Global Policy Forum

By James North

When the Asian economic crisis started to bite deeply, during the second half of 1997, Joseph Stiglitz recalls that his children were studying the Holocaust. Each day, he went off to his job as chief economist and No. 3 man at the World Bank, where he and his colleagues had come up with a consensus of how to contain the spreading crisis. Each day, he got increasingly frustrated as the bank's proposals were overruled by its sister organization, the International Monetary Fund, influenced strongly by what Stiglitz calls the IMF's "largest shareholder," the U.S. Treasury Department.

Especially frightening to Stiglitz was the IMF's rescue plan for Indonesia, East Asia's most populous country after China. The fund directed the Indonesian government to cut social spending and raise interest rates, policies designed to draw panicked overseas investors back into the country. But Stiglitz argued that sudden cuts, particularly in food and kerosene subsidies, could trigger social unrest in the fragile island nation, and that the violence might take an ugly ethnic turn. The Chinese minority there had already started to worry.

"My kids were writing school papers about people who remained silent during the Holocaust in Europe," Stiglitz remembered recently. "So you ask yourself the question: 'Do you remain silent and play the system, or do you speak out?' Why have a job with responsibility if you don't speak out?"

The IMF imposed its plan, and just as Stiglitz and the World Bank had predicted, ethnic conflict swept across Indonesia, leaving hundreds dead.

By then, however, the economist was speaking out on Indonesia and other international economic matters -- an action that earned him the enmity of Lawrence Summers, now Secretary of the Treasury, then in a lesser role at the agency, and other officials at the Treasury and the IMF. Their hostility, he asserts, led to his departure from the World Bank earlier this year.

Today, from the outside, Stiglitz is increasing his criticism of the U.S. Treasury/IMF policy toward Asia, Latin America and Russia, which is still fundamentally unchanged despite the great scare of 1997-98. Stiglitz himself may not join the expected protests this week in Washington at the IMF/World Bank annual meetings. But the intellectual rigor and creativity that has put him on just about everyone's short list for the Nobel Prize in Economics will provide powerful support for the critics.

The Malcontent

When Stiglitz left the World Bank, press accounts described him as "a malcontent," "a great nuisance" and "a scourge of the Washington establishment." In person, however, he seems pleasant and enthusiastic, not sour or contentious. Even when asked about his No. 1 opponent, Lawrence Summers, he was never hostile, maintaining a kind of bemused detachment about the Treasury Secretary; he chuckled when he recollected how Summers "went ballistic" after one of his critical speeches.

Joseph Stiglitz's disagreements with the so-called Washington Consensus are intellectual and not personal. He recognizes that he leans to the liberal side of the spectrum, but he also insists that his views are not based on sentiment, but on what he calls "good economic science."

Stiglitz: "Do you remain silent and play the system, or do you speak out?"

Take, for instance, the World Bank's response as the Asian crisis unfolded. After Thailand's devaluation in July 1997, the Bank started to get data showing that the country's financial crisis was triggering a depression -- a severe downturn that would soon spread to Indonesia, South Korea and Hong Kong. To Stiglitz, who had earlier been chairman of President Clinton's Council of Economic Advisers, the pattern looked familiar. "I was approaching it much as I would if I were advising the President of the United States, recommending stimulatory policies to counter the decline," he remembers.

Instead, the Treasury/IMF in tandem overruled the Bank and did the precise opposite, directing the beleaguered Asian countries, as a condition for getting the bailout emergency loans, to raise interest rates and to reduce government spending, including the all-important food and fuel subsidies.

Today, Stiglitz still cannot hide his astonishment at these contractionary policies. The Washington Consensus argued that the measures were necessary to restore overseas investor confidence, stabilize falling exchange rates and attract capital back into the afflicted countries. But he points out that their economic models were far too narrow, and therefore doomed to fail.

For example, the Treasury/IMF strategy ignored the potential for bankruptcies. The sky-high interest rates forced even sound companies in Thailand and Indonesia to the wall, which wasn't the best way to re-inspire foreign investors. At the same time, the sharp cuts in government spending stimulated violence across Indonesia, which did not build confidence overseas, either.

Stiglitz insists that "these political and social concerns are not outside the economic model." He knew that over the years, unrest had been frequent in the developing world following the imposition of austerity plans. Indeed, austerity-inspired uprisings are routinely called "IMF riots." But when he raised his doubts, within channels, he says, "It was like hitting your head against the wall."

Stiglitz has other pungent criticisms of the Washington Consensus:

He questions the Treasury/IMF insistence that emerging nations end restrictions on capital flows. He points out that vulnerability to hot money can worsen crises, emphasizing that some countries, such as China, have achieved significant rates of growth without making their currencies fully convertible.

He continues to criticize Western policy toward Russia. He argues that the crash privatization program, in a country with no working democratic, legal or financial regulatory system, created a corrupt new oligarchy that blocks economic growth. He is particularly biting about the IMF's 1998 Russian bailout. "Was this a good investment?" he asks. "You put in $6 billion ... that enables the oligarchs to take out $6 billion in capital flight the next day. Clearly the country is worse off, and everybody knew it was going to happen."

He has strong objections to the IMF's policy of "conditionality" -- of making loans to countries contingent on far-reaching internal changes. "Of course, any lender will need evidence the loan can be repaid," he recognizes. "But the conditionalities the IMF imposes have gone well beyond anything required for repayment."

Now that Stiglitz is outside the system, he's expanding his critique. He will divide his time between the Brookings Institution in Washington, teaching at Stanford and working on a book about his experiences on the inside.

Not surprisingly, he comes down hardest on the U.S. Treasury/IMF policymakers. They embody what Stiglitz calls "the theory of escalating commitment." By that he means, "The cost of continuing mistakes is borne by others, while the cost of admitting mistakes is borne by yourself."

Finally, he asserts, Treasury/IMF bureaucrats are following the dictates of an ideology, not testing economic models in a scientific way.

Stiglitz uses the term "market Bolsheviks" to describe the advisers who helped bring Russia to its economic knees in the 1990s -- people who believed fervently in a rigid fundamentalist doctrine and tried to force an entire society to conform to it, just as their central planning predecessors had done back in Lenin's day.

The economist savors one final irony. IMF policy makers never apply their anti-state orthodoxy to their own organization. "Intellectual consistency," he says, "should lead them to ask themselves, 'If we believe that government bureaucrats are always incompetent, then why are we an exception?

He points out that the spread of democracy, accountability, good governance and transparency are applauded around the world, at least in theory, and asks: "Is it right for an international organization to be the instrument of political change? Those of us who are committed to democracy are very uncomfortable with a bunch of international bureaucrats playing the role of God. Sometimes, they may play the role in the right way, but they can also overturn democratically elected governments."

In a sense, Joseph Stiglitz resembles another economist, who worked for the British Treasury and attended the 1919 Versailles peace negotiations after the First World War. John Maynard Keynes was so disturbed at what he saw there that he resigned his post and wrote The Economic Consequences of the Peace, an impassioned polemic that eerily predicted that the harsh and punitive economic settlement the Allies had imposed on Germany would create terrible unrest and "sow the decay of the whole civilized life of Europe."

"What was great about Keynes was the combination of someone who used analytic powers but who didn't distance himself from the human cost," Stiglitz observes. "During the Vietnam War, we tried to distance ourselves by talking about body counts. In economics, we talk about unemployment rates, so we don't see the people. The challenge is, how do you remain analytically honest, but not lose the human dimension?"

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