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BOOK REVIEW
Globalizing poverty, IMF style
Globalization and its Discontents,
by Joseph Stiglitz
Reviewed by Sreeram Chaulia
When
left-wing economist Michael Chossudovsky released a devastating
critique of international financial institutions in The
Globalisation of Poverty (1997), it was quickly dismissed by
many in the West as a propaganda tune of what British Prime
Minister Tony Blair berates as the "riff-raff" who have caused
trouble and violent street protests in Seattle, Prague, Nice,
Gothenburg and Genoa. But what if a Nobel laureate, former
economic adviser to the American White House and former chief
economist of the World Bank publishes an even more powerful
expose of the machinations of the Washington Consensus which has
heaped unimagined misery and privation on developing countries?
You sit up and take notice. Right?
More than that, after reading it, you can no longer be silenced
as a "disguised Marxist" who doesn't understand market economics
but rants away about alleged oppression of the poor. Stiglitz's
book is a weapon, a well of information, which every global
citizen must wade into, so that the next time the Czars of
"market fundamentalism" try to muffle your voice, you have the
answers and the right to hold them accountable for their deeds.
Stiglitz's own aim in writing is to "improve the information
that citizens have about what these institutions do, allowing
those who are affected by the policies to have a greater say in
their formulation". (Preface)
Market colonialism
The International Monetary Fund (IMF) and its sister
organizations have taken several "wrong-headed actions" in the
past decade based on the outworn presumption that markets, by
themselves, lead to efficient outcomes, actions which "make the
rich richer and the poor more impoverished - and increasingly
angry". (p.xv) The benefits of globalization - removal of
barriers to free trade and closer integration of national
economies - under IMF supervision have gone disproportionately
to the better off, pauperizing those at the bottom of society in
every part of the world. From 1990 to 1998, the actual number of
people living in poverty increased by more than 100 million,
even though world income rose by 2.5 percent per annum.
Promising to herald unprecedented prosperity, globalization has
proceeded to usher in unprecedented poverty.
Not only has the IMF ruined livelihoods of many a common man, it
has also failed in ensuring global economic stability by
mismanaging crises in East Asia, Latin America and Eastern
Europe. Collapsed currencies, weakened banking systems and
indebted transition countries are the manifestations of one
decade of market fundamentalism and naivete that laissez-faire
works always, all the more ironic since J M Keynes envisaged the
IMF in the 1940s under the belief that markets had imperfections
which needed corrective government intervention. Stiglitz offers
a deeper reason than IMF slavery to "textbook economics" for
exacerbation of macroeconomic crises and poverty - "the
institutions are not representative of the nations they serve,
but rather are closely aligned with the commercial and financial
interests of those in the advanced industrial countries". (p.20)
IMF resident country representatives are like "colonial rulers"
who callously impose policies on poor nations from their luxury
hotels, just as in modern hi-tech warfare, "dropping bombs from
50,000 feet ensures that one does not feel what one does".
(p.24) When an advanced country like South Korea could not help
but accept the severe fiscal stringency measures forced on it by
the IMF in 1997-98, can Ethiopia or Nepal resist? Besides
cutting off aid, the IMF uses its "bully pulpit" to discourage
private financiers to invest in countries that do not follow its
dictates, a form of economic blackmail that few can resist. The
IMF is also highly undemocratic in practice, by dealing solely
with finance ministers and central bank governors who represent
dominant financial and corporate barons of their countries. "The
idea that citizens in a borrowing country might also participate
in policy was simply too much." (p.50) The IMF does not
recognize the citizen's basic right to know about public
policies that impact heavily on her or his life.
The IMF's lending and crisis management are always predicated on
the mantra of rapid privatization, without worrying about
necessary safety nets such as unemployment insurance or
maintenance of pensions. "Eliminating the government enterprise
may leave a huge gap - and even if eventually the private sector
enters, there can be enormous suffering in the meanwhile"
(p.55), suffering that the fund coldly terms "necessary pain" of
adjustment. IMF-ruled privatization in the Ivory Coast, a sample
for scores of other developing countries, destroyed jobs instead
of creating new ones and inspired urban violence, increased
crime, social and political unrest, and ultimately, a civil war.
