By Joseph Hanlon
Debt Update
Jubliee 2000 Coalition
March, 1998
'Greater humility' is needed, admitted the World Bank's chief economist and senior vice president Joseph Stiglitz, in a speech in which he called for an end to 'misguided' policies imposed from Washington.
Joseph Stiglitz's wide-ranging condemnation of the 'Washington Consensus' and the conditions imposed on poor countries must raise fundamental questions about the entire debt relief process now being coordinated by the IMF and World Bank. Debt relief under the HIPC (Heavily Indebted Poor Countries) initiative is conditional on six years of faithfully obeying demands from the Fund and Bank which Stiglitz now calls 'misguided'.
The World Bank's senior vice president and chief economist is scathing about what he calls the '"Washington Consensus" of US economic officials, the International Monetary Fund (IMF), and the World Bank'. He says that 'the set of policies which underlay the Washington Consensus are neither necessary nor sufficient, either for macro-stability or longer-term development.' They are 'sometimes misguided', 'neglect .. fundamental issues', are 'sometimes even misleading, and do 'not even address ... vital questions'.
'Had this advice been followed [in the United States], the remarkable expansion of the US economy ... would have been thwarted.' Russia followed the Washington Consensus line while China did not, Stiglitz notes, and 'real incomes and consumption have fallen in the former Soviet empire, and real incomes and consumption have risen remarkably rapidly in China.'
The Washington Consensus only sought to achieve increases in measured GDP, whereas 'we seek increases in living standards including improved health and education. ... We seek equitable development which ensures that all groups in society enjoy the fruits of development, not just the few at the top. And we seek democratic development.'
Joseph Stiglitz made his speech in Helsinki, Finland, on 7 January 1998, and so far it has been little reported. Perhaps he needed to be as far away from Washington as possible, because he undermined virtually every pillar of the structural adjustment and stabilisation polices that serve as necessary conditions under HIPC. He asserts:
Moderate inflation is not harmful. Hyper-inflation is costly, but below 40% inflation per year, 'there is no evidence that inflation is costly'. Furthermore, there is no evidence of a 'slippery slope' there is no evidence that one increase in inflation causes further increases. Thus 'the focus on inflation ... has led to macroeconomic policies which may not be the most conducive for long-term economic growth.'
Budget deficits can be ok, 'given the high returns to government investment in such crucial areas as primary education and physical infrastructure (especially roads and energy).' Thus 'it may make sense for the government to treat foreign aid as a legitimate source of revenue, just like taxes, and balance the budget inclusive of foreign aid.'
Macro-economic stability is the wrong target. 'Ironically, macroeconomic stability, as seen by the Washington Consensus, typically down-plays the most fundamental sense of stability: stabilizing output or unemployment. Minimising or avoiding major economic contractions should be one of the most important goals of policy. In the short run, large-scale involuntary unemployment is clearly inefficient in purely economic terms it represents idle resources that could be used more productively.'
'The Advocates of Privatization Overestimated the Benefits of privatization and underestimated the costs.' And the gains occur prior to privatization, through a process of 'corporatization' which involves creating proper incentives. China 'eschewed a strategy of outright privatization'.
Competition not ownership, is key. Private monopolies can lead to excess profits and inefficiency. Government must intervene to create competition.
Markets are not automatically better. 'The unspoken premise [of the Washington Consensus] is that governments are presumed to be worse than markets. ... I do not believe [that]'. Stiglitz notes, in particular, that 'left to itself, the market will tend to underprovide human capital' and technology. 'Without government action there will be too little investment in the production and adoption of new technology.'
Primary education may not be the right priority. Tertiary (university) technical education has a particularly high economic return because it enables the economy to import ideas. But here, Stiglitz has two caveats. He wants to see the training of more scientists and engineers and not extra liberal arts graduates as were trained in much of Africa. And he warns university education causes an immediate increase in inequality because 'the direct beneficiaries ... are almost always better off than average.'
The Dogma of Liberalization has become an end in itself and not a means to a better financial system.' Financial markets do not do a good job of selecting the most productive recipients of funds or of monitoring the use of funds, and must be controlled. Deregulation led to the crisis in Thailand and the 'notorious Savings and Loan debacle in the United States.'
Perhaps the key problem is that Washington Consensus 'political recommendations could be administered by economists using little more than simple accounting frameworks.' This led to 'cases where economists would fly into a country, look at and attempt to verify these data, and make macroeconomic recommendations for policy reforms, all in the space of a couple of weeks.'
Stiglitz calls for a new 'post-Washington Consensus' which, he says, 'cannot be based on Washington'. And, he adds, one 'one principle of the emerging consensus is a greater degree of humility, the frank acknowledgement that we do not have all the answers.'
Comment:
Ann Pettifor, Director of the Jubilee 2000 Coalition, comments:
'Ethiopia and Nicaragua have had their debt relief under HIPC delayed because they tried to do what Joseph Stiglitz said was right. Mozambique is following the rules, but has been explicitly told that debt relief is conditional on rejecting Stiglitz policy. This leads to the bizarre position that the IMF and some of Stiglitz' own staff are making debt relief conditional on policies Stiglitz says are not conducive for long term growth. Stiglitz may say "we do not have all the answers," but his own staff disagree.'
'But if top IMF and World Bank officials do not agree on any of the policies being imposed on Asia and on poor countries of the south, perhaps it is time to take a closer look at the emperor's wardrobe. Conditionality exists because OECD governments, both as donors and as members of the Paris club of creditors, have agreed to make aid and debt relief conditional on IMF programmes. Many governments claim their aid programmes are poverty focused, yet they support conditions that the World Bank's own chief economist says do not promote an end of poverty.'
'Conditionality is a chain, like the chains of debt themselves, and it only takes one country to break the chain. If Britain, or the Netherlands, or Sweden decided to end IMF conditionality, the chain would be broken; other countries would follow and IMF policy would change.'
'But until that happens, we wonder what advice is being given to embassies in Addis and Managua, on how to respond to the question from local ministers about why they are not allowed to follow the advice of the World Bank's chief economist.'
This text is from a quarterly newsletter of the Jubilee 2000 Coalition, a group of more than 60 European and African organisations calling for the cancellation of all unpayable debt owed by the world's poorest countries. The year 2000 should be a 'Jubilee' year, based on the biblical concept under which, every 50 years (the 'Jubilee' year), all slaves are freed and debts cancelled. The Jubilee 2000 Coalition can be contacted at POBox 100, London SE1 7RT. E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it
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