Globalization and Its Discontents Revisited

by Joseph E. Stiglitz

  But although change is not easy, it is possible. The changes that the developing countries wrenched from the developed countries in November 2001 as the price for beginning another round of trade negotiations show that, at least in the WTO, there has been a change in bargaining power.

  Still, I am not sanguine that fundamental reforms in the formal governance of the IMF and World Bank will come soon. Yet in the short run, there are changes in practices and procedures that can have significant effects. At the World Bank and the IMF there are twenty-four seats at the table. Each seat speaks for several countries. In the present configuration, Africa has very few seats simply because it has so few votes, and it has so few votes because, as we noted, votes are allocated on the basis of economic power. Even without changing the voting arrangements, one could have more African seats; their voice would be heard even if their votes were not counted.

  Effective participation requires that the representatives of the developing countries be well informed. Because the countries are poor, they simply cannot afford the kinds of staff that the United States, for instance, can muster to support its positions at all the international economic institutions. If the developed countries were serious about paying more attention to the voices of the developing countries, they could help fund a think tank—independent from the international economic organizations—that would help them formulate strategies and positions.

  Transparency

  Short of a fundamental change in their governance, the most ­important way to ensure that the international economic institutions are more responsive to the poor, to the environment, to the broader political and social concerns that I have emphasized is to increase openness and transparency. We have come to take for granted the important role that an informed and free press has in reining in even our democratically elected governments: any mischief, any minor indiscretion, any favoritism, is subject to scrutiny, and public pressure works powerfully. Transparency is even more important in public institutions like the IMF, the World Bank, and the WTO, because their leaders are not elected directly. Though they are public, there is no direct accountability to the public. But while this should imply that these institutions be even more open, in fact, they are even less transparent.

  The problem of lack of transparency affects each of the international institutions, though in slightly different ways. At the WTO, the negotiations that lead up to agreements are all done behind closed doors, making it difficult—until it is too late—to see the influence of corporate and other special interests. The deliberations of the WTO panels that rule on whether there has been a violation of the WTO agreements occur in secret. It is perhaps not surprising that the trade lawyers and ex–trade officials who often comprise such panels pay, for instance, little attention to the environment; but by bringing the deliberations more out into the open, public scrutiny would either make the panels more sensitive to public concerns or force a reform in the adjudication process.

  The IMF comes by its penchant for secrecy naturally: central banks, though public institutions, have traditionally been secretive. Within the financial community, secrecy is viewed as natural—in contrast to academia, where openness is the accepted norm. Before September 11, 2001, the secretary of treasury even defended the secrecy of the offshore banking centers. The billions of dollars in the Cayman Islands and other such centers are not there because those islands provide better banking services than Wall Street, London, or Frankfurt; they are there because the secrecy allows them to engage in tax evasion, money laundering, and other nefarious activities. Only after September 11 was it recognized that among those other nefarious activities was the financing of terrorism.

  But the IMF is not a private bank; it is a public institution.

  The absence of open discourse means that models and policies are not subjected to timely criticism. Had the actions and policies of the IMF during the 1997 crisis been subject to conventional democratic processes, and there had been a full and open debate in the crisis countries about the proffered IMF policies, it is possible that they would never have been adopted, and that far saner policies would have emerged. That discourse might not only have exposed the faulty economic assumptions on which the policy prescriptions were based but also revealed that the interests of the creditors were being placed ahead of those of workers and small businesses. There were alternative courses of actions, where less of the risk was borne by these less powerful parties, and these alternative courses of actions might have been given the serious consideration that they deserved.

  Earlier, in my days at the Council of Economic Advisers, I had seen and come to understand the strong forces that drove secrecy. Secrecy allows government officials the kind of discretion that they would not have if their actions were subject to public scrutiny. Secrecy not only makes their life easy but allows special interests full sway. Secrecy also serves to hide the mistakes, whether innocent or not, whether the result of a failure to think matters through or not. As it is sometimes put, “Sunshine is the strongest antiseptic.”

  Even when policies are not driven by special interests, secrecy engenders suspicions—whose interests are really being served?—and such suspicions, even when groundless, undermine the political sustainability of the policies. It is this secrecy, and the suspicions it gives rise to, that has helped sustain the protest movement. One of the demands of the protestors has been for greater openness and transparency.

  These demands had a special resonance because the IMF itself emphasized the importance of transparency during the East Asia crisis. One of the clearly unintended consequences of the IMF’s rhetorical emphasis on transparency was that eventually, when the transparency spotlight was turned around to shine on the IMF itself, it was found wanting.5

  Secrecy also undermines democracy. There can be democratic accountability only if those to whom these public institutions are supposed to be accountable are well informed about what they are doing—including what choices they confronted and how those decisions were made. We saw in chapter 6 how modern democracies had come to recognize the citizens’ basic right to know, implemented through laws such as America’s Freedom of Information Act. We saw also, however, that while nominally espousing transparency and openness, the IMF and the World Bank have not yet embraced these ideas. They must.