Stiglitz also pooh-poohs the claim that privatization guarantees
a reduction in corruption, because the non-transparent manner in
which politicians conduct it with the IMF nod ensures "briberization"
on a much larger scale. Privatization of health, education and
water supply on false IMF assurances that consumption and
enrollment would not fall have also taken a heavy toll on the
poor.
The IMF and the World Trade Organization contentions that more
jobs will be created by trade liberalization and elimination of
tariff protection have also not materialized, with sub-Saharan
Africa's income declining by more than 2 percent after the
implementation of GATT's Uruguay Round rules. Theories that
without liberalization, foreign capital and investment will not
come have been proven unfounded when China demonstrated that
capital market liberalization was not needed to attract foreign
direct investment. Indiscriminate financial sector
liberalization led to the Argentine and Bolivian domestic
banking sector being dominated by foreign-owned entities,
contributing to macroeconomic instability and ultimately
full-blown crises. The IMF has also pushed through its "colonial
mentality" by insisting on foreign entrepreneurship to rectify
domestic corporate malfeasance, most notably in Korea's
microchip industry.
Stiglitz finds it incredible that the IMF, which poses to be the
sole reservoir of "sound advice" to less developed countries,
has no emphasis on employment, wages or land reform. All that
the fund cares for is keeping inflation under check, budgetary
deficits in range and exchange rates in order, while harping
that in the long run poverty can be attacked through Hooverite
economics. But then, Keynes is worth recalling - "In the
long-run, we are all dead."
Bungling in East Asia
The IMF-ordered excessive financial and capital market
liberalization was the single most important cause for the onset
of the East Asian downturn in late 1997. Several East Asian
governments feared "hot" speculative money that came in with
liberalized capital markets, but except Malaysia, none could
afford to "risk the wrath of the IMF" and chart a different
course. Once the crisis began, instead of admitting its foolish
mistakes, the IMF charged individual countries with corruption
and failing to take necessary reforms seriously. This blame game
exacerbated the stampede of capital out and put countries of the
region, which in the first place had high domestic savings and
did not need additional foreign investment, on the razor's edge.
Austerity measures were quickly shoved down East Asia's throat
as the crisis swelled, without realizing that "the problem was
not excess demand but insufficient demand". (p.104) The fund and
its godfather, the US Treasury, failed to recognize the
important trade interactions among countries in the region, and
continued to prescribe contractionary policies that worsened the
contagion from Thailand to Indonesia, Korea, Malaysia and Japan.
IMF bureaucrats strangled economies by raising interest rates up
50 times, making the recession even worse, especially hurting
small businesses, workers and the marginalized. When Japan
proposed a stimulus package through a new Asian Monetary Fund,
the IMF promptly squelched the idea as a threat to its turf. It
"did not want competition in its own domain". (p.112)
In the guise of "financial restructuring", the IMF then
overlooked the importance of keeping credit flowing by laying
down that all banks in the crisis-ridden economies shut down or
quickly meet impossible capital adequacy ratios. Good economics
would have required bankruptcy and standstill agreements, but
the IMF's "bank run" and exorbitant interest rates forced
shutdowns, leaving firms without enough working capital to
maintain production, let alone expand. Corporate restructuring
was successful in Korea and Malaysia, where governments took an
active role, but languished in Thailand, where the IMF's word
was supreme. Indonesia followed IMF advice and cut food and fuel
subsidies for the poor, only to see riots break out the very
next day. Mahathir Mohamad's Malaysia, with a track record of
ethnic riots, did not take the doctor's advice and fared far
better. Ironically, Malaysia was thoroughly criticized by the
international financial community and the IMF, though it was the
most successful in emerging from recession.
Sending Russia into a tailspin
Throughout the 1990s, Boris Yeltsin was encouraged by Western
aides and economic institutions that "if the Russian people were
allowed to choose, they would not choose the 'correct' economic
model", and therefore all market reforms were enacted by decree,
circumventing the Duma. It was a crude Bolshevik-style shock
therapy transition that went horribly wrong.
The IMF was a major advocate of maintaining Russia's overvalued
currency during its 1998 crisis. It supported the artificial
exchange rate at a high level by pumping in billions of dollars
of loans, only to allow Wall Street financiers and the mafia
oligarchs to take out their investments and loans and crush the
economy. Encouraging opening up of capital accounts facilitated
a rush of money out of the country. Russia was also induced to
make more foreign borrowing, leading the government to suspend
its debt payments in August 1998. "By lending Russia money for a
doomed cause, IMF policies led Russia into deeper debt, with
nothing to show for it." (p.151) Having told Russia that trade
liberalization was necessary for a successful transition, the US
Treasury and the IMF shut the door to Russian aluminum and
uranium exports with the self-centered motto: "Trade is good but
imports are bad."
