The sharecropping system weakens incentives—where they share equally with the landowners, the effects are the same as a 50 percent tax on poor farmers. The IMF rails against high tax rates that are imposed against the rich, pointing out how they destroy incentives, but nary a word is spoken about these hidden taxes…. Land reform represents a fundamental change in the structure of society, one that those in the elite that populates the finance ministries, those with whom the international finance institutions interact, do not necessarily like.
Stiglitz considers, and rejects, the view that these and other choices are the result of a conspiracy between the IMF and powerful interests in the richer countries—a view that is increasingly popular among the anti-globalization protesters who now appear at the IMF’s (and the World Bank’s) meetings. Stiglitz’s view is that in recent decades the IMF “was not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community.”
Finally, Stiglitz sees the IMF’s systematic biases as a reflection of a deeper moral failing:
The lack of concern about the poor was not just a matter of views of markets and government, views that said that markets would take care of everything and government would only make matters worse; it was also a matter of values…. While misguidedly working to preserve what it saw as the sanctity of the credit contract, the IMF was willing to tear apart the even more important social contract.
Throughout the book, the sense of moral outrage is evident.
Do Stiglitz’s criticisms hold up?
To begin, it is easy enough to accuse Stiglitz of selective memory. From reading Globalization and Its Discontents, one would never know that the IMF had ever done anything useful. Or that Stiglitz, and his colleagues first at the Council of Economic Advisers and then at the World Bank, had ever gotten anything wrong. Or that those against whom he often argued in the US government—especially at the Treasury, which he continually portrays as complicit in the IMF’s misdeeds, but at the Federal Reserve System too—had ever gotten a question right. (In the book’s sole mention of Alan Greenspan, Stiglitz accuses him of being excessively concerned with inflation to the exclusion of a vigorous expansion that could have otherwise taken place in the US during the Clinton years.)
One can also disagree with Stiglitz over the consequences of what the IMF plainly did, even including those policies it pursued that most people now agree proved counterproductive. By 2002 the Asian financial crisis of 1997–1998 is receding into the past. While some of the affected countries (most obviously Indonesia) still feel its effects, by now others have made solid recoveries. Stiglitz is right that they have not regained, and probably will not, the rates of growth they achieved before the crisis. But those rapid growth rates may well have been unsustainable in any case. Even in Russia, where per capita income remains well below what it was when the Soviet Union collapsed, and where the IMF pursued the policies toward which Stiglitz is the most scathing, the economic situation looks better today than it did when he was writing his book.
A more fundamental problem, as Stiglitz readily acknowledges, is that we cannot reliably know whether the consequences of the IMF’s policies were worse than whatever the alternative would have been. Many longtime observers of the developing world will notice that Stiglitz rarely mentions economic policy mistakes that poor countries make on their own initiative. Nor does he pay much attention to the large-scale corruption that is endemic in many developing economies—except in the case of corruption in Russia, where he argues that the privatization program pushed by the IMF opened the way for corruption on a historically unprecedented scale. He also never points out that the typical developing country spends far more on its military forces (to fight whom?) than it receives in foreign aid; yet it would seem necessary to take account of such wasteful expenditures, along with graft in all its forms, if one is to give a clear picture of why the nondeveloping economies are not succeeding.
It is surprising too, in light of his emphasis on the absence of adequate regulation and supervision of financial institutions in the developing world, that Stiglitz does not make more of the mistakes made by private-sector businesses. For example, what made Korea vulnerable to the 1997–1998 Asian turmoil was that the country’s business conglomerates (the “chaebols”) had borrowed too heavily, and that the country’s banks had financed these loans by borrowing in US dollars and relending in Korean won. True, banks abroad that were lending in dollars to the Korean banks may have become excessively confident that the IMF would bail them out if anything went wrong. But surely much of the fault lay with Korea’s own businessmen and bankers. And once they had built their house of cards, how much damage would its inevitable collapse have caused if the IMF had simply stayed away?
Defenders of the IMF cannot claim that all went well after countries implemented the Fund’s recommendations. But they would presumably argue that events would have turned out even worse on some alternative course. They would also presumably argue that of course they knew that information was imperfect, and markets incomplete, and institutions absent, in the countries that came to the IMF for assistance. The issue, to be argued on a case-by-case basis, is just what different set of actions might therefore have proved more beneficial.
