have a say in decisions affecting them, promoting fair trade and democracy. The most fundamental change is for a change in voting rights in the IMF and World Bank, where the US has a virtual single veto. Short of this, increased openness and transparency in global economic organizations is warranted. The IMF should be "more honest, more forthright, more modest". (p.231) It should limit itself to its core area, managing crises, and stay out of development issues or transition economies.

In crises, it should accept the dangers of capital market liberalization and financial sector deregulation. It must ensure improved safety nets by increasing capacities of the vulnerable to absorb risks. It must also disclose the expected poverty and unemployment impacts of its programs. IMF conditionality has "gone too far" and could be replaced by "selectivity", ie giving developing countries with good track records freedom to choose their own development strategies. IMF ceilings and criteria on debt relief need to be relaxed further. Without such reforms, the backlash that has already set sail will mount and destroy global economic, social and political order.

Conclusion
Stiglitz displays a soft corner for his own alma mater, the World Bank, while lambasting the IMF. He is hopeful that the International Bank for Reconstruction and Development will allow individual countries to be "in the driving seat" in the future, unlike the colonial IMF. But one would have liked him to take a more critical look at the bank, too, and ask why exactly it allows its development assistance to be linked to IMF structural adjustment stipulations.

Having said that, Globalization and its Discontents is the most important book of the year on one of the most important subjects of our times. Whether globalization can be reformed and its benefits more widely shared is the biggest question of the new century. Stiglitz offers a narrative from the proverbial horse's mouth and shows rare candor and courage by speaking out against a system of which he was himself a part.

Globalization and its Discontents, by Joseph Stiglitz, W W Norton & Co, 2002, New York. ISBN: 0-393-05124-2. Price: US$24.95, 282 pages.