Global Policy Forum

By Joanne Gray

When Joseph Stiglitz attacked the World Bank and IMF for adopting policies that added to some countries' economic burden, he made bitter enemies. But, as he tells Joanne Gray in Washington, he doesn't resile from his criticism of them, or of Wall Street. As World Bank chief economist and former top adviser to United States President Bill Clinton, Joseph Stiglitz was the consummate Washington insider.

But since his incendiary attack on the International Monetary Fund, which he accused of being arrogant, secretive and undemocratic, he's very much on the outer. Stiglitz alleges the US Treasury and the IMF acted as handmaidens for Wall Street, setting the scene for the Asian economic crisis by pushing developing countries to quickly open up their markets to the hot flood of foreign money. When that money was abruptly pulled out, the IMF's multibillion-dollar bailouts gave sick patients medicine that made their illnesses worse and spread the financial epidemic further. The IMF's loan conditions forced governments to slash spending and pushed interest rates sky high to halt currency devaluations. Stiglitz says that despite warnings from the World Bank, social and political instability and economic ruin inevitably ensued. The root of the problem is that "broad economic policy is being determined by special interests", he told The Australian Financial Review. "When the Treasury pushes for Wall Street, [people] sometimes think it's this high-minded, good policy, and they don't see it for what it is, which is financial markets' interests, which may or may not be good policy." Such a jaundiced perspective of the motives of Washington's economic establishment has pitted the frenetic 56-year-old Stanford professor against Treasury secretary Larry Summers, one of the nation's most powerful economic policy makers. As Treasury undersecretary for international affairs and later deputy to secretary Robert Rubin, Summers was deeply involved in the formulation of the IMF bailout plans in Mexico, Asia and Brazil, and in Russia policy.

The stoush is undermining the decade-old Washington consensus which underpins post-Cold War global economic policy, and which has pushed untrammelled markets and privatisation onto emerging economies. Many of the policy wonks in Treasury, the IMF and in Washington's rarefied think-tanks don't just disagree with Stiglitz's arguments they also find the passion behind his attacks unfair and a little unseemly. "He's blaming people for death," said Catherine Mann, senior fellow at the Institute for International Economics. "He says, 'If you had listened to me, these people in Indonesia wouldn't have died, and the middle class wouldn't have been ravaged in South Korea'. And policy groups around here who very much want to be doing the right thing feel very responsible for the outcome. And to say they did it on purpose almost, really is offensive." It's true Stiglitz's critique sounds like wisdom with hindsight. But he says he was fighting the same fights in the early days of the Clinton Administration.

As a member of the President's Council of Economic Advisers in 1993, Stiglitz clashed with Summers, then Treasury undersecretary for international economic affairs, over the pace at which South Korea should lift capital controls.

Stiglitz maintains he and the other Council members had urged gradual liberalisation, while Summers and Treasury wanted it speeded up. "Most people now agree it was rapid capital-market liberalisation that was at the root of the [Asian economic] problem and Larry and I had a very big fight in 1993, when I was in the White House," says Stiglitz. "The council argued it wasn't US national interest to push Korea to open up faster. This was not No1 on our priorities ... this was not going to create a lot of jobs for Americans. "Second, it was simply bad policy. This is pursuing special interests over national interests. And Larry pushed this through, reflecting the interests of Wall Street." The recent messy appointment of the IMF's new managing director, Horst Koehler, is another example of how the rich countries run the IMF as a fiefdom, to the exclusion of its major clients, poor and developing countries. Koehler was given the IMF top job after Frenchman Michel Camdessus resigned, and only after a squabble between the US and Europe that served to highlight the out-of-date governing structure of the IMF and the World Bank. In 1944, when the Bretton Woods lending agencies were formed, the US got the right to appoint the World Bank's president and Europe won the right to choose the IMF managing director. Developing countries, the main borrowers, have no say. "That colonial history is still there," says Stiglitz. "I would have thought they would have been embarrassed by it." It's not an exaggeration to say IMF management and its biggest shareholder, the US Treasury, are finding all this public scrutiny and criticism uncomfortable.

