Inside Out

by David Moberg

In These Times magazine, July 2002

***

a review of the book

Globalization and Its Discontents

by Joseph E. Stiglitz

When the 1997 global economic crisis began in Thailand, the International Monetary Fund made a bad situation worse by insisting on cutting government budgets, setting tough financial standards for banks and raising interest rates to preserve overvalued currencies. Rather than stabilizing troubled economies, IMF policies provoked social unrest and spread the crisis further. Tens of millions of urban workers and rural peasants suffered deeply for years afterward, but currency speculators, foreign banks and multinational corporate vultures picking over bargain-priced assets did just fine.

It was tragic that so much chaos and suffering resulted from these faulty remedies, but what is even more appalling is that the IMF (prodded and supported by the U.S. Treasury Department) had vigorously promoted what economist Joseph Stiglitz argues was the single most important cause of the crisis: rapid deregulation of national capital markets. With that policy shift, foreign investors flooded countries like Thailand with money that was often foolishly spent. At the first sign of trouble, they quickly pulled their money out, often making a killing on currency speculation as they exited. At the time, Stiglitz was chief economist of the World Bank, the IMF's sister institution, and he argued against the IMF strategy.

When these international financial institutions were established toward the end of World War 11, the IMF was supposed to help countries with temporary currency problems and maintain economic demand to prevent recessions much as the intellectual godfather of the two institutions, John Maynard Keynes, had advocated during the Depression. But over the decades, Stiglitz argues in his new book, Globalization and Its Discontents, the IMF mission shifted "from serving global economic interests to serving the interests of global finance."

The IMF abandoned its Keynesian focus on maintaining employment and economic growth and focused single-mindedly on fighting inflation. The shift occurred in large part because the IMF was controlled by and accountable to finance ministries and central banks of the richest countries, especially the United States. These leaders, in turn, were linked by ideology, self-interest and political influence to the big international banks, financial service companies and capital markets.

Neither peasants nor workers, nor even leaders of poor countries, had a voice in the marble halls of Washington. No debate was permitted-internally or with client governments-about alternatives to the "Washington consensus" of fiscal austerity, privatization and financial deregulation (or "liberalization"). Often the policies imposed were even kept secret from their victims.

This looked-and effectively functioned like-a conspiracy by rich and powerful international financiers to humiliate and control upstart industrializing countries (as well as Russia). Stiglitz says that the IMF strategy was really just a product of inadequate institutional governance and mistakenly rigid ideologies. But in either case, there's no question that a narrow group of powerful people from rich countries were ultimately setting an agenda that profited them while ravaging less-powerful countries. IMF policies rarely even served the economic interests of most people in rich countries.

Because of his academic credentials and insider experience, Stiglitz's condemnation of the IMF (and only a bit less harshly, U.S. Treasury officials) has unusual gravity. He argues forcefully that, for such policies to succeed, even if one agrees with IMF goals such as privatization of government enterprises, one must move gradually and take care that requisite social and economic institutions are in place.

In Eastern Europe, for example, he argues that the most successful transitions from communism were gradual, rather than the shock therapy of rapid, poorly planned imposition of unregulated markets in Russia that created colossal inequality and shrank the economy by more than one-third. Thanks to these free market Bolsheviks, Russia's wealth was looted and spirited out of the country, creating "the worst of all possible worlds."

The heart of Stiglitz's argument is simple and profound, | and based on the work that l won him a Nobel Prize last | year. The IMF and related l ideological enforcers of the I new globalization are "market fundamentalists" who believe that markets are perfect as long as governments, unions and other intruders stay out of the way. But the theoretical models underlying their policies assume perfect information that will lead to rational results.

Unfortunately, information is never perfect, complete or available to everyone, especially in developing countries. As a result, there is always a role for government to compensate and make markets more efficient. (I would also argue that gross inequities of power and wealth distort the economy and justify government intervention, even on the narrow grounds of making markets work at their best.)

But governments also have a mandate to ensure social justice and reduce poverty and inequality, Stiglitz argues-which economic growth doesn't necessarily accomplish. Social justice, a worthy goal in its own right, in turn contributes to a better functioning economy by reducing conflict and giving citizens a sense of shared ownership in their national endeavor. Economic development, Stiglitz insists, is not simply a matter of economics, but of social transformation- such as the change wrought by guaranteeing free education to all (undermined, however, by IMF insistence that countries charge fees for education).

Not incidentally, Stiglitz argues, IMF policies act as a new form of colonialism that undermines democracy and national sovereignty, and ignores or obstructs social development. As a result, even in countries with solid growth, like Mexico, the benefits of globalization are concentrated among the top 10 percent of the population, and many at the bottom are actually worse off. Stiglitz has a more charitable view of how his old employer, the World Bank, serves the poor than do many globalization critics. But he convincingly argues that instead of expanding its power, the IMF should narrow its focus and restore its Keynesian mission.

Stiglitz focuses much of his attack on the perils of deregulating capital markets. There is little evidence to show that such policies increase needed investment, especially in East Asian countries with high domestic savings rates. There are lots of problems, in any case, with foreign direct investment, which often destroys local businesses or, in the banking and finance sector, steers credit toward multinationals rather than domestic needs.

At the very least, Stiglitz says, countries should be able to impose short-term controls on flows of capital. Local economies would benefit more from a "stand-still" in payments of foreign debts or speedy reorganization of businesses under bankruptcy laws than from IMF bailouts of multinational lenders that simply leave countries more saddled with debt. China and Malaysia, Stiglitz notes, weathered the 1997 storm partly because they restricted capital flows. Yet despite his desire to tame global financial markets and raise funds for development aid, Stiglitz never mentions imposing small taxes (the "Tobin tax") on global financial transactions.

While Stiglitz observes that rapid opening of countries to foreign trade can be harmful, he chides the United States (and other rich countries) for preaching free trade while restricting access to its markets and subsidizing exports. It's clear that developing countries gained little in the last round of trade negotiations that created the World Trade Organization. But it's less clear how much exporting to the United States will help the world's poor. The successful Asian industrializing countries, eschewing the IMF model, did rely on exporting heavily to the United States. But the U.S. trade deficit has been large and growing for many years, and Stiglitz warns it will be unsustainable over time.

In many cases, multinational corporations benefit from expanded trade, while workers in both rich and poor countries lose out. For example, foreign production has displaced more than three-fourths of apparel and shoe workers in the United States. Yet the real wages of clothing and shoe workers in developing countries have fallen sharply over the past decade, according to trade analyst Alan Tonelson.

Markets in goods and services can be flawed, and market fundamentalism in trade can be misguided, just as in global finance. Although Stiglitz understandably is most concerned about the 2.8 billion people living on less than $2 a day, workers in developed countries also suffer from inequality, lost income and hardship as a result of globalization. Stiglitz has argued elsewhere that it's important in development to secure workers rights, but he barely mentions the issue here.

Bucking the tidal wave of market fundamentalism, Stiglitz restores government to a central role in economic well-being, although he seems to retain unjustified faith in privatization as a long-term, carefully pursued goal.

However, government is important not just to make markets work better, but to give people a choice about economic alternatives and to break out of the one-size-fits all policy mold imposed by the IMF. The need for democratic government is at least as great at the IMF as it is at the national level.

While the protests of those discontented with globalization give him hope, the clear and impassioned thinking of analysts like Stiglitz may also give hope to the protesters.

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