Interestingly, there is also disagreement today over just how prevalent dire poverty is in the developing world—and, what is more important, whether poverty is increasing or decreasing. Stiglitz echoes the standard view that the number of people around the world living on less than $1 per day, or $2 per day, has been increasing in recent years. By contrast, his own colleague in the Columbia Economics Department, Xavier Sala-i-Martin, has recently published a study arguing just the opposite.3 Sala-i-Martin’s point is that for purposes of assessing whether someone is economically well off or miserable, what matters is not how many US dollars the person’s income could buy in the foreign exchange market but what standard of living that income can support in the place where he or she lives. Because the currency values established in foreign exchange markets (and also the values that governments set officially for currencies for which there is no market) often do not accurately reflect purchasing power, the difference between the two measures of income is sometimes large.
In India, for example, the average person’s income in rupees in 2000 translated into just $460 per year at the prevailing market exchange rate of 44 rupees per dollar. But because food, clothing, housing, and other consumer necessities are so much cheaper in India than in the US, the same amount of rupees was equivalent to an American income of nearly $2,400. Similarly, the average Chinese income in 2000 was $840 at the official yuan–dollar market exchange rate, but more than $3,900 if measured on a purchasing power equivalent basis.4
Even if we allow for these differences in the cost of living, the number of people in the world who live on the equivalent of $1 per day, or $2 per day, is still depressingly large: according to Sala-i-Martin’s estimate, nearly 300 million, and not quite 1 billion, respectively. But this is far below the 1.2 billion and 2.8 billion figures that have become familiar in public discussion and are used by Stiglitz. More important, Stiglitz follows the more familiar view in saying that these totals are increasing, but Sala-i-Martin estimates that they are declining despite the rapid growth in world population. As a result, he finds, the proportion of people living on what amounts to $1 per day has fallen from 20 percent of the world’s population a quarter-century ago to just 5 percent today, while the $2-per-day poverty rate has fallen from 44 percent to 19 percent.
Much empirical research will have to be done and much analytical debate will have to take place before anyone can confidently decide which of these contrasting measurements is the more accurate. But it is worth pointing out that the major source of the decline in poverty over the last quarter-century, according to Sala-i-Martin’s calculation, is the dramatic reduction in poverty in China, the world’s most populous country—and Stiglitz, too, praises China’s performance as one of the developing world’s great recent economic success stories. (In keeping with his central theme, he argues that China succeeded in reforming its economy and reducing its poverty because it ignored the IMF’s advice to liberalize and privatize abruptly, and instead followed the gradualist approach, adapted to its own situation, which he favors.) To be sure, the plight of many developing countries, especially in sub-Saharan Africa, remains dire, as Sala-i-Martin also points out, and it may well be deteriorating. But if attention is centered on people rather than countries, the great advances made in China, and to a lesser extent in India—which together account for nearly 38 percent of the world’s population—necessarily represent a very significant improvement.
Stiglitz’s attack on the IMF raises not just factual (and counterfactual) questions but substantive issues as well, particularly his argument that the IMF acts on behalf of banks and bondholders, and rich countries more generally, and therefore against the interests of the poor. To what extent is the IMF supposed to act as lending institutions ordinarily act? Stiglitz complains at length, and with many specific cases to cite, that the IMF violates countries’ economic sovereignty when it requires them to carry out its policy recommendations as a condition for its granting credit. But don’t responsible lenders normally impose such conditions on borrowers? Stiglitz never acknowledges that today the IMF faces serious criticism from many economists and politicians in the West on the ground that it makes loans with too few conditions, so that the borrowing countries often simply end up wasting the money.5
Or should the IMF think of itself not as a lending institution, acting as responsible lenders normally do, but instead as an institution charged solely with promoting the welfare of the borrowing countries, with waste of some credits to be expected? Some parts of Stiglitz’s complaint are not so much about the IMF per se as about the absence of some form of international authority capable of imposing on citizens who are already relatively well off the burden of assisting their less fortunate fellow human beings elsewhere.
To be sure, the world’s rich countries could simply agree among themselves to devote a much greater share of their own incomes to foreign aid (a frequently suggested standard is 1 percent of GDP), either out of a sense of moral obligation or in recognition that raising the incomes of poor countries would create benefits spilling over to the industrialized world as well. But in fact there is no such agreement. The foreign aid that most rich countries give is shrinking compared to their GDP, and the efficacy of such aid is increasingly being challenged anyway.
