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Stiglitz, the IMF and Globalization
1. Thank you for the invitation to talk to you this evening. I'm told that your fellow MIT alum Joseph Stiglitz addressed this group a couple of years ago and used his time to say some nice things about the IMF. The organizers of this evening's entertainment thought it would be fun if I repay his kindness.
2. The title of my talk is "Stiglitz, the IMF and Globalization". My preference would have been to talk about these three topics in the reverse order from which they appear in the title and to have run out of time by the time I got to the third. Instead, because Stiglitz has been so prominent in the press in recent years, and so critical of the IMF, I have to devote the bulk of my talk to responding to his attacks on us. My defense for getting into the fight is the classic one: "He started it!". I hope there will be time at the end to discuss the far more important issue of how to make globalization work for all, an issue on which Stiglitz and the IMF share common ground.
3. In the very unlikely event that you haven't heard of us, let me just say that the IMF is a multilateral agency with two main jobs: first, to help preserve global economic and financial stability and, second, to assist in the global war on poverty.
4. And for the few among you who may not heard of Joe Stiglitz, he is a noted academic economist. Since he addressed your group, he's won the Nobel Prize, an honor his fellow economists, who rarely agree on anything, agree he completely and richly deserves. Joe has also gone from being the Chief Economist of the World Bank to Chief Critic of the IMF.
5. One of the many things that he criticizes us for is dispensing policy advice without taking on board the lessons of the academic work that won him the Nobel. Stiglitz evidently feels that being a top-notch academic economist is ample qualification for being a good policymaker. The fact is that Joe got a late start in policymaking and shows it. Policymaking requires a different skill set from academic theorizing. Joe's skills as a policymaker are vastly improved by hindsight, something his former boss Jim Wolfensohn alluded to when he said about Joe: "To stand back later and say, "If you'd done it my way everything would have been different," is a little generous to yourself."
6. Stiglitz has recently written a book called "Globalization and its Discontents". Despite its general title, the book is mostly about the IMF, not a major critique of globalization. The Economist, said in its review that a more accurate title for the book would have been "The IMF and My Discontent."
7. My bean-counting assistant noted that the index to the book has some 64 references to globalization, whereas references to the IMF-almost all critical-total 340. That works out to over one alleged mistake committed by the IMF per page. You'd think by sheer accident we'd have gotten a couple of things right.
8. That's my bottom-line message: You can't judge a book by its cover. There are two books in here:
9. Let me begin with Stiglitz's overarching critique of the IMF, that it is driven by "market fundamentalism". Stiglitz accuses the IMF of being driven by a belief in the perfection of markets and the imperfection of governments. The accusation is simply wrong. IMF staff are well aware that they owe their jobs to the imperfections of markets.
10. What is probably true is that the staff of the IMF (and the World Bank) have over time become more confident about the ability to use markets to serve the public interest. What caused this shift? Quite simply, the evidence. Through the 1980s, central planning represented an important alternative to markets as a way of organizing economies. The collapse of the Soviet Union and the fall of the Berlin Wall suggested to many that markets, whatever their faults, were a more durable way of organizing a country's economy. This feeling was reinforced by the good economic performance of the United States and the United Kingdom, both of which had moved to more market-oriented systems during the 1980s.
11. While these monumental changes were going on in the world economy, Stiglitz was hard at work in academia illuminating in a remarkable series of papers the flaws of market economies. As the award of the Nobel Prize attests, those papers are surely important contributions. But it cannot come as a surprise that, given the sweeping historical developments that I have described, the practical lessons being applied in the policymaking realm involved making more, rather than less, use of markets to solve economic problems.
12. The great British economist John Maynard Keynes, who Stiglitz greatly admires, once said in replying to a critic: "When I get new information, I change my opinions. What, sir, do you do with new information?" One is tempted to ask Joe Stiglitz why, despite the new information about the fall of central planning, there has not been a transition in his views about the relative prevalence of market and government failure.
