Global Policy Forum

Interview: Joseph Stiglitz, Nobel prize-winning economist

By Charlotte Denny

For a man who has provoked a collective temper tantrum at the highest levels of the International Monetary Fund, Joseph Stiglitz is looking remarkably relaxed. The Nobel laureate has just launched a stinging attack on the organisation and its handling of the crises that have swept through the world financial system over the last 10 years in his latest book, Globalization and its Discontents.

Bureaucrats at the IMF are accustomed to the anti-globalisation movement accusing them of running the world financial system in the interests of Wall Street. But when the same case is made by a Nobel prize winner who has held chairs at practically every ivy league university in the US and who used to be chief economist at the IMF's sister organisation, the World Bank, it is harder to dismiss.

Normally impervious to its critics, the IMF has gone ballistic this time. At a World Bank gathering last week to launch the book, the IMF's chief economist Kenneth Rogoff launched an extraordinary personal attack on Mr Stiglitz, accusing him of peddling "snake oil". Thomas Dawson, the organisation's external relations director, said in a recent speech that his skills as a policymaker had been "vastly improved by hindsight". In London this week to promote the book, the IMF's chief tormentor is unruffled by the storm he has unleashed. Part of his beef with the organisation is that it is incapable of taking criticism. Personal attacks from thin-skinned IMF officials rather prove his point.

His academic career has given him a reputation for intellectual self-confidence bordering on arrogance, but in person he is rather amiable, quite happy to engage in a discussion about the internal culture of the World Bank versus the IMF.

Mr Stiglitz is no stranger to controversy. His increasingly outspoken attacks on the IMF while chief economist at the World Bank contributed to his departure from it in January 2000. Rumour has it that the bank's president, James Wolfensohn, was leant on by the US treasury, enraged by Mr Stiglitz's attack. Since leaving Washington he has become even more scathing about the IMF, once memorably describing its staff as "third-rate economists from first-rate universities".

His role as the lone wolf critic belies his orthodox career path, which includes a 20-year period in academia. Mr Stiglitz won his Nobel prize last year for a collaborative project in the 1970s on theory involving asymetric information. The obscure-sounding research has proved influential in explaining why markets so often fail.

His critics accuse him of being an ivory tower academic, with no experience at the coalface. While making enemies, however, he has become the intellectual poster boy of anti-globalisation protesters.

The sight of the World Bank and the IMF at each other's throats must be bemusing to these protesters, who tend to lump the two together. In fact, the Washington neighbours have very different outlooks and are often at loggerheads.

The IMF's enemies say it is like the Chinese Red Army - a tightly disciplined, regimented organisation where deviation from the orthodox ideology is not tolerated. The World Bank, on the other hand, is more like a university faculty.

"It is like a debating society, and I encouraged that," Mr Stiglitz says. "My view was that the problems of development are very complex and there is not one monopoly view. Our role as advisers was not to tell people the one true way but to lay out what we know and what we don't know."

Rebuttal

IMF staff argue that as the world's financial firefighter, called in when countries are facing a speculative attack on their currencies, they cannot afford the luxury of debating how to tackle the crisis. It is an argument which cuts no ice with Mr Stiglitz, who says: "In the middle of the forest fire you may not have a discussion about how to fight it. But it is very important to have that debate before the fire breaks out - and there will fires."

Claims that its secretive approach is necessary to prevent investors taking fright are just an excuse for suppressing alternative views, he says.

"The result of the IMF's overconfidence in policies that didn't work is that it undermined its long-run credibility to the point where everybody in Wall Street believes the emperor has no clothes."

The IMF made two big errors in the 1990s, in Mr Stiglitz's view. The first was to bow to Wall Street's demand for new markets, by making IMF loans conditional on countries opening up their financial sectors. The resulting rise in speculative capital flows has proved disastrous for fragile economies. At the first sign of trouble, for eign investors pull out. At the height of the Asian crisis, some countries faced capital outflows of more than 10% of GDP.

The second error was to prescribe a mix of fiscal austerity and high interest rates for the countries in the speculators' firing line. Calling on countries running healthy budget surpluses to tighten their belts only intensified the recession, he says. Meanwhile, raising interest rates to protect their currencies did not succeed in warding off the speculators and simply intensified the pain for domestic firms.

The IMF says it has learnt from the Asian crisis, but Mr Stiglitz says it has repeated all the same mistakes during the latest collapse in Argentina and is now trying to shift the blame to the government. Argentina is by no means the irresponsible overspender that the IMF claims it is, he says. "The image they are painting is of a country which has been completely profligate - but even near the end Argentina's deficit was only 3% of GDP," he says. "The US had a 4.9% deficit ratio in 1992 during a much milder recession."

He says: "I thought they were giving them a really bum rap. They made the same mistake as they did in east Asia, which is pushing extremely contractionary fiscal policies on a country in recession. And then they said that if Argentina only stick to it long enough, it'll eventually recover."

The idea that countries must take pain to attract foreign investment is absurd, he says. Argentina just was not attractive to investors. It had an overvalued exchange rate and high real interest rates as the peso's peg to the dollar squeezed the economy so hard, prices were falling. Part of the reason why the IMF is trapped in what he calls "market fundamentalism" is because it is dominated by the US, and its treasury is in thrall to Wall Street's interests.

Mr Stiglitz describes how during the height of the Asian crisis, a IMF team flew into South Korea. In town for just over a week to arrange an emergency loan for the Korean government, the IMF analysts did not even ring the World Bank, which unlike them had been in the country and had some expertise about its economy.

"I would ask people from the IMF why they had put a particular provision in to the loan agreement, for instance that the central bank had to focus exclusively on inflation - inflation had not been a problem in Korea - and they would say 'oh we always do that'. Or you would ask, 'why privatise the Korean steel industry?' It was one of the most efficient in the world, which was making profits not losses and contributing to government revenue, and they would say 'because we always do it'."

So how does he feel about being the hero of the anti-globalisation movement?

"I think the anti-globalisation movement has done a huge service in bringing into the open a series of issues which have really had too little attention. In the developing world people were very aware of all these problems and injustices, but in the United States and Europe, particularly the United States, these issues were just not on the radar screen."

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