  REFORMING THE IMF AND THE GLOBAL FINANCIAL SYSTEM

  There are some common themes facing reform in all of the international economic institutions, but each institution has a set of problems of its own. I begin with the IMF, partly because it brings out more clearly some problems that are present to a lesser extent in other institutions.

  I began the previous chapter by asking, How could an organization with such talented (and high paid) government bureaucrats make so many mistakes? I suggested that part of its problems arose from the dissonance between its supposed objective, the objective for which it was originally created, promoting global economic stability, and the newer objectives—such as capital market liberalization—which did more to serve the interests of the financial community than of global stability. This dissonance led to intellectual incoherency and inconsistencies that were more than just matters of academic interest. No wonder, then, that it was hard to derive coherent policies. Economic science was too often replaced by ideology, an ideology that gave clear directions, if not always guidance that worked, and an ideology that was broadly consonant with the interests of the financial community, even if, when it failed to work, those interests themselves were not well served.

  One of the important distinctions between ideology and science is that science recognizes the limitations on what one knows. There is always uncertainty. By contrast, the IMF never likes to discuss the uncertainties associated with the policies that it recommends, but rather, likes to project an image of being infallible. This posture and mind-set makes it difficult for it to learn from past mistakes—how can it learn from those mistakes if it can’t admit them? While many organizations would like outsiders to
believe that they are indeed infallible, the problem with the IMF is that it often acts as if it almost believes in its infallibility.

  The IMF has admitted to mistakes in the East Asia crisis, acknowledging that the contractionary fiscal policies exacerbated the downturn, and that the strategy for restructuring the financial system in Indonesia led to a bank run, which only made matters worse. But, not surprisingly, the Fund—and the U.S. Treasury, which was responsible for pushing many of the policies—has tried to limit the criticisms and their discussion. Both were furious when a World Bank report touched on these and other mistakes and got front-page coverage in the New York Times. Orders to muzzle the critics were issued. More tellingly, the IMF never pursued the issues further. It never asked why the mistakes had occurred, what was wrong with the models, or what could be done to prevent a recurrence in the next crisis—and there surely will be another crisis in the future. (In January 2002, Argentina was going through a crisis. Once again, the IMF bailout policies failed to work; the contractionary fiscal policies that it insisted upon pushed the economy into an ever deeper recession.) The IMF never asked why its models systematically underestimated the depth of recessions—or why its policies are systematically excessively contractionary.

  The Fund tries to defend its stance of institutional infallibility, saying that if it showed it was wavering in its conviction that its policies were correct, it would lose credibility—and the success of its policies requires that markets give it credibility. Here again, there is real irony. Does the IMF, always praising the “perfection and rationality” of the market, really believe that it enhances its credibility by making overly confident forecasts? Predictions that repeatedly don’t pan out make the Fund look rather less than infallible, especially if the markets are as rational as it claims. Today, the IMF has lost much of its credibility, not only in developing countries but also with its cherished constituency, the financial community. Had the IMF been more honest, more forthright, more modest, it would arguably be in a better standing today.

  Sometimes, IMF officials give another reason for their failure to discuss alternative policies and the risks associated with each. They say that it would simply confuse the developing countries—a patronizing attitude that reflects a deep skepticism about democratic processes.

  It would be nice if the IMF, having had these problems pointed out, would change its mind-set and its modes of behavior. But this is not likely to be the case. Indeed, the Fund has been remarkably slow in learning from its mistakes—partly, as we have seen, because of the strong role of ideology and its belief in institutional infallibility, partly because its hierarchical organizational structure is used to ensure its prevailing worldviews dominate throughout the institution. The IMF is not, in the jargon of modern business schools, a “learning organization,” and like other organizations that find it difficult to learn and adapt, it finds itself in difficulties when the environment around it changes.

  Earlier in this chapter, I argued that a fundamental change in mind-set is likely to occur only with a change in governance, but that such changes are unlikely in the near term. Increased transparency would help; but even there, meaningful reforms were being resisted.

  A broad consensus—outside the IMF—has developed that the IMF should limit itself to its core area, managing crises; that it should no longer be involved (outside crises) in development or the economies of transition. I strongly concur—partly because the other reforms that would enable it to promote democratic, equitable, and sustainable development and transition are simply not forthcoming.

  There are other dimensions to narrowing the focus. The IMF currently is responsible for the collection of valuable economic statistics, and though by and large it does a good job, the data it reports are compromised by its operating responsibilities; to make its programs seem to work, to make the numbers “add up,” economic forecasts have to be adjusted. Many users of these numbers do not realize that they are not like ordinary forecasts; in these instances, GDP forecasts are not based on a sophisticated statistical model, or even on the best estimates of those who know the economy well, but are merely the numbers that have been negotiated as part of an IMF program. Such conflicts of interest invariably arise when the operating agency is also responsible for statistics, and many governments have responded by creating an independent statistical agency.

