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Stiglitz. Globalization and Its Discontents 1

Stiglitz. Globalization and Its Discontents 1

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Globalization: Stiglitz's Case

By Benjamin M. Friedman

Globalization and Its Discontents

Volume 49, Number 13 · August 15, 2002 

Globalization: Stiglitz's Case 
By Benjamin M. Friedman 
Globalization and Its Discontents  by Joseph E. Stiglitz 

Norton, 282 pp., $24.95 

1. 
The most pressing economic problem of our time is that so many of what we usually  call  "developing  economies"  are,  in  fact,  not  developing.  It  is  shocking  to  most  citizens  of  the  industrialized  Western  democracies  to  realize  that  in  Uganda,  or  Ethiopia,  or  Malawi,  neither  men  nor  women  can  expect  to  live  even  to  age  forty‐ five. Or that in Sierra Leone 28 percent of all children die before reaching their fifth  birthday. Or that in India more than half of all children are malnourished. Or that in  Bangladesh  just  half  of  the  adult  men,  and  fewer  than  one  fourth  of  adult  women,  can read and write.[1]   What  is  more  troubling  still,  however,  is  to  realize  that  many  if  not  most  of  the  world's poorest  countries, where very  low incomes and incompetent governments  combine to create such appalling human tragedy, are making no progress—at least  not  on  the  economic  front.  Of  the  fifty  countries  where  per  capita  incomes  were  lowest in 1990 (on average, just $1,450 per annum in today's US dollars, even after  we allow for the huge differences in the cost of living in those countries and in the  US), twenty‐three had lower average incomes in 1999 than they did in 1990. And of  the  twenty‐seven  that  managed  to  achieve  at  least  some  positive  growth,  the  average  rate  of  increase  was  only  2.7  percent  per  annum.  At  that  rate  it  will  take  them another seventy‐nine years to reach the income level now enjoyed by Greece,  the poorest member of the European Union.[2]     This  sorry  situation  stands  in  sharp  contrast  to  the  buoyant  optimism,  both  economic  and  political,  of  the  early  postwar  period.  The  economic  historian  Alexander  Gerschenkron's  classic  essay  "Economic  Backwardness  in  Historical  Perspective"  suggested  that  countries  that  were  far  behind  the  technological  frontier of their day enjoyed a great advantage: they could simply imitate what had  already proved successful elsewhere, without having to assume either the costs or  the  risks  of  innovating  on  their  own.  The  economist  and  demographer  Simon  Kuznets,  who  went  on  to  win  a  Nobel  Prize,  observed  that  economic  inequalities 

Page 1 of 14

Globalization: Stiglitz's Case

By Benjamin M. Friedman

Globalization and Its Discontents

often widen when a country first begins to industrialize, but argued that they then  narrow again as development proceeds. Albert Hirschman, an economist and social  thinker, put forward the hypothesis that, for a while, at the beginning of a country's  economic development, the tolerance of its citizens for inequality increases, so that  the temporary widening that troubled Kuznets need not be an insuperable obstacle.  Throughout the countries that had been colonies of the great European empires, the  view  of  the  departing  powers  was  that  the  newly  installed  democratic  institutions  and  forms  they  were  leaving  behind  would  follow  the  path  of  the  Western  democracies.  Political  alliances,  like  the  myriad  regional  pacts  established  during  the Eisenhower‐Dulles era (SEATO, CENTO, and all the others), would help cement  these gains in place.   Not  surprisingly,  the  contrast  between  that  earlier  heady  optimism  and  today's  grimmer reality has led to a serious (and increasingly acrimonious) debate over two  closely  related  questions.  What,  in  retrospect,  has  caused  the  failure  of  so  many  countries to achieve the advances confidently predicted for them a generation ago?  And what should they, and those abroad who sympathize with their plight and seek  to help, do now?     Perhaps  not  since  the  worldwide  depression  of  the  1930s  have  so  many  thinkers  attacked  a  problem  from  such  different  perspectives:  Have  the  non‐developing  economies  (to  call  them  that)  pursued  the  wrong  domestic  policies?  Or  have  they  been innocent victims of exploitation by the industrialized world? Is it futile to try to  foster  economic  development  without  an  appropriate  social  and  political  infrastructure, including what  has come to be called the "rule of law" and perhaps  also  including  political  democracy  as  well?  Or  do  these  favorable  institutional  creations follow only after a sustained improvement in material standards of living  is already underway? Would more foreign aid help? Or does direct assistance from  abroad  only  create  parallels  on  a  national  scale  to  the  "welfare  dependency"  sometimes  alleged  in  the  US,  dulling  the  incentive  for  countries  to  undertake  difficult  but  needed  reforms?  How  much  blame  lies  with  corruption  in  the  nondeveloping  countries'  governments,  often  including  the  outright  theft  by  government officials of a large fraction of whatever aid is received? And then there  is  the  most  controversial  question  of  all:  Is  the  "culture"  of  these  countries— specifically  in  contrast  to  Western  culture—simply  not  conducive  to  economic  success?  One  important  concrete  expression  of  the  optimism  with  which  thinking  in  the  industrialized world addressed the challenge of economic development a generation  and more ago, before these painful questions became prominent, was the creation of  new  multinational  institutions  to  further  various  aspects  of  the  broader  development  goal.  The  United  Nations  spawned  a  family  of  sub‐units  to  this  end,  most  prominently  the  UN  Development  Program  and  the  UN  Conference  on  Trade  and  Development.  The  Food  and  Agriculture  Organization  (founded  in  1945,  but 
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Globalization: Stiglitz's Case

By Benjamin M. Friedman

Globalization and Its Discontents

separately  from  the  UN)  and  the  World  Health  Organization  (1948)  had  more  specific  mandates.  The  International  Bank  for  Reconstruction  and  Development  (commonly called the World Bank), established in 1944 mostly to help rebuild war‐ torn Europe, soon shifted its attention to  the developing world once that  task was  largely completed.   The  International  Monetary  Fund  (the  IMF,  or  sometimes  just  the  Fund)  was  a  latecomer to the development field. Established in tandem with the World Bank in  1944, the IMF's original mission was to preserve stability in international financial  markets  by  helping  countries  both  to  make  economic  adjustments  when  they  encountered  an  imbalance  of  international  payments  and  to  maintain  the  value  of  their  currency  in  what  everyone  assumed  would  be  a  permanent  regime  of  fixed  exchange rates.  By the early 1970s, however, the fixed exchange rate system proved untenable, and  floating  rates  of  one  kind  or  another  became  the  norm.  Moreover,  as  the  Western  European  economies  gained  strength  while,  at  the  same  time,  more  and  more  developing  countries  entered  the  international  trading  and  financial  economy,  it  was  increasingly  the  developing  countries  that  ran  into  balance  of  payments  problems  or  difficulties  over  their  currencies  and  therefore  turned  to  the  IMF  for  assistance.  As  a  result,  over  time  the  IMF  became  increasingly  involved  in  the  business  of  economic  development.  And  as  development  has  faltered  in  many  countries—including  many  in  which  the  IMF  has  played  a  significant  part—the  IMF's  policies  and  actions  have  increasingly  moved  to  the  center  of  an  ongoing,  intense debate over who or what to blame for the failures of the past and what to do  differently in the future.  Joseph E. Stiglitz, in Globalization and Its Discontents, offers his views both of what  has gone wrong and of what to do differently. But the main focus of his book is who  to blame. According to Stiglitz,  the story of failed development  does have a villain,  and the villain is truly detestable: the villain is the IMF. 

