Metroland Online

When leaders of the world’s richest countries got together for a two-day chat last month, they chose to meet in a secluded spot in the Canadian Rockies, the mountain resort of Kananaskis, protected by missiles and dug-in tanks. What the Canadians feared was not a handful of terrorists but those thousands of protestors who now show up at these globalization conferences. At last year’s meeting in Genoa, protestors filled the streets, and in the ensuing riots one of the young activists was killed by Italian paramilitary police.

Now it turns out that the most articulate critic of economic globalization, one of the most knowledgeable and radical, wasn’t atop the barricades. He was at the World Bank. Joseph Stiglitz is a former vice president and chief economist of the World Bank. Prior to that he was a cabinet member in the Clinton administration and chairman of the Council of Economic Advisors, and in 2001 he shared the Nobel Prize in economic science. His recent book, Globalization and Its Discontents, is an astonishing indictment of the United States’ role directing globalization. It’s going to take more than a water cannon to blow away this one.

Two powerful institutions shaping economic globalization are the World Bank and the International Monetary Fund. For those of you who missed school the day we discussed this, let’s review: The IMF and the World Bank originated as part of a plan to finance the rebuilding of Europe after World War II. The World Bank provides countries with long-term loans in such areas as health and education. The mission of the IMF is to ensure global economic stability: the IMF supplies countries with emergency loans if their economies sink so dangerously as to imperil other nations and the smooth working of our interdependent economies.

The IMF and the World Bank were established at a time when the economic theories of John Maynard Keynes were gaining influence. Keynes said that in some situations, a government can rescue its nation’s sinking economy by, for example, spreading more money around to stimulate demand and to raise employment. He believed that a government has an obligation to intervene in its country’s marketplace to regulate capitalism’s boom-and-bust cycles and to alleviate unnecessary suffering. The IMF was designed to do exactly that on a global scale.

But in Stiglitz’s view, the IMF has failed miserably in its mission. “It has not done what it was supposed to do—provide funds for countries facing an economic downturn, to enable the country to restore itself to close to full employment.” Instead, “IMF funds and programs not only failed to stabilize the situation but in many cases actually made matters worse, especially for the poor.”

The IMF has failed because it has abandoned its founders’ generous economic vision and become part of what Stiglitz calls the “Washington Consensus.”

Here’s what happened: The disintegration of the Soviet Union and the unraveling of its government-controlled economy made robust capitalism and the “free”—i.e., unregulated—market look great. The United States was victorious, capitalism was victorious. This and other events led to the development of a Washington Consensus between the IMF, the World Bank and the U.S. Treasury about the “right” policies for developing countries. And these policies were not based on Keynes’ theories, but on those of Adam Smith. In 1776, Smith had argued that market forces—everyone’s desire for profits and bargains—brought efficiency to the economy and increased the general wealth, and all as if guided by an “invisible hand.”

The IMF conjures up the invisible hand by imposing certain conditions on the country receiving aid. For example, the IMF can—and often does—insist that the debtor country revive its sick economy by raising interest rates, by cutting back government programs, by opening its banking system to foreign investment. This is the kind of medicine Adam Smith would have prescribed. Alas, all too often these measures bankrupt already weakened businesses, eliminate health and education programs, and open the country to exploitation by larger foreign banks. In Stiglitz’s tally, countries that swallowed IMF medicine got sicker, whereas countries that resisted it got better.

Fiscal austerity, privatization and market liberalization make up the Washington Consensus. In the real world, that means a debtor country should raise interest rates, sell off government programs to entrepreneurs, eliminate trade barriers and remove controls from the market. These actions can ruin a country, especially a developing country with fragile financial and political institutions. The United States Treasury—the IMF’s largest shareholder and the only one with veto power—pushed liberalization. In doing so, the Treasury Department contributed to the financial problems in East Asia, and the IMF’s rash liberalization of financial and capital markets helped bring about the 1990s collapse of East Asian economies. Malaysia and South Korea, ultimately rejecting IMF policies, fared better.

The IMF also has failed in its attempt to guide the transition of Russia and former Soviet nations from communism to a market economy. The Czech Republic, which enthusiastically pursued the goals set by the IMF, is worse off now than it was in 1989, whereas Hungary, treading more cautiously, is growing internationally competitive. Western advisers, especially from the United States and the IMF, swept into Russia “to preach the gospel of the market economy,” and they must take at least some of the blame for the wretched results. At one time there was a lot of talk about the wonders of “shock therapy” for Russia—the abrupt elimination of government controls, the hasty selling off of government enterprises—but apparently zapping doesn’t work in economics any better than it does in psychiatry. China, on the other hand, has taken a much slower and more controlled approach to the market; in 1990 China’s gross domestic product was 60 percent that of Russia, but by the end of the decade the numbers had been reversed. “While Russia saw an unprecedented increase in poverty, China saw an unprecedented decrease.”

Well, nobody’s perfect, not even a Nobel Prize Laureate. Globalization and Its Discontents suffers from the author’s I-told-them-so tone. Stiglitz’s bland praise of China’s economy overlooks some horrendous failings and a lot of human misery. And while it’s easy to see how our leaders are imprisoned in an ideology that takes no account of its own errors, still it’s hard to believe that the last economics text they read was Adam Smith’s 1776 Wealth of Nations. Kenneth Rogoff, the IMF’s chief economist, has scoffed at Stiglitz’s ideas as “at best highly controversial, at worst, snake oil.” Indeed, the World Bank and the IMF are often at odds, and it’s clear that Joseph Stiglitz has an ax to grind. In the end, however, it’s great to have this bright ax when dealing with the monsters of globalization.

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