Globalization and Its Discontents Revisited

by Joseph E. Stiglitz

  THERE ARE SEVERAL reasons for the failure of conditionality. The simplest has to do with the economists’ basic notion of fungibility, which simply refers to the fact that money going in for one purpose frees up other money for another use; the net impact may have nothing to do with the intended purpose. Even if conditions are imposed which ensure that this particular loan is used well, the loan frees up resources elsewhere, which may or may not be used well. A country may have two road projects, one to make it easier for the president to get to his summer villa, the other to enable a large group of farmers to bring their goods to a neighboring port. The country may have funds for only one of the two projects. The lender may insist as part of its conditionality that its money go for the project that increases the income of the rural poor; but in providing that money, it enables the government to fund the other.

  There were other reasons why conditionality did not enhance economic growth. In some cases, they were the wrong conditions: financial market liberalization in Kenya and fiscal austerity in East Asia had adverse effects on the countries. In other cases, the way conditionality was imposed made the conditions politically unsustainable; when a new government came into power, they would be abandoned. Such conditions were seen as the intrusion by the new colonial power on the country’s own sovereignty. The policies could not withstand the vicissitudes of the political process.

  There was a certain irony in the stance of the IMF. It tried to pretend that it was above politics, yet it was clear that its lending program was, in part, driven by politics. The IMF made an issue of corruption in Kenya and halted its relatively small lending program largely because of the corruption it witnessed there. Yet it maintained a flow of money, billions of dollars, to Russia and Indonesia. To some, it seemed that while the Fund was overlooking grand larceny, it was taking a strong stand on petty theft. It should not have been kinder to Kenya—the theft was indeed large relative to the economy; it should have been tougher on Russia. The issue is not just a matter of fairness or consistency; the world is an unfair place, and no one really expected the IMF to treat a nuclear power the same way that it treated a poor African country of little strategic importance. The point was far simpler: the lending decisions were political—and political judgments often entered into IMF advice. The IMF pushed privatization in part because it believed governments could not, in managing enterprises, insulate themselves from political pressures. The very notion that one could separate economics from politics, or a broader understanding of society, illustrated a narrowness of perspective. If policies imposed by lenders induce riots, as has happened in country after country, then economic conditions worsen, as capital flees and businesses worry about investing more of their money. Such policies are not a recipe either for successful development or for economic stability.

  The complaints against the IMF imposition of conditions extended beyond what conditions and how they were imposed, but were directed at how they were arrived at as well. The standard IMF procedure before visiting a client country is to write a draft report first. The visit is only intended to fine-tune the report and its recommendations, and to catch any glaring mistakes. In practice, the draft report is often what is known as boilerplate, with whole paragraphs being borrowed from the report of one country and inserted into another. Word processors make this easier. A perhaps apocryphal story has it that on one occasion a word processor failed to do a “search and replace,” and the name of the country from which a report had been borrowed almost in its entirety was left in a document that was circulated. It is hard to know whether this was a one-off occurrence, done under time pressure, but the alleged foulup confirmed in the minds of many the image of “one-size-fits-all” reports.

  Even countries not borrowing money from the IMF can be affected by its views. It is not just through conditionality that the Fund imposes its perspectives throughout the world. The IMF has an annual consultation with every country in the world. The consultations, referred to as “Article 4” consultations after the article in its charter that authorized them, are supposed to ensure that each country is adhering to the articles of agreement under which the IMF was established (fundamentally ensuring exchange rate convertibility for trade purposes). Mission creep has affected this report as it has other aspects of IMF activity: the real Article 4 consultations are but a minor part of the entire surveillance process. The report is really the IMF’s grading of the nation’s economy.

  While small countries often had to listen to the Article 4 evaluations, the United States and other countries with developed econo­mies could basically ignore them. For instance, the IMF suffered from inflation paranoia, even when the United States was facing the lowest inflation rates in decades. Its prescription was therefore predictable: increase interest rates to slow down the economy. The IMF simply had no understanding of the changes that were then occurring, and had been occurring over the preceding decade in the U.S. economy that allowed it to enjoy faster growth, lower unemployment, and low inflation all at the same time. Had the IMF’s advice been followed, the United States would not have experienced the boom in the American economy over the 1990s—a boom that brought unprecedented prosperity and enabled the country to turn around its massive fiscal deficit into a sizable surplus. The lower unemployment also had profound social consequences—issues to which the IMF paid little attention anywhere. Millions of workers who had been excluded from the labor force were brought in, reducing poverty and welfare roles at an unprecedented pace. This in turn brought down the crime rate. All Americans benefited. The low unemployment rate, in turn, encouraged individuals to take risks, to accept jobs without job security; and that willingness to take risks has proven an essential ingredient in America’s success in the so-called New Economy.

  The United States ignored the IMF’s advice. Neither the Clinton administration nor the Federal Reserve paid much attention to it. The United States could do so with impunity because it was not dependent on the IMF or other donors for assistance, and we knew that the market would pay almost as little attention to it as we did. The market would not punish us for ignoring its advice or reward us for following it. But poor countries around the world are not so lucky. They ignore the Fund’s advice only at their peril.