2. 
Joseph  Stiglitz  is  a  Nobel  Prize–winning  economist,  and  he  deserves  to  be.  Over  a  long career, he has made incisive and highly valued contributions to the explanation  of  an  astonishingly  broad  range  of  economic  phenomena,  including  taxes,  interest  rates, consumer behavior, corporate finance, and much else. Especially among econ‐ omists who are still of active working age, he ranks as a titan of the field. In recent  years Stiglitz has also been an active participant in economic policymaking, first as a  member  and  then  as  chairman  of  the  US  Council  of  Economic  Advisers  (in  the  Clinton  administration),  and  then,  from  1997  to  2000,  as  chief  economist  of  the  World  Bank.  As  the  numerous  examples  and  personal  recollections  in  this  book  make clear, his information and his impressions are in many cases firsthand. 

Page 3 of 14

 or for loans from banks and other private‐sector lenders that look to the IMF  to indicate whether a borrower is creditworthy.  inadequate  markets. or when other institutions that standard  economic thinking takes for granted are absent or flawed. at the same time. Friedman Globalization and Its Discontents In  Globalization  and  Its  Discontents  Stiglitz  bases  his  argument  for  different  economic policies squarely on the themes that his decades of theoretical work have  emphasized:  namely. or institutions—is no one's fault. governments can  fight recessions and depressions by using expansionary monetary and fiscal policies  to  spur  the  demand  for  goods  and  services. time and again the IMF has  called for policies that conform to textbook economics but do not make sense for the  countries  to  which  the  IMF  is  recommending  them.  "Recent  advances  in  economic  theory"—he  is  in  part  referring  to  his  own  work—"have  shown  that  whenever  information  is  imperfect  and  markets  incomplete.Globalization: Stiglitz's Case By Benjamin M.  according  to  the  theory  of  incomplete  information.  and unworkable institutions—all of which  are especially characteristic of  newly developing countries. then the invisible hand works most imperfectly. or markets.  in  the  countries  that  have followed them."   As a result.  what  happens  when  people  lack  the  key  information  that  bears on the decisions they have to make.  The implication of each of these absences or flaws is that free markets.  and  especially in developing countries. he  argues. or when markets for important kinds of  transactions are inadequate or don't exist.  have  ignored  the  implications  of  incomplete  information. (Whether any given government will actually choose its interventions  well is another matter. Stiglitz argues. when families and firms  seek to buy too little compared to what the economy can produce.  Stiglitz  complains  that  the  IMF  has  done  great  damage  through  the  economic  policies  it  has  prescribed  that  countries  must  follow  in  order  to  qualify  for  IMF  loans. As a result.  At  the  microeconomic  level.  Stiglitz  seeks  to  show  that  the  consequences of these misguided policies have  been disastrous. not just according  to  abstract  statistical  measures  but  in  real  human  suffering. governments can improve the outcome by well‐chosen  interventions.  As  Stiglitz  nicely  puts  the  point.) At the level of national economies.  can  trade  in  complete  and  efficient  markets.  to  put  unemployed labor back to work and. left to their  own devices. And governments can use a variety of devices. do not necessarily deliver the positive outcomes claimed for them by  textbook  economic  reasoning  that  assumes  that  people  have  full  information.  ranging  from  job  creation  to  manpower  training  to  welfare  assistance. cushion the human hardship  deriving  from  what—importantly. Stiglitz continues. The organization and its officials.  They  can  also  use  tax  policy  to  steer  investment  into  more  productive  industries and trade policies to allow new industries to mature to the point at which  they can survive foreign competition.  which  is  to  say  always.  and  can  depend  on  satisfactory  legal  and  other  institutions.     Page 4 of 14 .  governments  can  regulate  banks  and  other  financial  institutions  to  keep  them  sound.

 Stiglitz argues that the high interest rates imposed  on many countries by the IMF have worsened their economic downturns.  which  make  deposits  and  other  assets  denominated  in  the  currency  more  attractive  to  hold. but the IMF usually recommends (in effect.  that  in  the long run free trade practiced by everyone benefits everyone: each country will  arrive at the mixture of products that it can sell competitively by using its resources  and skills efficiently. he argues that cuts in spending  or tax hikes  only  make the  downturn worse.  and  they  have forced the bankruptcy of countless otherwise productive companies that could  not meet the suddenly increased cost of servicing their debts.  As  one  of  the  conditions for  extending  a loan. Eliminating tariffs.  The  most  traditional  and  perhaps  best‐known  IMF  policy  recommendation is for a country to cut government spending or raise taxes. the IMF often requires that the  country's financial  Page 5 of 14 . which is not yet ready to compete. or both.  eliminating  food subsidies for the poor. He  also emphasizes the social  cost of  cutting  back  on  various  kinds  of  government  programs—for  example.  Liberalizing Capital Markets. quotas.  Everyone  favors  free  trade—except  many  of  the  people  who  make things and sell them. The usual  underlying  presumption  is  that  much  government  spending  is  wasteful  anyway. Stiglitz points out that today's industrialized countries did not  practice free trade when they were first developing. Many developing countries have weak banking systems  and  few  opportunities  for  their  citizens  to  save  in  other  ways. and tight monetary policy.  when  the  deficit  is  mostly the result of an induced decline in revenues.Globalization: Stiglitz's Case By Benjamin M. Friedman Globalization and Its Discontents Most of the specific policies that Stiglitz criticizes will be familiar to anyone who has  paid even modest attention to the recent economic turmoil in the developing world  (which  for  this  purpose  includes  the  former  Soviet  Union  and  the  former  Soviet  satellite countries that are now unwinding their decades of Communist misrule):  Fiscal  austerity. They are  intended  to  fight  inflation  that  was  not  a  serious  problem  to  begin  with. and that even today they do so  highly  imperfectly.)  He  argues  that  forcing  today's  developing  countries  to  liberalize  their  trade  before  they  are  ready  mostly  wipes  out  their  domestic industry. Many countries come to the IMF because they are having trouble  maintaining  the  exchange  value  of  their  currencies. implemented mostly through high interest rates.  is again the standard corrective. only to  be engulfed by food riots.  High interest rates. subsidies.  to balance its budget and eliminate the need for government borrowing.  (Witness  this  year's  increase  in  agricultural  subsidies  and  new  barriers  to  steel  imports  in  the  US. and other barriers  to free trade usually has little to do directly with what has driven a country to seek  an IMF loan.  A  standard  IMF  recommendation  is  high  interest  rates.  Rapidly  increasing  prices— sometimes at the hyperinflation level—are also a familiar problem in the developing  world. requires) eliminating such  barriers  as  a  condition  for  receiving  credit.  The  argument  is  the  usual  one.  Stiglitz  charges  that  the  IMF  has  reverted  to  Herbert  Hoover's  economics  in  imposing  these  policies  on  countries  during  deep  recessions.  Trade  liberalization. which Indonesia did at the IMF's behest in 1998.