13. Other eminent economists have made the transition. Larry Summers, former U.S. Treasury Secretary and currently President of an university in Cambridge whose name escapes me, is one example. He said, in an interview, that when he was growing up Milton Friedman was the devil incarnate in his household. But now, Summers said, he has ungrudging respect for Friedman's views about the market.
14. The IMF's critics on the right find the allegation that the IMF is driven by market fundamentalism completely ludicrous. For instance, listen to what Brink Lindsey of the Cato Institute, the true home of market fundamentalism, says in his review of the book in the Wall Street Journal. Lindsey writes that for Stiglitz to accuse the IMF of market fundamentalism "is misleading to the point of absurdity ...There's nothing in his book that suggests even a whisper of the many profound disagreements between the "disciples of Milton Friedman," as he calls them, and the IMF's economists. Such disagreements do not fit well with Mr. Stiglitz's ax-grinding, and so, apparently, he decided to leave them out."
15. Not only is the overarching criticism incorrect, notes Lindsey, but the examples that Stiglitz provides of how market fundamentalism led the IMF astray are vastly over-blown. According to Stiglitz, Russia's difficult transition from communism, worsening poverty in Africa, the collapse of Argentina's economy--these all are manifestations of what happens when the IMF's market fundamentalists get their way. The fact is that there are all very complex situations on which there was, and remains to this day, plenty of disagreement about the right way to do things and who is to blame for things that have gone wrong. The IMF deserves its share of the blame, but so do many others.
16. In fact, many of Stiglitz's criticisms should apply with equal force to our sister institution, the World Bank. Issues related to privatization, the quality of a country's institutions, consideration of alternate strategies to alleviate poverty-these are all areas where our sister institution tends to be what's called the "lead agency". But, as the New York Times noted in its review, the Bank "is spared the searing indictment that Professor Stiglitz reserves for the IMF ... Not surprisingly, part of the book's purpose seems to be an attempt to ensure that events during his World Bank tenure do not besmirch his own reputation. In the process, one suspects that some score-settling may well be in play."
17. As part of this score-settling, Stiglitz has made some very mean-spirited observations about Fund staff and officials, past and present. One charge in particular should not go unanswered, particularly before this audience. Stiglitz notes that Stanley Fischer, the former deputy head of the IMF and former MIT professor of economics, went straight from the IMF to Citigroup. Stiglitz adds: "A chairman of Citigroup was Robert Rubin who, as secretary of Treasury, had a central role in IMF policies. One could only ask, Was Fischer being richly rewarded for having faithfully executed what he was told to do?" To anyone who knows Fischer's utter devotion to institutions he works for, whether it was the IMF or MIT, the suggestion that he used twisted IMF policies to ensure a job at Citicorp is repugnant. Stiglitz surely knows that Fischer is regarded as a man of unimpeachable integrity and yet he cannot resist the jibe at him.
18. I also take strong exception to the portrayal of IMF staff as uncaring bureaucrats serving the narrow interests of the Western financial community. Stiglitz implies that IMF staff see the unemployed "as just a statistic ... the unintended casualties in the fight against inflation or to ensure that Western banks get repaid." He suggests that IMF staff, like the pilots of "modern high-tech warfare" who drop "bombs from 50000 feet", have no feelings for the people whose lives are affected by their policies. The IMF's staff are drawn from nearly a 150 countries; many are acutely aware of the pain and suffering of the people of developing countries and want the situation in these countries to get better. Stiglitz has not cornered the market on morality and caring. Another Stiglitz refrain is that IMF staff "make themselves comfortable in five-star hotels" in the countries they visit for missions. If, as Stiglitz recommends in his book, the IMF and the World Bank become subject to some sort of a Freedom of Information Act, many IMF staff will rush to ask for the release of Stiglitz's own travel and hotel records during his years as a World Bank staffer: Given the shrillness of his complaints about others staying in five-star hotels, we fully expect to find that Stiglitz has been leading by example and staying in places several notches lower.