  Another activity of the Fund is surveillance, reviewing a country’s economic performance, under the Article 4 consultations discussed in chapter 6. This is the mechanism through which the IMF pushes its particular perspectives on developing countries that are not dependent on its aid. Because an economic slowdown in one country can have adverse effects on others, it does make sense for countries to put pressure on each other to maintain their economic strength; there is a global public good. The problem is the report card itself. The IMF emphasizes inflation; but unemployment and growth are equally important. And its policy recommendations too reflect its particular perspectives on the balance of government and markets. My direct experience with these Article 4 consultations in the United States convinces me that this too is a task that should be taken over by others. Because the most direct impact of one country’s slowdown is on its neighbors, and the neighbors are much more attuned to the circumstances in the country, regional surveillance is a viable alternative.

  Forcing the IMF to return to its original mission—narrowing its focus—enables greater accountability. We can attempt to ascertain whether it has prevented crises from happening, creating a more stable global environment, and whether it has resolved them well. But clearly, narrowing focus does not solve the institution’s problem: part of the complaint is that it has pushed policies, such as capital market liberalization, which have increased global instability, and that its big bailout policies, whether in East Asia, or Russia, or Latin America, have failed.

  Reform Efforts

  In the aftermath of the East Asia crisis, and the failures of the IMF policies, there was a general consensus that something was wrong with the international economic system, something needed to be done to make the global economy more stable. However, many of those at the U.S. Treasury and IMF felt that only minor changes were needed. To compensate for the lack of grandness in the changes, they conceived a grandiose title for the reform initiative, reform of the global financial architecture. The term was intended to suggest a major change in the rules of the game that would prevent another crisis.

  Underneath the rhetoric, there were some real issues. But just as those in charge at the IMF did everything to shift the blame away from their mistakes and away from the systemic problems, they did everything they could to curtail the reforms, except to the extent that they result in more power and money to the IMF and more obligations (such as compliance with new standards set by the advanced industrial countries) on the emerging markets.

  These doubts are reinforced by the way discussions of reform have proceeded. The “official” reform debate has been centered in the same institutions and dominated by the same governments that have effectively “run” globalization for over fifty years. Around the world today, there is a great deal of cynicism about the reform debate. Faced with the same people at the table who had been responsible for the system all along, the developing countries wondered if it was likely that real change would occur. As far as these “client countries” were concerned, it was a charade in which the politicians pretended to do something to redress the problems while financial interests worked to preserve as much of the status quo as they could. The cynics were partly right, but only partly so. The crisis brought to the fore the sense that something was wrong with the process of globalization, and this perception mobilized critics across a wide landscape of issues, from transparency to poverty to the environment to labor rights.

  Inside the organizations themselves, among many influential members there is a sense of complacency. The institutions have altered their rhetoric. They talk about “transparency,” about “poverty,”
about “participation.” Even if there is a gap between the rhetoric and the reality, the rhetoric has an effect on the institutions’ behavior, on transparency, on the concern for poverty. They have better Web sites and there is more openness. The participatory poverty assessments have generated more involvement and a greater awareness of the poverty impacts of programs. But these changes, as profound as they seem to those inside the institutions, appear superficial to outsiders. The IMF and World Bank still have disclosure standards far weaker than those of governments in democracies like the United States, or Sweden, or Canada. They attempt to hide critical reports; it is only their inability to prevent leaks that often forces the eventual disclosure. There is mounting unhappiness in developing countries with the new programs involving participatory poverty assessments, as those participating are told that important matters, such as the macroeconomic framework, are off limits.6

  There are other instances where there has been more change in what is said than in what is done. Today, the dangers of short-term capital flows and premature capital and financial market liberalization are occasionally acknowledged even by senior officials at the IMF. This constitutes a major change in the official stance of the Fund—though it is still too soon to see whether, or how, the change in rhetoric will be reflected in policies implemented within countries.7 So far, the evidence does not look promising, as one simple episode illustrates. Shortly after the new managing director Horst Köhler took office, he undertook a tour of some member countries. In a visit to Thailand at the end of May 2000, he noted what had by then become conventional wisdom outside the IMF, and was beginning to seep into the IMF itself: the dangers of capital market liberalization. Neighboring Indonesia quickly picked up on the opening, and by the time he visited there in June, its government had announced plans to explore interventions into the capital market. But quickly, the Indonesians—and Köhler—were set straight by the IMF staff. The bureaucracy won again: capital market liberalization might, in theory, be problematic; but capital market interventions (controls) evidently were not to be on the table for those seeking IMF assistance.