 and that they and other foreign investment firms will do  a  better  job  of  mobilizing  and  allocating  the  country's  savings. And when banks can't collect what  they're owed.  and  many  more—has  been  a  major  initiative  of  the  last  two  decades  both  in  industrialized  countries  and  in  some  parts  of  the  developing  world.  a  standard  recommendation nowadays is to sell public‐sector companies to private investors.   Fear  of  default.  Stiglitz  argues  that  the  larger  and  more  efficient  foreign  banks  drive  the  local  banks  out  of  business.Globalization: Stiglitz's Case By Benjamin M.  from  the  very  beginning.  Selling  off  government‐  owned  enterprises—telephone  companies.   Stiglitz  argues  that  many  of  these  countries  do  not  yet  have  financial  systems  capable of handling such transactions. the result of premature privatization has been to  give away the nation's assets to what amounts to a new criminal class. Especially in Russia and other parts of  the former Soviet Union. or worse yet the opportunity for graft. to be  rescued  from  the  consequences  of  their  own  reckless  credit  policies.  that  the  failings  of  which  he  accuses  the  IMF  are  not  just  random  mistakes.  railroads.  In  his  view  these  policies—what  he  labels  the  "Washington  consensus"—add  up  to  something that is unattractive. if not outright repugnant. or systems of corporate governance  capable of monitoring the new managements. keeps them going.  The problem with all this. Stiglitz argues. or regulatory systems capable of preventing  harmful behavior once the firms are privatized. he writes.  Stiglitz  also  argues  that  the  end  result  is  to  saddle  a  developing  country's  taxpayers  with  the  permanent  burden  of  paying  interest  and  principal  on  the  new  debts  that  pay  off  yesterday's mistakes. His theme is that there is a coherence to this set of individual policies.  A  top  priority  of  IMF  policy.  Especially  when  countries  that  come  to  the  IMF  have  a  budget  deficit.  steel  producers. in several different ways. Friedman Globalization and Its Discontents markets be open to participation by foreign‐owned institutions.  As a formal matter.  They  want. they typically accept a "voluntary" restructuring of the country's debt. One reason for doing so is the expectation that private management will do a  better  job  of  running  these  activities.   Page 6 of 14 .  and  that  mobilizing  savings  is  not  a  problem  because  many  developing  countries  have  the  highest savings rates in the world anyway. The rationale is that  foreign banks are sounder.  that  the  foreign  institutions  are  much  less  interested  in  lending  to  the  country's  domestically  owned  businesses  (except  to  the  very  largest  of  them). he says.  Another  is  that  many  of  these  public  companies should not be running at all. the IMF always gets repaid.  in order to avoid the appearance of default.    Stiglitz's indictment of the IMF and its policies is more than just an itemized bill of  particulars.  has  been  to  maintain wherever possible the fiction that countries do not default on their debts. and only the government's desire to provide  welfare disguised as jobs. often serves only to take off the hook the  banks and other private lenders that have accepted high risk in exchange for a high  return for lending to these countries in  the first place. is that the new credit that the IMF extends.  Privatization.

  Rather  it  simply  acts on the belief—seriously mistaken in his view—that allowing free markets to do  their  work  will  automatically  take  care  of  such  problems.  or  at  least  did  not  take  into  account.  the  IMF itself  is  responsible  for  worsening—in  some  cases.  Stiglitz  repeatedly  claims  that  the  IMF's  policies  stem  not  from  economic  analysis  and  observation  but  from  ideology—specifically.  The  IMF. Again the claim is not that the IMF dislikes growth per se.  an  ideological  commitment to free markets and a concomitant antipathy to government. of course.  By  extension.  By  making  countries  adopt  high  interest  rates  that  stifle  investment  and  bankrupt  companies. impervious to  either counterarguments or counterevidence.  he  argues."  Liberalizing  a  country's  trade  makes  sense  when  its  industries  have  matured  sufficiently  to  reach  a  competitive  level. but that it  believes free markets are all that is needed to make growth happen.  the  IMF  encourages  low  confidence  on  the  part  of  foreign  lenders.   More specifically.    Page 7 of 14 . a form of religion. the IMF gives currency traders a one‐way bet  and  therefore  encourages  market  speculation.  By  forcing  countries  that  are  in  trouble  to  slash  their  imports.  he  argues.  A  further  implication  of  this  belief  in  the  efficacy  of  free  markets. in effect.  As  a  further  consequence  of  the  misguided  policies  that  follow  from  this  "curious  blend  of  ideology and bad  economics.  that  the  IMF  prefers  serious  recessions  or  unemployment  per  se.  in  his  eyes.  the  underlying  motivation  is  ideological:  a  belief  in  the  superiority of free markets that he sees as.Globalization: Stiglitz's Case By Benjamin M.  but  not  before.  according  to  Stiglitz.  the IMF also does not act to promote economic growth (which helps to produce full  employment). Friedman Globalization and Its Discontents First. instead adopting a "cookie cutter" approach in which one set of  policies  is  right  for  all  countries  regardless  of  their  individual  circumstances.  Privatizing  government‐ owned  firms  makes  sense  when  adequate  regulatory  systems  and  corporate  governance  laws  are  in  place. He does not argue.  by  repeatedly  coming to these lenders' rescue.  By  making  countries  maintain  overvalued  exchange  rates  that  everyone  knows will have to fall sooner or later.  the  IMF  encourages  the  contagion  of  an  economic  downturn  from  one  country  to  its  neighbors.  is  that  the  IMF  has  abandoned  its  original  Keynesian  mission  of  helping  countries to maintain full employment while they make the adjustments they need  in  their  balances  of  payments. Again and  again  he  accuses  IMF officials  of  deliberately  ignoring  the  "facts  on  the  ground"  in  the countries to which they were offering recommendations. he argues that the IMF ignores the need for proper "sequencing.  for  actually  creating—the  problems  it  claims  to  be  fighting.  But  importantly." Stiglitz argues. the IMF encourages lax credit standards.  instead  the  IMF  recommends  policies  that  result  in  steeper downturns and more widespread joblessness. In part his complaint is  that  they  did  not  understand.  but  not  before.  At  the  same  time.  deliberately  ignores such factors.  his  and  other  economists'  theoretical  work  showing  that  unfettered  markets  do  not  necessarily  deliver  positive  results  when  information  or  market  structures  or  institutional  infrastructure are incomplete.