Even within countries with firmly established democratic governments, there is always debate about how generous such assistance should be and what form it should take. But a large part of what troubles Stiglitz and many others who share his views of inequality among countries is that there is not only no such agreement but also no effective mechanism—what he calls “systems of global governance”—for even choosing a policy in this important area and then making it stick. The earnest desire in some quarters for a more formal approach to international burden-sharing, together with the equally sincere resistance to the idea among others, is nothing new. But it is worth recognizing explicitly that it is central to the question of inequality.
Moreover, the matter at issue is deeper than simply whether there should or should not be functioning institutions empowered to act, in effect, as a world government. What obligations the citizens of one country owe to citizens of another is a question that goes to the heart of what is involved in being a nation-state and in acting as a responsible human being. Is it morally legitimate for US citizens to pay taxes to provide fellow Americans with a minimum standard of health care under Medicaid, or a minimum standard of nutrition through food stamps, that is far above what the average Angolan receives—and not at the same time be willing to pay the costs of bringing Angola, and the rest of the world’s low-income countries, up to that standard? Most Americans will readily answer yes. But as philosophers like John Rawls and Thomas Pogge have argued, wholly apart from the practical benefits that we might gain from alleviating human misery abroad, justifying in moral terms why we owe more to strangers who are close at hand than we owe to strangers who are far away turns out to be complicated and, in the end, extremely difficult.
Many of the more practical economic elements of Stiglitz’s argument are also issues of long standing. He makes a strong case for policies that favor gradualism over “shock therapy”; that put the emphasis not on what developing countries have in common but on how each is different; that place the concerns of the poor above those of creditors; that give maintaining full employment a higher priority than reducing inflation (at least when inflation is less than 20 percent a year); and that fight poverty and promote economic growth directly, rather than merely establish conditions under which economies will be likely to grow, and poverty to decline, on their own. There is serious debate over each element in this program. Stiglitz provides a powerful logical case, together with much by way of both broad-based evidence and firsthand specifics, to support his side on each of these issues. But his objective is not to give a balanced assessment of the debate.
Stiglitz has presented, as effectively as it is possible to imagine anyone making it, his side of the argument, including the substantive case for the kind of economic development policies he favors as well as his more specific indictment of what the IMF has done and why. His book stands as a challenge. It is now important that someone else—if possible, someone who thinks and writes as clearly as Stiglitz does, and who understands the underlying economic theory as well as he does, and who has a firsthand command of the facts of recent experience comparable to his—take up this challenge by writing the best possible book laying out the other sides of the argument. What is needed is not just an attempt to answer Stiglitz’s specific criticisms of the IMF but a book setting out the substantive case both for the specific policies and also for the general policy approach that the IMF has advocated.
Who might write such a book? The most obvious candidate is the former MIT economist Stanley Fischer, who throughout the years that Stiglitz’s analysis covers was the IMF’s first deputy managing director—that is, the Fund’s second-highest ranking official, but for most observers, the person who, far more than anyone else, actually set the direction of the organization’s policies. Another is my Harvard colleague (now president of the university) Lawrence Summers, who served as the US deputy treasury secretary, and then secretary, during these years. Supporters of the IMF in the academic world, like MIT’s Rudiger Dornbusch, may lack the firsthand “who said what to whom” knowledge that comes from high-level public service, but they are clear-thinking economists and powerful advocates nonetheless. In the absence of such an answer, however, Stiglitz’s book will surely claim a large place on the public stage. It certainly stands as the most forceful argument that has yet been made against the IMF and its policies.
"The Disturbing 'Rise' of Global Income Inequality," National Bureau of Economic Research Working Paper No. w8904, April 2002.↩
Data from the 2002 World Development Report, Table 1.↩
Surprisingly, Stiglitz is not consistent in his own treatment of the question of what conditions are appropriate for loans. He repeatedly castigates the IMF for imposing its officials' views over those of government officials in debtor countries. But he boasts about how the World Bank, where he worked, forced Russia to accept stringent conditions in order to receive a loan.↩
“The Disturbing ‘Rise’ of Global Income Inequality,” National Bureau of Economic Research Working Paper No. w8904, April 2002.↩
Data from the 2002 World Development Report, Table 1.↩
Surprisingly, Stiglitz is not consistent in his own treatment of the question of what conditions are appropriate for loans. He repeatedly castigates the IMF for imposing its officials’ views over those of government officials in debtor countries. But he boasts about how the World Bank, where he worked, forced Russia to accept stringent conditions in order to receive a loan.↩