Global Policy Forum

By Joseph Stiglitz

Stanley Fischer's departure as First Deputy Managing Director of the IMF provided an ideal opportunity to re-examine the Fund's "Washington Consensus" ideology of privatization, liberalization (especially trade liberalization), and macro-stabilization. That ideology reigned supreme throughout Mr. Fischer's tenure. By naming Ann Krueger as his replacement, however, the IMF has elevated one of orthodoxy's high priestesses, and this signals a stubborn adherence to the failed past rather than a hopeful new direction for the future.

Ann Krueger is a respected professor of economics at Stanford, former chief economist at the World Bank, and a person of enormous energy, integrity, and commitment to what she believes is good for developing countries. But her track record is also her greatest liability: the policies of the "Washington Consensus" have proven to be an utter failure in promoting growth and stability in developing and transition economies. Her area of expertise, trade policy, is hardly one that the Fund can draw on to restore its battered credibility.

The choice of Dr. Krueger partly reflects the appointment process itself – a legacy of the postwar carve-up of the new Bretton Woods international financial institutions. Under this postwar horse-trading America always got to name the head of the World Bank, while a European would always lead the IMF, with an American filling the number two spot at the Fund. So it has remained.

Despite the demise of colonialism, candidates from developing countries – the focus of the IMF's activities – need not apply. Prior to Dr. Krueger's appointment, no one said: "The IMF is truly international. Let us search for the best person, an expert in macroeconomic policy and monetary economics, especially as they relate to the developing world, who can heal the wounds of the past and restore the confidence of the poor in an institution that seems to ignore their concerns."

No, this was an American appointment – and a plum one at that, because it is not subject to approval by the US Congress. So, despite the embarrassment associated with the recent appointment of the current IMF Managing Director Horst Kohler, when the Clinton Administration heavy-handedly vetoed Europe's first choice for the post, someone with deep experience in developing countries and a new approach to their problems was never seriously considered. Considerations of realpolitik dominated: America insisted on its supposed entitlement, and the IMF acquiesced.

Notwithstanding Dr. Krueger's experience and standing as an economist, trade policy is a structural issue that falls within the mandate of the World Bank. Will the lines of division between the World Bank and the IMF now be blurred still further?

Renowned monetary economists like Stanley Fischer had difficulty in dealing with the intricacies of modern finance. An expert in trade may find these intricacies even more baffling. The high interest rates the IMF advised in the name of stabilization led to mass bankruptcy and destruction of capital. Rather than promoting stable economies with faster growth and lower interest rates, the IMF's simplistic prescriptions for capital and financial market liberalization often resulted in the opposite: collapsing financial sectors, prohibitively high borrowing costs, widespread social dislocation, and political upheaval.

What went wrong? IMF and World Bank structural adjustment policies combining trade liberalization with tight monetary policy were supposed to redirect resources from less productive to more productive uses. In practice, however, when restrictive monetary policy is implemented without sufficient attention to the development of financial institutions oriented toward providing credit to small and/or medium-sized domestic firms, it is almost impossible to create new jobs and enterprises. In country after country, displaced workers went from low productivity jobs to zero productivity unemployment.

Designing policies that work for the developing world requires a profound understanding of financial markets and development. Unfortunately, Dr. Krueger's track record is not reassuring. Whatever her merits as a trade economist, mindless trade liberalization without the right preconditions is no solution.

Nor, judging from the World Bank's practices while she was its chief economist, is there reason to hope for more meaningful participation by developing countries, much less a genuine debate about alternative strategies. This is all the more tragic today because leaders in most of the developing world are in a better position than ever before to make informed policy decisions that are sensitive to their countries' local contexts.

The IMF's approach to the developing world is cut from the same neo-liberal cloth as the World Bank's, with scant regard for whether they actually fit the situation of the countries they are intended to help. The inevitable result has been the IMF's inability to manage crises, incomprehension of the needs of transition economies, and a failure to promote development. While Dr. Krueger seems sympathetic to critics of the massive IMF bailouts of the Fischer era, knowing what you are against is insufficient. The IMF needs a new paradigm, not a warmed-over embodiment of a stale and repugnant ideology.

A changing of the guard at the IMF was necessary and inevitable. It presented an opportunity for the Fund to demonstrate that it was ready to move in a new direction, that it was prepared to interact with developing countries in new ways, that the years of the "Washington Consensus" would be put in the past. Of course, reading too much into a single appointment is wrong. But, at the least, Dr. Krueger's arrival at the Fund does not bode well – either for the developing world or for shoring up the IMF's eroded legitimacy.

Joseph Stiglitz, professor of economics at Columbia University was formerly Chairman of the Council of Economic Advisers to U.S. President William J. Clinton and Chief Economist and Senior Vice President of the World Bank.

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