 There is money to bail out banks but not to pay  for  improved  education  and  health  services. do not necessarily like..  the  IMF.  but  it  was  reflecting  the  interests and ideology of the Western financial community. The IMF  rails against high tax rates that are imposed against the rich."   Page 8 of 14 . of what they produce. after working at the IMF..  are on the agenda. the effects are the same as a 50 percent tax on poor farmers.  As  Stiglitz points out.  Here  again  Stiglitz's  point  is  that  the  IMF's  mistakes  are  not  random  but  the  systematic  consequence  of  its  fundamental  biases. Taxation.Globalization: Stiglitz's Case By Benjamin M. those with whom the international  finance institutions interact. land reform is off. Stiglitz's view is that in recent  decades  the  IMF  "was  not  participating  in  a  conspiracy. in many developing countries a small group of families own much  of  the  cultivated  land.  let  alone  to  bail  out  workers  who  are  thrown out of their jobs as a result of the IMF's macroeconomic mismanagement. Friedman Globalization and Its Discontents Second.  One  specific  example.  in  preference  to  that  of  workers.  and  its  adverse  effects. pointing out how they  destroy  incentives. as  well as with bankers and investment bankers.  in  Stiglitz's  view.  peasants.   Stiglitz considers.  He  sees  it  as  no  accident  that  the  IMF  regularly provides money that goes to pay off loans made by banks and bondholders  who are eager to accept the high interest rates that go along with assuming risk— while preaching the virtues of free markets as they do so—although they are equally  eager to be rescued by governments and the IMF when risk turns into reality. 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.  He  also  notes  that  many  IMF  officials  come  to  the  Fund  from jobs in the private financial sector. He observes that  IMF officials tend to meet only with finance ministers and central bank governors.  systematically  acts  in  the  interest  of  creditors. one that those  in the elite that populates the finance ministries.  Land  reform represents a fundamental change in the structure of society.   The sharecropping system weakens incentives—where they share equally with the  landowners.  and  more  darkly.  job  creation  is  off.  and  of  rich  elites  more  generally.  with  tenant farmers keeping perhaps half.  and  other  poor  people.  but  nary  a  word  is  spoken  about  these  hidden  taxes. while others. and rejects. go  on to take jobs at banks or other financial firms.  Agriculture  is  organized  according  to  sharecropping. they never meet with poor peasants  or  unemployed  workers.  land  reform.   Stiglitz  also  thinks  it  is  no  coincidence  that  food  subsidies  and  other  ways  of  cushioning the hardships suffered by the poor are among the first programs that the  IMF tells countries to cut when they need to balance their budgets. Stiglitz argues.  sharply  illustrates  what  he  has  in  mind.  His  argument  is  as  much  about  the policies the IMF doesn't recommend as the ones it does:   Stabilization  is  on  the  agenda. or less..

Globalization: Stiglitz's Case By Benjamin M. where he argues that the privatization program  Page 9 of 14 .  Many  longtime  observers  of  the  developing world will notice that Stiglitz rarely mentions economic policy mistakes  that poor countries make on their own initiative. Stiglitz is right that they have  not  regained.  is  that  we  cannot  reliably  know  whether  the  consequences  of  the  IMF's  policies  were  worse  than  whatever  the  alternative  would  have  been.  3.  and  probably  will  not.  and  where  the  IMF  pursued  the  policies  toward  which  Stiglitz  is  the  most  scathing. 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. While some of the affected countries (most obviously Indonesia) still feel  its effects..  it  is  easy  enough  to  accuse  Stiglitz  of  selective  memory.  the IMF was willing to tear apart the even more important social contract. But those rapid growth rates may well have been unsustainable in any case.  even  including  those  policies  it  pursued  that  most  people  now  agree  proved  counterproductive. but at the Federal  Reserve System too—had ever gotten a question right.  which he continually portrays as complicit in the IMF's misdeeds. and his colleagues first at the Council of Economic  Advisers and then at the World Bank. Friedman Globalization and Its Discontents Finally. had ever gotten anything wrong.  as  Stiglitz  readily  acknowledges.  the  economic  situation  looks  better  today  than  it  did  when he was writing his book. Or that Stiglitz. While  misguidedly working to preserve what it saw as the sanctity of the credit contract. (In the book's sole mention  of Alan Greenspan.   Throughout the book.  From  reading  Globalization and Its Discontents. Or that those  against  whom  he  often  argued  in  the  US  government—especially  at  the  Treasury.  Do Stiglitz's criticisms hold up?  To  begin. it was also a matter of values. By 2002 the Asian financial crisis of 1997–1998 is receding into  the past. by now others have made solid recoveries.  Even in Russia. 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.  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...  the  rates  of  growth  they  achieved  before  the  crisis. one would never know that the IMF had ever done  anything useful.  views  that  said  that  markets  would  take  care  of  everything  and  government would only make matters worse. the sense of moral outrage is evident.)   One  can  also  disagree  with  Stiglitz  over  the  consequences  of  what  the  IMF  plainly  did.  A  more  fundamental  problem. where per capita income remains well below what it was when the  Soviet  Union  collapsed.

  It  is  surprising  too.[3]  Sala‐i‐Martin's  point  is  that  for  purposes  of  assessing  whether  someone  is  economically  well  off  or  miserable.  in  light  of  his  emphasis  on  the  absence  of  adequate  regulation  and  supervision  of  financial  institutions  in  the  developing  world.  By  contrast. has recently published a study arguing  just  the  opposite.  whether  poverty  is  increasing  or  decreasing. to be argued on a case‐by‐case basis.  his  own  colleague  in  the  Columbia  Economics Department.  Stiglitz  echoes  the  standard  view  that  the  number  of  people  around  the  world  living  on  less  than  $1  per  day. if one is to give a clear picture of why the nondeveloping economies are  not succeeding.  or  $2  per  day.  and  markets incomplete. for example.  what  is  more  important. along with graft in all  its forms. But they would presumably argue that events would  have  turned  out  even  worse  on  some  alternative  course.  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.  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.  But  surely  much  of  the  fault  lay  with  Korea's  own  businessmen  and  bankers. And once they had built their house of cards. is just what different  set of actions might therefore have proved more beneficial.  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. The issue.Globalization: Stiglitz's Case By Benjamin M. 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. 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.  Page 10 of 14 .  and  that  the  country's banks had financed these loans by borrowing in US dollars and relending  in Korean won.  that  Stiglitz  does  not  make  more  of  the  mistakes  made  by  private‐sector  businesses. in the countries that came to the IMF  for assistance.    Interestingly. there is also disagreement today over just how prevalent dire poverty  is  in  the  developing  world—and. True.   In India. 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.  They  would  also  presumably  argue  that  of  course  they  knew  that  information  was  imperfect. and institutions absent.  has  been  increasing  in  recent  years.  what made Korea vulnerable to the 1997–1998 Asian turmoil was that the country's  business  conglomerates  (the  "chaebols")  had  borrowed  too  heavily. Friedman Globalization and Its Discontents pushed by the IMF opened the way for corruption on a historically unprecedented  scale. Xavier Sala‐i‐Martin.  the  difference  between  the  two  measures of income is sometimes large.