Stiglitz resigned earlier this year as chief economist so he could speak out, and was advising World Bank president Jim Wolfensohn. But during the IMF-World Bank annual meetings in April, Stiglitz launched a bomb. His cutting critique of the IMF and Treasury was published in the New Republic. In it, he accused the IMF of using bad macro-economic models in multibillion-dollar country bailouts, when the problems were at a micro level, and of employing third-rate economists. He called for more open discussion about global economic policy. The article opened the door wider on an institution whose processes have had little real public scrutiny. It also provided heavy ammunition for the street protesters who flocked to Washington to rail against the IMF's and World Bank's policies towards developing countries.

A few weeks after the World Bank/IMF spring meetings, Stiglitz was pushed out as Wolfensohn's adviser, reportedly at Summers' behest. He is now dividing his time between the Brookings Institution, teaching at Stanford University and writing a book. Treasury was "enormously hostile" to the article, and the IMF management and board's reaction, says Stiglitz, "was to be dismissive of the protesters, saying they weren't informed, the critics don't understand". He says the IMF "does not want to change ... perhaps is structurally incapable of changing." The IMF's best defence is to point to the economic recoveries among the crisis-hit Asian countries. But Stiglitz scoffs. Thailand, for example, did everything the IMF demanded. "They were very committed, they were the best student, and today 40 per cent of the loans are non-performing, 21/2 years later, and the economy is still below '97," says Stiglitz. "Real wages fell by 25 per cent. I mean, these are big cataclysmic effects on the country. "Korea is recovering, but my view is that it's because they did a lot of things the IMF did not tell them to do. They didn't shut down the banks when the IMF told them to shut down the banks, they didn't shut down the computer chip industry when the IMF told them to. "Malaysia did not have an IMF program they are recovering well. Thailand and Indonesia had IMF programs and they are disasters. So the story about the recovery being an IMF recovery is a little bit weird."

That the attack on the status quo is coming from a former insider has given the campaign to reform the IMF unusual clout, even though, to many, Stiglitz is part of the establishment. Stiglitz and Summers, as well as IMF deputy managing director Stanley Fischer, economic adviser and Harvard Professor Jeffrey Sachs and Massachusetts Institute of Technology professor Paul Krugman, all trained in economics at MIT.

All are of the economic school of thought that is critical of both laissez-faire economics and of too much government intervention. Stiglitz made his name in the '70s developing theories explaining that financial markets often behaved erratically because of information difficulties. "The unfortunate thing is that, for anybody who is outside a kind of inner circle of economic policy makers on global issues, all of these different views are in a very, very narrow part of a huge spectrum," says Nancy Birdsall, of the Carnegie Endowment. More extreme critics on the right accuse the IMF of creating moral hazard by bailing out Western lenders when their loans turn sour. US Congressional Republicans agree with proposals by Carnegie Mellon Professor Allan Meltzer for the IMF to stop long-term loans altogether. The real battle over the IMF's future, says Birdsall, isn't between Stiglitz and Summers. "It's between the right, as represented in some ways by the Meltzer Commission, and the globaphobics, as represented somewhat by the street protesters."

Stiglitz says the street protesters who failed to close down the meetings in Washington last month have the right message. The protesters "were very concerned about what was happening to poor people in developing countries, very concerned there's an absence of democratic accountability" at the World Bank and the IMF, he says. The global lenders give the impression they care more about "creditors getting repaid and foreign exchange stability than about the plight of the poor". He believes the protesters drew attention to the fact the IMF and World Bank "may be reflecting more the interests, I'd say not even of the US, but of financial communities within the United States and the other G7 countries". Stiglitz certainly has made a splash as the whistle-blowing insider, but it's harder to assess his longer-term impact. He needs to do more, though, to restore his place in Washington. "Joe needs to put a legitimate thought piece into the ring about what to do that would be better," says Catherine Mann. "If he comes out with a provocative and well-founded idea, he will be listened to. People aren't going to ignore him just because he's been rather loud and abusive here recently, because he is very smart and people know that."

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