World bank rebel wages war on Wall Street
By Ian Fraser
Published: Sunday Herald
Date: July 7th, 2002
JOSEPH Stiglitz is a rare breed, an heretical economist who has ruffled the self-satisfied global establishment that once fed him.
When I met him in the fashionable surroundings of One Aldwych last week, Stiglitz warned that current fears about the reliability of corporate accounts could easily extend to the governmental level.
Stiglitz says: “We’ve been seeing the same lack of ethics in accounting in the Bush administration on the public side. Misleading accounting practices are pervasive and were very extensively engaged in by the Bush administration in the context of the last tax cut.”
In his book, Globalization And Its Discontents, the Nobel laureate and former World Bank chief economist goes beyond attacking George W Bush. He declares war on the entire Washington financial and economics establishment, of which he was once a part, over its failure to reduce disparities between rich and poor countries.
Stiglitz accuses the agents of US economic policy – the US Treasury, the International Monetary Fund and the World Bank – of having subverted the process of globalisation for many years, turning it into a one-way street which benefits only the developed world.
“I tried in my book to describe the lack of intellectual coherence in the World Bank,” said Stiglitz. “Even Milton Freidman would reject most of what they are doing.”
With capitalism at what he terms a “crossroads”, just as it was during the Great Depression of the 1930s, and with the IMF weakened after its maladroit handling of the Asian, Russian and Argentine crises, the neo-Keynesian Stiglitz believes that we have a wonderful opportunity to encourage the IMF and World Bank to mend their ways.
Rather than continuing to use the IMF as a cudgel to push discredited Reaganite/Thatcherite free market policies on troubled emerging markets, he believes the IMF and World Bank must become less ideologically driven and ensure their prescriptions are no longer mere blood-letting.
In common with Will Hutton, author of The World We’re In, Stiglitz believes the developed world must also set an example by dismantling its own trade barriers – such as farm tariffs and the Common Agricultural Policy – before it brutalises poorer countries into opening up their own markets to Western goods.
He accuses the IMF of gross hypocrisy, especially when it claims not to believe in subsidies yet spends “billions of dollars in bail-outs – which are nothing more than subsidies for foreign exchange markets”.
Stiglitz also wants to ensure that IMF loans no longer come with strings attached. At the moment, they are loaded with conditions which almost invariably undermine the recipient countries’ “ownership” of the prescribed reforms – and hence their willingness to carry them out.
He points out that, at times of crisis, the IMF’s medicine usually has the unfortunate side-effect of worsening the country’s affliction, crippling its economy for years and causing lasting social problems.
He professes admiration for countries such as China, Malaysia and Botswana which have seen off the IMF. “China and Malaysia both saw maintaining social stability was of first order importance. They protected their own citizens more than the democracies did.”
Stiglitz adds: “IMF decisions were made on the basis of a curious blend of ideology and bad economics, dogma that sometimes seemed to be thinly veiled special interests.”
The most shocking thing, he says, is that the real winners are advanced economies such as the US and UK – and the investment banks on Wall Street. He says such firms earn millions of dollars by shifting capital in and out of countries which are prone after succumbing to the IMF treatment.
The most controversial passage in his book alludes to conflicts of interest in Washington which allow “masters of the Universe” from big banks to shift effortlessly in and out of the IMF or even US Treasury.
Robert Rubin, for example, went from Goldman Sachs, to the Treasury Secretary and left to become chairman of Citigroup, the world’s largest bank.
Stiglitz writes: “Stan Fischer, the deputy managing director [of the IMF] went directly from the IMF to become a vice-chairman at Citibank. One could ask: Was Fischer being richly rewarded for having faithfully executed what he was told to do?”
This was like a red rag to a bull for the IMF, which rose to the bait last week. Ken Rogoff, the former Harvard University professor and chess grand master who recently became economic counsellor and research director at the IMF, responded with a furious tirade against Stiglitz, which is published on the IMF’s website.
Rogoff said: “You slander Fischer, implying Citibank may have dangled a job offer in front of him in return for his co-operation in debt renegotiations. Fischer is well known to be a person of unimpeachable integrity. Of all the false inferences and innuendos in this book, this is the most outrageous. I’d suggest you should pull this book off the shelves until this slander is corrected.”