  There are at least two reasons why the IMF should consult widely within a country as it makes its assessments and designs its programs. Those within the country are likely to know more about the economy than the IMF staffers—as I saw so clearly even in the case of the United States. And for the programs to be implemented in an effective and sustainable manner, there must be a commitment of the country behind the program, based on a broad consensus. Such a consensus can only be arrived at through discussion—the kind of open discussion that, in the past, the IMF shunned. To be fair to the IMF, in the midst of a crisis there is often little time for an open debate, the kind of broad consultation required to build a consensus. But the IMF has been in the African countries for years. If it is a crisis, it is a permanent ongoing crisis. There is time for consultations and consensus building—and in a few cases, such as Ghana, the World Bank (while my predecessor, Michael Bruno, was chief economist) succeeded in doing that, and these have been among the more successful cases of macroeconomic stabilization.

  At the World Bank, during the time I was there, there was an increasing conviction that participation mattered, that policies and programs could not be imposed on countries but to be successful had to be “owned” by them, that consensus building was essential, that policies and development strategies had to be adapted to the situation in the country, that there should be a shift from “conditionality” to “selectivity,” rewarding countries that had proven track records for using funds well with more funds, trusting them to continue to make good use of their funds, and providing them with strong incentives. This was reflected in the new Bank rhetoric, articulated forcefully by the Bank’s president, James D. Wolfensohn: “The country should be put in the driver’s seat.” Even so, many critics say t
his process has not gone far enough and that the Bank still expects to remain in control. They worry that the country may be in the driver’s seat of a dual-control car, in which the controls are really in the hands of the instructor. Changes in attitudes and operating procedures in the Bank will inevitably be slow, proceeding at different paces in its programs in different countries. But there remains a large gap between where the Bank is on these matters and where the IMF is, both in attitudes and procedures.

  As much as it might like, the IMF, in its public rhetoric at least, could not be completely oblivious to the widespread demands for greater participation by the poor countries in the formulation of development strategies and for greater attention to be paid to poverty. As a result, the IMF and the World Bank have agreed to conduct “participatory” poverty assessments in which client countries join the two institutions in measuring the size of the problem as a first step. This was potentially a dramatic change in philosophy—but its full import seemed to escape the IMF. On one occasion, recognizing that the Bank was supposed to be taking the lead on poverty projects, just before the initial and, theoretically, consultative IMF mission to a certain client country prepared to depart, the IMF sent an imperious message to the Bank to have a draft of the client country’s “participatory” poverty assessment sent to IMF headquarters “asap.” Some of us joked that the IMF was confused. It thought the big philosophical change was that in joint Bank-IMF missions, the Bank could actually participate by having a say in what was written. The idea that citizens in a borrowing country might also participate was simply too much! Stories of this kind would be amusing were they not so deeply worrying.

  Even if, however, the participatory poverty assessments are not perfectly implemented, they are a step in the right direction. Even if there remains a gap between the rhetoric and the reality, the recognition that those in the developing country ought to have a major voice in their programs is important. But if the gap persists for too long or remains too great, there will be a sense of disillusionment. Already, in some quarters, doubts are being raised, and increasingly loudly. While the participatory poverty assessments have engendered far more public discussion, more participation, than had previously been the case, in many countries expectations of participation and openness have not been fully realized, and there is growing discontent.

  In the United States and other successful democracies citizens regard transparency, openness, knowing what government is doing, as an essential part of government accountability. Citizens regard these as rights, not favors conferred by the government. The Freedom of Information Act of 1966 has become an important part of American democracy. By contrast, in the IMF style of operation, citizens (an annoyance because they all too often might be reluctant to go along with the agreements, let alone share in the perceptions of what is good economic policy) were not only barred from discussions of agreements; they were not even told what the agreements were. Indeed, the prevailing culture of secrecy was so strong that the IMF kept much of the negotiations and some of the agreements secret from World Bank members even in joint missions! The IMF staff provided information strictly on a “need to know” basis. The “need to know” list was limited to the head of the IMF mission, a few people at IMF headquarters in Washington, and a few people in the client country’s government. My colleagues at the Bank frequently complained that even those participating in a mission had to go to the government of the country who “leaked” what was going on. On a few occasions, I met with executive directors (the title for representatives that nations post to the IMF and the World Bank) who had apparently been kept in the dark.

  One recent episode shows how far the consequences of lack of transparency can go. The notion that developing countries might have little voice in the international economic institutions is widely recognized. There may be a debate about whether this is just a historical anachronism or a manifestation of realpolitik. But we should expect that the U.S. government—including the U.S. Congress—should have some say, at least in how its executive director, the one who represents the United States at the IMF and the World Bank, votes. In 2001, Congress passed and the president signed a law requiring the United States to oppose proposals for the international financial institutions to charge fees for elementary school (a practice that goes under the seeming innocuous name of “cost recovery”). Yet the U.S. executive director simply ignored the law, and the secrecy of the institutions made it difficult for Congress—or anyone else—to see what was going on. Only because of a leak was the matter discovered, generating outrage even among congressmen and women accustomed to bureaucratic maneuvering.