The outcome of the fiasco was that while only 2 percent of
Russians lived under poverty in 1989, by late 1998, the number
soared to 23.8 percent. Russia today has levels of income
inequality comparable with the worst in the world. IMF
infatuation with privatization without concomitant competition
and anti-trust policies has engendered the rise of monopolies
and cartels managed by crony capitalists. "A few friends and
associates of Yeltsin became billionaires, but the country was
unable to pay pensioners their $15 a month pension." (p.159) The
poor today consume fewer calories of food and energy even though
World Bank economists boast that Mercedes car traffic jams are
far too frequent in Moscow!
Poland, the most successful of the former Easter Bloc
transitions, has credited its performance to explicit rejection
of the doctrines of the Washington Consensus. China's gradualist
approach to transition avoided the pitfalls that marked the
shock therapies of Russia and other Eastern European countries
under IMF tutelage. The way ahead, according to Stiglitz, is for
each country to determine what is best in light of its
peculiarity and to refuse IMF bullying and "one size fits all"
remedies.
Reforming the sham reformers
The IMF is a public institution created to address failures in
the market, which is strangely run by powers that have a high
level of confidence in markets and little confidence in public
institutions. By not accepting market failures and the right of
governments to intervene, the IMF has shown a failure to justify
its own existence. Meant to solve problems of instability and
crisis, today the IMF has become part of the problem. It has
moved from "serving global economic interests to serving the
interests of global finance". (p.207) The IMF is essentially an
institution pursuing policies that are in the interests of
creditors, as was blatantly unveiled when Wall Streeters placed
bets on the size of the IMF's new bailout package for recovering
their latest loans made to Russia. Billions went to corporate
and financial bailouts in Indonesia, leaving nothing for those
forced into unemployment. IMF autocracy has brought matters to
such a head that "the world feels it is being deprived of making
its own choices". (p.221) Workers thrown out of jobs due to IMF
programs have no seat at the table in Washington or country
capitals.
Abandoning globalization is neither feasible nor desirable to
Stiglitz, who strongly thinks that the problem is with the way
it is being implemented. The potential benefits of globalization
can be realized only through caring about the environment,
making sure that the poor have a say in decisions affecting
them, promoting fair trade and democracy. The most fundamental
change is for a change in voting rights in the IMF and World
Bank, where the US has a virtual single veto. Short of this,
increased openness and transparency in global economic
organizations is warranted. The IMF should be "more honest, more
forthright, more modest". (p.231) It should limit itself to its
core area, managing crises, and stay out of development issues
or transition economies.
In crises, it should accept the dangers of capital market
liberalization and financial sector deregulation. It must ensure
improved safety nets by increasing capacities of the vulnerable
to absorb risks. It must also disclose the expected poverty and
unemployment impacts of its programs. IMF conditionality has
"gone too far" and could be replaced by "selectivity", ie giving
developing countries with good track records freedom to choose
their own development strategies. IMF ceilings and criteria on
debt relief need to be relaxed further. Without such reforms,
the backlash that has already set sail will mount and destroy
global economic, social and political order.
Conclusion
Stiglitz displays a soft corner for his own alma mater, the
World Bank, while lambasting the IMF. He is hopeful that the
International Bank for Reconstruction and Development will allow
individual countries to be "in the driving seat" in the future,
unlike the colonial IMF. But one would have liked him to take a
more critical look at the bank, too, and ask why exactly it
allows its development assistance to be linked to IMF structural
adjustment stipulations.
Having said that, Globalization and its Discontents is
the most important book of the year on one of the most important
subjects of our times. Whether globalization can be reformed and
its benefits more widely shared is the biggest question of the
new century. Stiglitz offers a narrative from the proverbial
horse's mouth and shows rare candor and courage by speaking out
against a system of which he was himself a part.
Globalization and its Discontents, by Joseph Stiglitz, W
W Norton & Co, 2002, New York. ISBN: 0-393-05124-2. Price:
US$24.95, 282 pages.
(©2002 Asia Times Online Co, Ltd. All rights reserved. Please
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