Rogoff also accused Stiglitz of “carelessly slandering” IMF staff, “ignominiously sabotaging” interest defence policies, and of fuelling the panic during the Asian crisis “by undermining confidence in the very institutions you were working for”.
Yet Stiglitz showed no signs of toning down his critiques when I met him last week, after emerging unscathed from a BBC studio in which he was confronted by Jeremy Paxman and Economist editor Bill Emmott on Radio 4’s Start the Week.
Stiglitz resigned in summer 1999 as the World Bank’s chief economist to become a professor of economics and finance at New York’s Columbia University precisely because he wanted the freedom to speak out about such things. He isn’t likely to allow himself to be muzzled now – especially since post Seattle and Genoa he believes the battle is already half won.
According to Stiglitz, capital market liberalisation was a crazy policy to inflict on East Asia during the economic crisis of 1997- 98. “You can’t argue that more capital was needed in East Asia because they were saving 30-35% of their GDP. They were having a hard time investing their own savings. So why was capital market liberalisation pushed on them? Because it benefited Wall Street.”
Born in 1943 in Gary, Indiana, Stiglitz became a Yale professor at the age of 26. In 1993 joined Bill Clinton’s team of economic advisers, and was eager to play his part in creating a more equitable and balanced America. He has since aimed at ensuring globalisation is handled in ways that are more palatable to the developing world. If this could not be achieved from inside, he wants to fight the same fight from without.
He says: “One point that I make in the book is that all the activities of the IMF have been in developing countries and yet it’s still run by G7 and particularly by the United States. The US Treasury, always the most conservative American institution, has a disproportionate voice.”
Stiglitz mistrusts the current system whereby the World Bank is always headed up by an American with the IMF always run by a European, with an American as IMF number two.
“It’s a global institution and it should be the best qualified person in the world.”
When the German Horst Kohler replaced Michel Camdessus as IMF head, Stiglitz notes the ridiculousness of the situation. “Despite the fact that all the IMF’s work has been in the developing world since 1976, nobody said the next head should be from a developing country.”
He questions the appointment of Anne Krueger, a Bush nominee, as IMF number two. “People all around the world were saying this institution needs to open up to new ideas. And so who do they appoint? Somebody who was a throwback to the Reagan era. It was really quite astounding.”
But does Stiglitz detect any glimmers of hope? And is there any chance that the people at the World Bank and IMF are going to listen to his impassioned pleas for change?
“I’m very hopeful. There’s been an enormous amount of change, especially at the World Bank in the last eight years. Many of the issues I raised six years ago have already resulted in change. They are now talking about the importance of [national] bankruptcy. I started talking about reducing the burden of conditionality they are now talking about that.”
“There’s been some movement at the IMF. But there’s still a long, long way to go.”
Many citizens of the third world will be hoping that Stiglitz is not burned at the stake before we finally get there.
Globalization And Its Discontents (Penguin, £16.99) is out now. The article was also published by the Irish newspaper the Sunday Tribune.
THE THOUGHTS OF A GLOBAL HERETIC:
ON GEORGE W BUSH
Joseph Stiglitz considers Bush’s imposition of tariffs on steel to be an example of very poor leadership. “If the United States, the richest country in the world with a very low unemployment rate, a strong safety net – not the best in the world but still there – and a dynamic economy, says it needs surge protection safeguards, what must every developing country be saying to itself?”
ON THE GLOBAL ECONOMY
“I am worried about the global economy. In the US, the weak dollar will lead to more exports and more inflationary worries, which will lead to higher interest rates. The adverse change in the US fiscal position combined with the large trade deficit, together with anxiety about the dollar’s stength and the US economy, will continue to weaken our stock market. This will become a downward drag on the US consumer, who has been the main source of global economic growth.”
ON BRITAIN AND THE EURO
“It doesn’t make economic sense for Britain to join, as Britain and Europe are not part of an optimum currency area. The ECB and the Maastricht convention has locked Europe in a straitjacket in which the ECB’s focus is on inflation and there are limits on deficits, which means the ability to engage in counter-cyclical policy has been greatly limited. Until Europe recognises it has given up the means of maintaining full employment it would be inadvisable [for Britain to join].”
“Do I think misleading accounting is pervasive? Yes. The US economy and the US stock market has been sustained by foreigners’ belief that the US is a safe haven, but it’s no longer the case.”
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