  Today, in spite of the repeated discussions of openness and transparency, the IMF still does not formally recognize the citizen’s basic “right to know”: there is no Freedom of Information Act to which an American, or a citizen of any other country, can appeal to find out what this international public institution is doing.

  I should be clear: all of these criticisms of how the IMF operates do not mean the IMF’s money and time is always wasted. Sometimes money has gone to governments with good policies in place—but not necessarily because the IMF recommended these policies. Then, the money did make a difference for the good. Sometimes, conditionality shifted the debate inside the country in ways that led to better policies. The rigid timetables that the IMF imposed grew partly from a multitude of experiences in which governments promised to make certain reforms, but once they had the money, the reforms were not forthcoming; sometimes, the rigid timetables helped force the pace of change. But all too often, the conditionality did not ensure either that the money was well used or that meaningful, deep, and long-lasting policy changes occurred. Sometimes, conditionality was even counterproductive, either because the policies were not well suited to the country or because the way they were imposed engendered hostility to the reform process. Sometimes, the IMF program left the country just as impoverished but with more debt and an even richer ruling elite.

  The international institutions have escaped the kind of direct accountability that we expect of public institutions in modern democracies. The time has come to “grade” the international economic institution’s performance and to look at some of those programs—and how well, or poorly, they did in promoting growth and reducing poverty.

  CHAPTER 7

  FREEDOM TO CHOOSE?

  FISCAL AUSTERITY, PRIVATIZATION, and market liberalization were the three pillars of Washington Consensus advice throughout the 1980s and 1990s. The Washington Consensus policies were designed to respond to the very real problems in Latin America, and made considerable sense. In the 1980s, the governments of those countries had often run huge deficits. Losses in inefficient government enterprises contributed to those deficits. Insulated from competition by protectionist measures, inefficient private firms forced customers to pay high prices. Loose monetary policy led to inflation running out of control. Countries cannot persistently run large deficits; and sustained growth is not possible with hyperinflation. Some level of fiscal discipline is required. Most countries would be better off with governments focusing on providing essential public services rather than running enterprises that would arguably perform better in the private sector, and so privatization often makes sense. When trade liberalization—the lowering of tariffs and elimination of other protectionist measures—is done in the right way and at the right pace, so that new jobs are created as inefficient jobs are destroyed, there can be significant efficiency gains.

  The problem was that many of these policies became ends in themselves, rather than means to more equitable and sustainable growth. In doing so, these policies were pushed too far, too fast, and to the exclusion of other policies that were needed.

  The results have been far from those intended. Fiscal austerity pushed too far, under the wrong circumstances, can induce recessions, and high interest rates may impede fledgling business enterprises. The IMF vigorously pursued privatization and liberalization, at a pace and in a manner
that often imposed very real costs on countries ill-equipped to incur them.

  Privatization

  In many developing—and developed—countries, governments all too often spend too much energy doing things they shouldn’t do. This distracts them from what they should be doing. The problem is not so much that the government is too big, but that it is not doing the right thing. Governments, by and large, have little business running steel mills, and typically make a mess of it. (Although the most efficient steel mills in the world are those established and run by the Korean and Taiwanese governments, they are an exception.) In general, competing private enterprises can perform such functions more efficiently. This is the argument for privatization—converting state-run industries and firms into private ones. However, there are some important preconditions that have to be satisfied before privatization can contribute to an economy’s growth. And the way privatization is accomplished makes a great deal of difference.

  Unfortunately, the IMF and the World Bank have approached the issues from a narrow ideological perspective—privatization was to be pursued rapidly. Scorecards were kept for the countries making the transition from communism to the market: those who privatized faster were given the high marks. As a result, privatization often did not bring the benefits that were promised. The problems that arose from these failures have created antipathy to the very idea of privatization.

  In 1998 I visited some poor villages in Morocco to see the impact that projects undertaken by the World Bank and nongovernmental organizations (NGOs) were having on the lives of the people there. I saw, for instance, how community-based irrigation projects were increasing farm productivity enormously. One project, however, had failed. An NGO had painstakingly instructed local villagers on raising chickens, an enterprise that the village women could perform as they continued more traditional activities. Originally, the women obtained their seven-day-old chicks from a government enterprise. But when I visited the village, this new enterprise had collapsed. I discussed with villagers and government officials what had gone wrong. The answer was simple: The government had been told by the IMF that it should not be in the business of distributing chicks, so it ceased selling them. It was simply assumed that the private sector would immediately fill the gap. Indeed, a new private supplier arrived to provide the villagers with newborn chicks. The death rate of chicks in the first two weeks is high, however, and the private firm was unwilling to provide a guarantee. The villagers simply could not bear the risk of buying chicks that might die in large numbers. Thus, a nascent industry, poised to make a difference in the lives of these poor peasants, was shut down.