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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
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