  and  therefore  against  the  interests  of  the  poor. More  important. remains dire. while the $2‐per‐day poverty rate has  fallen from 44 percent to 19 percent. the plight of many developing countries.  To  what  extent  is  the  IMF  supposed  to  act  as  lending  institutions ordinarily act? Stiglitz complains at length. and not  quite  1  billion.  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.  the  average  Chinese  income  in  2000  was $840 at the official yuan–dollar market exchange rate.  (In  keeping  with  his  central  theme.  which he favors.  or  $2  per  day.  But  it  is  worth  pointing  out  that  the  major  source  of  the  decline  in  poverty  over  the  last  quarter‐century.    Stiglitz's attack on the IMF raises not just factual (and counterfactual) questions but  substantive issues  as well.  according  to  Sala‐i‐ Martin's calculation. nearly 300 million. and instead followed the gradualist approach. especially in  sub‐Saharan Africa.8  billion  figures that have become familiar in public discussion and are used by Stiglitz.  is  still  depressingly large: according to Sala‐i‐Martin's estimate.  the  same  amount  of  rupees  was  equivalent  to  an  American  income  of  nearly  $2.  and  rich  countries  more  generally.  But  don't  responsible  lenders  normally  impose  such  conditions  on  borrowers?  Stiglitz  never  acknowledges  that  today  the  IMF  faces  serious  criticism  from  many  Page 11 of 14 . but more than $3.  respectively. As a result.  praises  China's  performance  as  one  of  the  developing  world's  great  recent  economic  success  stories.900 if  measured on a purchasing power equivalent basis. the world's most  populous  country—and  Stiglitz.  But  this  is  far  below  the  1. the number of people in  the  world  who  live  on  the  equivalent  of  $1  per  day.  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. 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.  too. the great  advances made in China. 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 if attention is centered on people rather than countries. and it may well be  deteriorating. he finds.  and  other  consumer  necessities  are  so  much  cheaper  in  India  than  in  the  US.  but  Sala‐i‐Martin  estimates  that  they  are  declining  despite  the  rapid  growth in world population.Globalization: Stiglitz's Case By Benjamin M.  Similarly. 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.[4]   Even if we allow for these differences in the cost of living. is the dramatic reduction in poverty in China. particularly his argument that the IMF acts on  behalf of  banks  and  bondholders. as Sala‐i‐Martin also points out.  Stiglitz  follows  the  more  familiar  view  in  saying  that  these  totals  are  increasing.  housing.400. and with many specific cases  to cite.) To be sure.  clothing.2  billion  and  2. Friedman Globalization and Its Discontents But  because  food. adapted to its own situation.

 but instead as an institution charged solely with promoting the  welfare  of  the  borrowing  countries. wholly apart from the practical benefits that  we might gain from alleviating human misery abroad.  Moreover.  or a minimum standard of nutrition through food stamps. 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.  is  nothing new. extremely difficult. as a world government. 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.  The  foreign  aid that most  rich  countries give  is  shrinking  compared  to  their GDP.  together  with  the  equally  sincere  resistance  to  the  idea  among  others. But it is worth recognizing explicitly that it is central to the question of  inequality.  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. The earnest  desire  in  some  quarters  for  a  more  formal  approach  to  international  burden‐ sharing.   Even  within  countries  with  firmly  established  democratic  governments. in the end.  and  the  rest  of  the  world's  low‐income  countries.  acting  as  responsible  lenders normally do.  up  to  that  standard?  Most  Americans  will  readily  answer  yes.  Is  it  morally  legitimate  for  US  citizens  to  pay  taxes  to  provide fellow Americans with a minimum standard of health care under Medicaid.Globalization: Stiglitz's Case By Benjamin M.  But  as  philosophers  like  John  Rawls and Thomas Pogge have argued.  Page 12 of 14 .  so  that  the  borrowing  countries  often  simply  end  up  wasting  the  money.   To  be  sure.[5]   Or  should  the  IMF  think  of  itself  not  as  a  lending  institution. 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. Friedman Globalization and Its Discontents economists and politicians in the West on the ground that it makes loans with too  few  conditions. in effect.  But  in  fact  there  is  no  such  agreement. the matter at issue is deeper than simply whether there should or should  not be functioning institutions empowered to act. that is far above what the  average Angolan receives—and not at the same time be willing to pay the costs of  bringing  Angola.  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. and the efficacy of such aid is increasingly being challenged anyway.  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).  there  is  always  debate  about  how  generous  such  assistance  should  be  and  what  form  it  should take.

  His  book  stands  as  a  challenge.  There  is  serious  debate  over  each  element  in  this  program.  It  is  now  important  that  someone  else—if  possible. on  their  own. Table 2. who throughout the years that Stiglitz's analysis covers  was  the  IMF's  first  deputy  managing  director—that  is. however.  that  put  the  emphasis  not  on  what  developing  countries  have  in  common  but  on  how  each  is  different. his  side  of  the  argument. and poverty to decline.  that  place  the  concerns  of  the  poor  above  those  of  creditors.  In  the  absence of such an answer. during these years.  Page 13 of 14 .Globalization: Stiglitz's Case By Benjamin M. 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.  that  give  maintaining  full  employment  a  higher  priority  than  reducing inflation (at least when inflation is less than 20 percent a year). But his  objective is not to give a balanced assessment of the debate. and that  fight  poverty  and  promote  economic  growth  directly.  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. as effectively as it is possible to imagine anyone making it.  the  Fund's  second‐highest  ranking official.  He  makes  a  strong  case  for  policies  that  favor  gradualism  over  "shock  therapy". but  they  are  clear‐thinking  economists  and  powerful  advocates  nonetheless.  rather  than merely  establish  conditions under which economies will be likely to grow.  Stiglitz has presented. who served as the  US deputy treasury secretary. but for most observers.  together  with  much  by  way  of  both  broad‐based  evidence and firsthand specifics.  Another  is  my  Harvard  colleague (now president of the university) Lawrence Summers. Stiglitz's book will surely claim a large place on  the public stage.  Stiglitz  provides  a  powerful  logical  case.  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. and then secretary. Supporters of  the IMF in the academic world. to support his side on each of these issues. the person who. like MIT's Rudiger Dornbusch. may lack the firsthand  "who said what to whom" knowledge that comes from high‐level public service.  someone  who  thinks  and  writes  as  clearly  as  Stiglitz  does.  actually  set  the  direction  of  the  organization's  policies. and who understands the underlying economic theory as well as he does. It certainly stands as the most forceful argument that has yet been  made against the IMF and its policies. far more than anyone else. Friedman Globalization and Its Discontents   Many of the more practical economic elements of Stiglitz's argument are also issues  of  long  standing.  Notes  [1] Data from the 1999/2000 World Development Report.   Who  might  write  such  a  book?  The  most  obvious  candidate  is  the  former  MIT  economist Stanley Fischer.