19. Stiglitz has also attacked the competence of IMF staff, once characterizing them as "third-rank students from first-rate universities." This provoked Rudi Dornbusch, a famous MIT professor of international economics, into responding that "at Harvard and MIT, and everywhere else, fresh Ph.Ds who can't get jobs at the top 5 universities in the world will pick the World Bank or the IMF. And that is all for the better. Anyone likely to be picked as top draft choice by the top schools may be a trifle too theoretical for the cruder world of policymaking. Stiglitz himself with his predilection for the intriguing exceptions rather than the general rule is a great case in point."
20. OK, enough of the food-fight. Let me shift to a more positive tone and acknowledge the validity of some of the criticisms Stiglitz makes of the IMF. As I noted earlier, the IMF's has two main tasks: first, to help preserve global financial stability and, second, to assist the World Bank and others in the global war on poverty. The critiques by Stiglitz (and others) on some of our failures on both of these fronts, while not accurate down to every last detail, are well-taken.
21. One criticism is that the U.S. Treasury and the IMF showed excessive zeal in encouraging countries to open up to short-term foreign capital in the mid-1990s. The critics say that the entry, and often the subsequent hasty exodus, of foreign capital into economies which are too small or whose financial sectors are ill-equipped to regulate and absorb the capital can be devastating. Is this a valid characterization? It's useful to recall a bit of history first. When the IMF was created in 1944, its founders envisioned a world with free trade but with restrictions on movement of capital across countries. In the jargon, current accounts were to be open, but capital accounts closed. There is no denying that the vision of the world being promoted by the IMF in the mid-1990s was different: at the 1997 IMF-World Bank meetings the proposal on the table was to make eventual deregulation of international capital flows obligatory for IMF members. In the case of Korea, the U.S. Treasury did press (albeit with lack of success) for broad capital account liberalization in the context of the country's OECD accession.
22. But while Stiglitz's characterization of a greater push toward capital account liberalization is broadly correct, it is inaccurate in many important details. The IMF and the U.S. Treasury did not encourage countries to liberalize short-term flows through the banking sector, which is what turned out to be the Achilles Heel during the Asian crisis. And many countries liberalize for their own reasons rather than as a consequence of external prodding-Thailand for instance was keen to have Bangkok emerge as international financial sector like Singapore. Nevertheless, as a result of the criticism by Stiglitz and others, the IMF is more vocal in pointing out the risks of rapid capital account liberalization. While such cautionary notes have always been present in IMF advice on capital account liberalization, today they are much more likely to be given greater prominence. For instance, three weeks ago, although unnoticed by anyone in the international media but the Dow Jones newswires, we advised Sri Lanka against opening up its capital account until its financial sector was further strengthened.
23. Other aspects of our handling of the financial crisis in Asia have also come for criticism from Stiglitz and others. We've acknowledged that we made mistakes in our initial response to the crisis. As anyone who has been centrally involved in crisis situations will tell you, battlefield medicine is never perfect. We were surprised by the speed and virulence with which the crisis spread to many countries in the region. The experience revealed the IMF had not kept up with the rapid developments in international capital markets, a deficiency it has tried to rectify through a number of steps taken over the last couple of years.
24. Our most glaring error, according to many observers, was to recommend excessive belt-tightening to Thailand at the start of the crisis. It is worth recalling that in July 1997, Thailand was still growing rapidly, had a huge and growing current account deficit (more than 8 percent of GDP), and faced large, though as yet unrecognized, fiscal liabilities to recapitalize the financial system. It was against this background that the Imf recommended a roughly-unchanged fiscal position. However, once the scope of the crisis became evident, we quickly changed course. Indeed, IMF-supported programs in Thailand and other crisis countries were soon marked by large budget deficits, in part because of increases in spending on social safety net programs. This is exactly the kind of easing of fiscal policy Stiglitz advocates.
