After September 11 many Americans asked plaintively, as President Bush did: “Why do they [i.e., the rest of the world] hate us?” Part of the answer is: They hate us because of the IMF. In the last few decades, the International Monetary Fund has inflicted enormous and unnecessary suffering throughout the less-developed world, largely at the behest of American financial institutions, which have profited hugely from its policies. These policies form a large part of what is nowadays called the “Washington consensus,” or more loosely, “globalization.” In this urgently important new book, the eminent economist Joseph Stiglitz drags the IMF over the coals, arguing persuasively that the Fund’s version of globalization has indeed produced many hateful results.
Stiglitz was chairman of the Council of Economic Advisers from 1993 to 1997, then chief economist and senior vice president of the World Bank from 1997 to 2000. In 2001 he was awarded the Nobel Prize in economics for his earlier work on market imperfections, especially the effects of inequalities of information. Most remarkably for someone of this background, he seems also to have acquired a modicum of conscience, imagination, and humility.
The IMF was founded in 1944 to help prevent another worldwide depression like that of the 1930s. That depression was caused by a “liquidity failure”: concerned above all to avoid inflation, budget deficits, and trade deficits, governments kept interest rates high, spending low, and exports out. These policies drastically reduced economic activity. The IMF was intended to counter this by lending money to some countries and pressuring others to pursue more expansionary policies.
The Fund was premised on the fundamental insight of Keynesianism: markets are not usually self-correcting, at least not before a great many non-rich people have been driven to the brink of destitution. In the 1980s the Reagan Administration, never much concerned about the non-rich – especially the non-American non-rich, who needn’t be cozened into voting Republican at the next election – installed a new leadership at the IMF. The new crew were what Stiglitz calls “market fundamentalists,” economists with one prescription for all problems: privatize, stabilize, and liberalize – or else. Or else no IMF loans and, equally important, no IMF certification of credit-worthiness to international lenders.
Although there are many essential goods and services that only government can or will supply, most economic activity is more efficiently conducted for profit, through markets. Everyone recognizes this. But markets cannot function in a social vacuum. Unfortunately, not everyone recognizes that. In particular, Stiglitz alleges, the IMF does not seem to recognize it. Without an institutional infrastructure – property law, regulatory regimes, civil courts, a banking system, a healthy and literate population, and a social safety net – a market economy cannot flourish. Pace and sequence matter, too: without competition policies in place, privatization may simply substitute private monopolies for public ones; and without new jobs for displaced workers to move into, privatization may cause increased unemployment and political instability. On the evidence Stiglitz presents, the IMF usually ignores these qualifications and insists that privatization proceed as widely and rapidly as possible.
“Stability,” for the IMF, does not mean, as one might think, social peace or economic security for ordinary people. (On the contrary, the Fund consistently promotes “labor market flexibility,” which translates as “economic insecurity for ordinary people.”) Stability means for the Fund what it means for bankers: low inflation. To preserve the value of a developing nation’s currency (hence the value of its interest payments to its Western creditors), the IMF demands high interest rates, high exchange rates, and budgetary austerity, i.e., reduced spending on food subsidies, education, public health, and other social services. Growth and employment may well suffer, but this is necessary in order to maintain the “confidence” of international lenders. As the Fund’s officials like to say: No pain, no gain.
“Liberalize” is another term of art; it has nothing to do with “liberality” or “liberalism.” It means giving up all attempts to regulate trade, foreign investment, and capital flows. This means that domestic banks, farmers, and manufacturers must compete against multinationals, and also that the latter must not be overly burdened by taxes, labor unions, occupational safety standards, environmental regulations, or technology-sharing requirements. Trade liberalization can be hard on developing countries. (More accurately, on their populations; it’s good for their economic statistics.) Unrestricted capital flows are also problematic, since they force developing countries to maintain large reserves, which could otherwise be used to finance growth. Stiglitz believes that premature capital market liberalization is the most damaging of the IMF’s many misguided policies.
Developing countries particularly resent the IMF’s insistence on liberalization. It is doubly hypocritical, they argue. First, this is not at all the way the United States developed throughout the 19th century. We subsidized and protected domestic industries and limited imports. Second, while demanding access to developing countries’ markets, the US keeps many of their exports out of our markets. The charge of hypocrisy is justified, Stiglitz concludes.
The pain inflicted by the IMF (and the US Treasury Department, its principal sponsor) is real enough. What about the gain? Actually, according to Stiglitz, the countries that have not followed the IMF’s advice have been more successful, by any rational measure, than those that followed it most slavishly. South Korea and Malaysia weathered the 1997-8 East Asian financial crisis better than Indonesia and Thailand. China and Poland have made a smoother transition from communism than Russia and the Czech Republic. And the Fund’s star pupil, Argentina, is now virtually a basket case.
But the IMF has not learned from its mistakes, and probably will not. For one thing, economists are generally an arrogant and narrow-minded bunch. The Fund recruits the best and brightest new PhDs, pampers them outrageously, and rarely sends them to live in the countries whose destinies they are fashioning. For another thing, the IMF and the Treasury Department are notoriously secretive and unaccountable. Presidents, Stiglitz notes, are sometimes kept in the dark; and as for the public, it has no business even asking.
The deepest reason things won’t change, though, is that the IMF’s “mistakes” are not really mistakes. Or rather, they are only mistakes from the point of view of the hapless population of the developing world. From Wall Street’s point of view, they are the only possible policies; and the IMF’s position, in Stiglitz’s words, is: “What [Wall Street] views as good for the global economy is good for the global economy and should be done.” Which, when you come down to it, is pretty much how the Federal Reserve Board thinks about the domestic economy.
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