    Letters  November 21.  Stiglitz  is  not  consistent  in  his  own  treatment  of  the  question  of  what  conditions  are  appropriate  for  loans. Pogge.  But he boasts about how the World Bank.  [4] Data from the 2002 World Development Report.  Afghanistan—are  excluded  because  per  capita  income  data  are  not  available  for  them.  He  repeatedly  castigates  the  IMF  for  imposing its officials' views over those of government officials in debtor countries." National Bureau of Economic  Research Working Paper No. What Is Poverty?    Page 14 of 14 .  [5]  Surprisingly. where he worked. Friedman Globalization and Its Discontents These  are  my  calculations  based  on  data  in  the  2001  World  Development  Indicators. 1999 is the latest year for which full data are available. forced Russia to accept  stringent conditions in order to receive a loan. Table 1. Some countries  that  are  presumably  poor  enough  to  be  in  the  "lowest‐income  fifty"—for  example. w8904. April 2002.  [3] "The Disturbing 'Rise' of Global Income Inequality.Globalization: Stiglitz's Case [2]  By Benjamin M. 2002: Thomas W.

People in high places did not always want to listen to him. it is mostly because of how he says it. According to Stiglitz. Worse yet. and that ideology was often more important than rigorous intellectual debate. Stiglitz’s Globalization and its Discontents (W. As a memoir. in many cases. self-serving. He found out that politics was the main sport played inside the beltway. to recognize that many of his ideas are important and deserve to be discussed seriously. As a result of the debate generated by the book. and did not like it there. the book is powerful. ‘‘intellectual consistency has never been the hall-mark of the IMF. they often ignored his advice. it is entertaining and informative. It should be read by anyone interested in economic development. One does not have to agree with everything Stiglitz has to say. and when they did. The book is at its weakest when it comes to the criticism of the IMF. The main argument The main tenet of the book is simple.’’ His characterizations of IMF economists and policies are unfair and. It is part memoir. part manifest. and part criticism of the International Monetary Fund (IMF). public policy in an era of globalization. As a manifest. and goes something like this: pro-globalization policies have the potential of doing a lot of good. I believe that the book would have been more effective had Stiglitz chosen a more temperate style. he got little respect. And this is not only because of what Stiglitz has to say.252 Book reviews Review of Joseph E. New York and London) Joe Stiglitz has written an important book. and the political economy of decision making in international organizations. It tells the story of how Professor Stiglitz went to Washington. The tone is overly hostile and aggressive. and he misses no opportunity to insult the IMF staff. 1.’’ and the staff systematically practices ‘‘bad economics.W. if undertaken properly and if . some policies that have become readily accepted in Washington are likely to be revised in the future. Norton.

and I had to ask myself if he was being serious. The culprits are the IMF and its ‘‘market fundamentalists. including increases in destitution and social conflict. reduce growth. If anything. culture. and it was highly skeptical of Mexico’s trade-opening strategy during the mid-1980s. However. given his theoretical writings during the last 35 years. crucial aspects of the sequencing and pace of reform were ignored. is overly simplistic and ignores the evolution of reform thinking during the last two decades. Stiglitz frames his criticism around the insights of the theory of asymmetric information. taking into account their own history. And (3). if poorly designed—or if a cookie-cutter approach is followed—pro-globalization policies are likely to be costly. or fairly. it opposed Argentina’s currency board. when I read—in pp. and traditions. At times. At other times. In the 1980s and early 1990s. is that globalization has not been pushed carefully. and often using inadequate—or plainly wrong—economic analysis. and increase poverty. however. Stiglitz believes that in the early 1990s.Book reviews 253 they incorporate the characteristics of each individual country. liberalization policies have been implemented too fast. that the IMF was initially critical of Chile’s social security reform.’’ the ‘‘Washington Consensus. and generalized frustration. the IMF response to crises—and in particular to the East Asian crisis—was a disaster that made things worse rather than better. the reforms were the result of a ‘‘national consensus’’ that was more imaginative. (2) Advocating (and imposing) capital account liberalization was a huge mistake. however. On the contrary. In Argentina.’’ This view. They will increase instability. the World Bank and the US Treasury launched a conspiracy of sorts to run worldwide economic reform—this is the infamous ‘‘Washington Consensus.’’ and the US Treasury. It is well known. (1) In designing reform packages during the 1990s. The problem. I had trouble believing what I was reading. reform was implemented too fast—Stiglitz prefers gradualism—and in the wrong order. In particular. Chile. for example. make countries more vulnerable to external shocks. policy makers in many developing nations were moving faster than the multilaterals or the Treasury. the original emphasis on how to undertake economic reform came from a group of developing countries’ economists—many of them from Latin America—and not from the ranks of the multilaterals. according to Stiglitz. Not surprisingly. for example. the IMF. Stiglitz claims that if things had been done differently. and Mexico. for example. Countries should embrace globalization on their own terms. I found his arguments to be persuasive. This was the case. As a consequence. daring and far-reaching than anything bureaucrats in Washington were willing to accept at that time. As a result. Three interrelated policy issues are at the center of Stiglitz’s criticism of globalization. in many countries. 129 and 231—that the 2002 Argentine crisis could have been avoided by following a more expansive fiscal policy! . that is. if they had been done his way. imposing fiscal austerity and raising interest rates were terrible mistakes that cost the East Asian countries several points in terms of growth. we now face terrible results. he argues. the outcome in terms of social conditions would have been significantly better. in the wrong order.