25. There is another, more technical, debate about which there is still no meeting of the minds between Stiglitz and others. This debate has to do with the appropriateness of the IMF's advice on monetary policy during the Asian crisis. The IMF and many others continue to disagree with Stiglitz's assertion that it is obvious that monetary policy must also be eased at the onset of a financial crisis. As Larry Summers noted recently, "when a country's exchange rate is declining rapidly because capital is trying to leave the country, and the country's financial institutions are in real trouble, there is a fundamental conflict between restoring external confidence by raising interest rates and providing for financial repair through increased liquidity. It's a classic problem of a single instrument and multiple targets. Confidence is widely recognized as essential in combating financial crises." Others have taken similar positions. Dornbusch for instance says that "investors will take confidence and bring money back when they see fiscal conservatism and high interest rates. Do that for a few months and you are on the right track." Our former chief economist Michael Mussa said in his typically colorful language that those who advocate easing monetary policy at the onset of a financial crisis are smoking something "not entirely legal". So the point is that there isn't a professional consensus on this topic. What's needed is honest debate and a closer look at the evidence, not polemics.
26. The experience of more recent financial crises, such as the one in Argentina, suggest that our existing mechanisms to resolve crises in a rapid and orderly fashion do not work smoothly. One problem is that governments do not deal with their sovereign debt problems promptly; the situation is often allowed to fester until a crisis is precipitated. Our current deputy head Anne Krueger has suggested creating a statutory mechanism to secure a more orderly and timely restructuring of unsustainable sovereign debts. For those of you who may have been following this issue, the mechanism being proposed is to empower a super-majority of creditors to take key decisions in the restructuring process in negotiation with the debtor. Stiglitz has been quite supportive of the general idea of having a sovereign debt restructuring mechanism.
27. With respect to our other main task, poverty alleviation, Stiglitz notes that the IMF and the World Bank have recently launched a new approach. This is a more "participatory" approach, one which involves the country's government and its civil society at an early stage in measuring the size of the poverty problem and in devising development strategies to reduce poverty. We get a rare compliment here when Stiglitz says that even though participatory assessments are not yet being perfectly implemented "they are a step in the right direction". He also notes correctly that if the gap between the rhetoric and reality of the new poverty strategy "persists for too long or remains too great, there will be a sense of disillusionment."
28. As promised, let me finish with a brief discussion of globalization, the supposed subject of the book. Stiglitz provides a mainstream, but nonetheless eloquent and clear, description of the benefits of globalization. He notes that "opening up to international trade has helped many countries grow far more quickly than they would otherwise have done. ... Because of globalization many people in the world live longer than before and their standard of living is far better." ... "People in the West may regard low-paying jobs at Nike as exploitation" but, says Stiglitz, "working in a factory is a far better option for many than growing rice" on the farm. It is also the case, says Stiglitz, that globalization "has reduced the sense of isolation felt in much of the developing world and has given many people in the developing world access to knowledge well beyond the reach of even the wealthiest in any country a century ago." With all of this, we couldn't agree more.
29. However, the benefits of globalization are spread very unevenly. In Africa the high expectations that people had for the continent following colonial independence remain unfulfilled. Growth in many countries in Latin America has yet to be placed on a secure footing. India is only just emerging from decades of economic slumber. As a consequence, many millions of people throughout the developing world remain mired in poverty. People disagree on the solutions to this problem. Even Larry Summers, not easily stumped, admits that "he doesn't have it all figured out"; however, he thinks "that in the developing world, far more people are poor because of too little globalization rather than too much, and far more people are poor because of a lack of economic reform rather than because of excessively rapid economic reform." Others such as Stiglitz feel that there has been too much of a "one-size-fits all" approach taken to development, and that market reforms have been pushed with excessive zeal and haste; he says that countries must be free to experiment with alternatives and follow paths that best suit their situations and needs.
30. While there are no easy answers, one concrete step could be taken to help the situation considerably, and that is for developed countries to lower the trade barriers they have against precisely those products in which the developing countries have a comparative advantage. On this particular issue, the relevant portions of Stiglitz's book read like passages from speeches by the IMF's Managing Director.
31. Let me end on that note of harmony.
IMF EXTERNAL RELATIONS DEPARTMENT