In 1992. Moreover. he simply said. Many argued that politically. Adam Smith. who was to become the IMF’s Economic Counselor. argued in a mid-1980s article in the IMF Staff Papers that the capital account should. I remember being introduced to this view by an economist turned politician. argued in The Wealth of Nations that determining the appropriate sequencing was a difficult issue that involved. and only once the economy has been able to expand successfully its export sector. a consensus of sorts developed on the sequencing and speed of reform. Increasingly. it is essential that reform be implemented at the right speed and in the right sequence (see.’’ When I asked him what were the bases of his recommendation. The sequencing and pace of reform and capital account liberalization Stiglitz repeatedly argues that for economic liberalization to succeed. for example. since the beginning of the economics profession. Part III. This emphasis on speed and sequencing is not new in policy discussions. In particular. For example.’’ In the book. fiscal imbalances should be dealt with very early on in the reform process. Of course. be opened towards the end of the reform process. and in response to what was perceived as US pressure to lift controls on international capital movements. ‘‘politics. people at the IMF did not object to these general principles. We should do as much as we can. but most people did. but his criticism fails to address the political economy concerns that at the time worried Klaus and other pioneer reformers in Central and Eastern Europe. political considerations (see the Cannan Edition. and (5). he said: ‘‘Oh. As a result of the discussion surrounding this work. The most important elements of this consensus included: (1) trade liberalization should be gradual and buttressed with substantial foreign aid. (3) in countries with very high inflation. conferences were organized. In fact. indeed. Chapter VII. Smith supported gradualism—just as Stiglitz does—on the grounds that cold-turkey liberalization would result in a significant increase in unemployment. not everyone agreed with all of these recommendations.254 Book reviews 2. . Most participants agreed that following an . you are the ‘sequencing’ professor. primarily. and different country experiences were explored. pp. Yung Chul Park from Korea University organized a conference on capital account liberalization. p. Sometime during the early 1990s. as fast as we can. Stiglitz is critical of Klaus’s ‘‘rapid and simultaneous’’ reform strategy. . Jacob Frenkel. Papers were commissioned. ‘‘you got it all wrong. (2) an effort should be made to minimize the unemployment consequences of reform. people in Washington began to call for simultaneous and very fast reforms. When I met him in Prague in 1991. for example. this was the only way to move forward. . reform opponents would successfully block liberalization efforts.’’ and then he added. the argument went. Book IV. this received wisdom on sequencing and speed began to be challenged. This is a very important principle. Vaclav Klaus. however. I believe that Stiglitz is particularly on target when he argues that opening the capital account too soon is likely to generate serious dislocations. it has been dealt with over and over again. In the early 1980s. . 73– 78). 121). the World Bank became particularly interested in understanding issues related to sequencing and speed of reform. the capital account should be liberalized at the very end of the process. There is not such a thing as an optimal sequence. Otherwise. politics. and Stiglitz is right in emphasizing it. (4) financial reform requires the creation of modern supervisory and regulatory agencies.

In doing this.[A] strong case can be made in support of rapid and decisive liberalization in capital transactions’’ (pp. there is some evidence suggesting that price-based and transparent mechanisms. Even if the liabilities are entirely in private hands. But agreeing that sequencing is important is not the same as saying that capital controls should never be lifted.). and carefully listened to the counter counter-arguments. however. However. work relatively well as a transitional device. even Chile-style . 20). at the same time. and yet others—such as Chile—used market-based mechanisms to slow down the rate at which capital was flowing into the economy. provided counter-arguments.without any offset in future output with which to service the loans. Edwards (Ed. There was also broad support for the idea that a premature opening of the capital account could entail serious danger for the country in question (see S. It allows for some capital mobility and discourages short-term speculative monies. they tended to follow different strategies and paths.there are some negative externalities [of an early capital account liberalization]. however. which preceded the events discussed in this book. permitting the capital-importing country to live beyond its means. as I have argued elsewhere. one of the few dissenters was the late Manuel Guitian. the government may feel compelled to transform the unrepayable debt into sovereign debt rather than allow execution of mortgages or other collateral’’ (p. He listened to others’ arguments. . One is that the borrowing goes into consumption rather than into investment. and have strong institutions and domestic capital markets. In a paper presented at this conference. Also. . . such as the flexible tax on short-term inflows used by Chile during much of the 1990s. it avoids arbitrary decisions by bureaucrats. Many countries. I believe that Guitian’s paper—suggestively titled ‘‘Capital Account Liberalization: Bringing Policy in Line with Reality’’—is one of the first written pieces that documents the IMF’s change in views regarding sequencing and capital account convertibility. The following quote is illustrative: ‘‘unfortunately.Book reviews 255 appropriate sequencing was vital for the success of liberalization. Yet. Robert Mundell captured succinctly the views of most participants. Capital Controls. others only allowed long-term capital movements. did not need any prodding from the IMF or the US to open their capital account. Cambridge University Press. 1995). . Recent research that uses new and improved measures on the degree of capital mobility suggests that a freer capital account has a positive effect on long run growth in countries that have surpassed a certain stage in the development process. . While some countries only relaxed bank lending. there was no dogma or arrogance in Guitian’s position. more and more countries began to relax their controls on capital mobility. 85 –86). After discussing the evolution of international financial markets. Guitian summarized his views as follows: ‘‘There does not seem to be an a priori reason why the two accounts [current and capital] could not be opened up simultaneously. and never had any intention of following a different policy. Starting in 1995. At the 1992 Seoul conference on capital liberalization. who argued in favor of moving quickly towards capital account convertibility. then a senior official at the IMF. . Indonesia and Mexico—just to mention two important cases—had a long tradition of free capital mobility. A difficult and important policy issue—and one that Stiglitz does not really tackle in this book—is how and when to remove impediments to capital flows. in stark contrast to Stiglitz’s characterization of the IMF leadership. and expressing reservations about the ‘‘capital-account-last’’ sequencing recommendation. Exchange Rates and Monetary Policy in the World Economy.

became a long-term feature of the regional economies. and once the economy had stabilized. does not have—at least. He claims that the experiences of China and India. And a key feature of currency crises is that the public drastically reduces its demand for government securities and domestic money. Worse yet. happened. the IMF made a serious recession even deeper. and recovered quickly—support his views. A number of people have long recognized this. Anyone mildly informed knows that there are many reasons why India and China have not faced a crisis. turning to safer assets. and the recent proposal by Anne Krueger. In country after country politicians experimented with populist policies that at the end of the road deepened the crisis. is a positive development in an effort to implement an effective standstills framework. This . when what was supposed to be a temporary tightening of controls. is that Malaysia surprised many observers by tightening controls only temporarily. The case of Malaysia is a bit more complicated. the controls were lifted just as Dr. nor did they result in orderly reforms. These were not. (3) not allowing the imposition of capital controls on outflows.256 Book reviews capital controls have costs. Also. after approximately a year. the stricter controls on capital outflows did not encourage the restructuring of the domestic economies. This argument is highly unpersuasive. not yet—much empirical support. The historical norm is closer to what happened in Latin America during the 1980s debt crisis. Two of Stiglitz’s criticisms are right on target: closing banks in the midst of a panic is a major mistake. and fails to recognize how severe the situation had become by late 1997. (2) bailing out private and mostly foreign creditors. Moreover. contractionary fiscal policies. and of Malaysia—which did not follow the IMF’s advice. however. these were major currency crises. in fact. especially foreign exchange. What is clear. massive bailouts are costly and ineffective. if not plainly wrong. major mistakes included (1) closing down. as the IMF insisted. a number of banks in Indonesia. The opposite. Mahatir had originally announced. as he argues. and they did not spare Chile from contagion or macro instability during the second half of the 1990s. and (4) imposing tight fiscal policies and high interest rates. the IMF’s First Deputy Managing Director. in the middle of a financial panic. It has recovered fast—although not as fast as South Korea—but it is not clear if this recovery has been the result of the imposition of capital controls. He argues that the East Asian crisis called for expansionary and not. the IMF-mandated increases in interest rates generated a string of bankruptcies that deepened the confidence crisis and further contributed to the slowdown. in Latin America. two countries that did not suffer a crisis. In his view. What makes Malaysia’s case particularly interesting is that historically the temporary use of controls is quite unique. In his view. ‘‘severe downturns’’ that required textbooktype counter-cyclical fiscal policies. however. however. Crisis management in East Asia Stiglitz is particularly critical of the way in which the IMF handled the East Asian crisis. 3. Stiglitz’ most severe criticism refers to the IMF’s fiscal and interest rate policies. by imposing fiscal retrenchment. and attributing this to the presence of capital controls is overly simplistic. Stiglitz’s position.

USA E-mail address: sedwards@anderson. Under most circumstances. and that he is truly pained by what he believes are major problems with globalization. The agenda should be to improve institutions and incentives. and he exaggerates greatly the extent of market failures. We have been there. I was left with a sense of emptiness. pumping in liquidity when the demand for money is shrinking. The answer depends in part on the government’s objectives. However. The agenda should not be to bring back bureaucrats. to put an end to corruption and abuse. Sebastian Edwards University of California. I have no doubt that Stiglitz is sincere. however. At the end of the road. if the decline in the demand for domestic money is not brought to an end.3 8 7 8 ( 0 2 ) 0 0 0 9 7 . to implement policies that raise productivity. 4. Cambridge. Los Angeles. Stiglitz has too much confidence on the ability of governments to do the right thing. he is also rather naıve. If foreign currency denominated debt is high—as was the case in a number of the East Asian countries—the weakening of the currency will result in a significantly higher debt burden and further bankruptcies.ucla. and to make sure that globalization becomes a fair process.4 . and it does not work. and the key question is by how much to let the exchange rate depreciate. neither do large deficits translated into money printing. CA. and by how much—and for how long—to increase interest rates. and issuing government debt when government securities are being dumped. If the authorities want to avoid default and runaway inflation—clear key objectives of every East Asian government—letting the exchange rate run amok is highly risky. Moreover. what at the end makes this book fail.edu 9 September 2002 PII: S 0 3 0 4 . And it is this naivete. or rapidly depreciating exchange rates. the price of foreign exchange will jump drastically—greatly overshooting its equilibrium level—and inflation will increase significantly. While massive and recurrent bankruptcies do not contribute towards achieving this goal. to promote competition and efficiency. USA National Bureau of Economic Research. Concluding remarks I finish where I began: This is an important book that deserves to be read and discussed widely. to truly help the poor and the destitute. the issue is one of trade-offs. At the end of the road. is unlikely to restore confidence or avoid an inflationary explosion.Book reviews 257 constrains what governments in crisis countries can do: with a declining demand for government securities—by both local and foreign investors—it is very difficult to run a more expansionary fiscal policy unless the deficit is monetized. xenophobic autocrats. where the industrial countries also dismantle their protective barriers. and corrupt politicians to run the economy. and not the ¨ stridency of the delivery. The first order of business in a major currency crisis is to re-establish confidence.

org BOOK REVIEWS Edited by N. NORTON. To submit reviews for this section. * 89 . he advocates Keynesian policymaking (money printing and deficit spending) on virtually every page.Journal of Libertarian Studies Volume 18. 1 (Winter 2004). STIGLITZ. Indeed. made more transparent and accountable.” and that national politicians be supported by somebody in charge when something goes wrong. it is wiser to give other individuals the right to interfere. Stephan Kinsella* JOSEPH E.stephankinsella. While the author emphasizes time and again that he is not leveling an attack against market principles and globalization in general. by and large. no. and subtle attack against globalization in the past few years. Stiglitz strongly believes that bad policymaking can be reduced by enlightened policymaking. and it suits the well-meaning anti-globalist who believes that since individuals make mistakes. NEW YORK: W. Inc.mises.W. He also believes that international agencies. Put differently. It is an enjoyable book for the reader in search of the perfect world. against what he believes to be devious free-market attitudes. 89–98 ©2004 Ludwig von Mises Institute www.com/jls. and less dependent on special interests. GLOBALIZATION AND ITS DISCONTENTS. like the IMF and the World Bank. And that when international economic agencies do not behave properly. pursue the well-being of their peoples. in a rather dogmatic style with some shades of arrogance. The author believes that national leaders. they must be reformed. xxii + 282. well-argued. must ensure that global phenomena maintain a “human face. But it is also deceptive. 2002. it is hard to see much economics in these conclusions (see in particular the final General Counsel. Applied Optoelectronics. It is probably the most readable. PP. pp. both nationally and on a global scale. Although the author fights. Globalization and its Discontents is an enjoyable and thoughtprovoking book. his prose is simple and accessible to a wide audience. visit www.

He further realized that globalization without governance often leads to devastating results. the first chapter) focuses on poverty and globalization.S. the author keeps concentrating on bad policymaking carried out both by Western national governments and by international organizations. On the contrary. the 2001 Nobel Laureate. these rules should be fairness and consensus. the core argument of the book is not the analysis of the causal link between ideology. POLITICALLY CORRECT MISCONCEPTIONS ABOUT FREE MARKET ECONOMICS Although much of the text (for instance. however. rather than globalization per se. He later continued his career at the World Bank where he was chief economist and senior vice president. during which he found out that decision-making processes are often influenced by politics and ideology. Rather. politics. Some readers might also question its logic. The foreword to the book sets the pace. In particular. Treasury. The next paragraphs will therefore reconsider the main issues raised by Stiglitz. 1 (Winter 2004) chapter of the book). According to Stiglitz. His thesis is not developed in a theoretically consistent framework. especially on Less Developed Countries (LDCs). he states clearly that the origin of all problems is the way globalization has been managed. these doubts are justified. Stiglitz does not state explicitly that poverty is the consequence of globalization. The author claims that this book is the result of those eye-opening experiences. While taking good care to inform the possibly unaware reader about his fundamental contributions to economic science. As the following pages will explain. and underscore some factual and methodological puzzles. and concludes by suggesting suitable rules for global economic management. people have been betrayed. Instead. in chapter nine. especially in 90 . Surprisingly. no. Professor Stiglitz. highlight his most important arguments. He posits a direct causal link between globalization and bad policymaking.Journal of Libertarian Studies 18. he feels that since mainstream economists became the managers of the globalization process. and they should be designed through a democratic process so as to guarantee social justice and meet the needs of everybody. reveals that he became interested in real-world matters in 1993 when he joined the Clinton administration. the author offers a list of case studies in bad economics and policymaking by the IMF and the U. these being in fact equivalent to a number of implicit assumptions. and economic performance in a globalized world.

manifest that globalization is an improvement for those who are allowed to choose. It is. experts. But it is irrelevant for those who cannot choose—where more-or-less altruistic policymakers decide on their behalf—and it is even harmful for those who enjoy normative privileges. therefore. globalization refers to the freedom to choose among opportunities available on a global scale: Buyers are free to maximize their purchasing power. He adds that globalization policies and institutions—including the IMF and U. globalization is assumed to have been aborted. globalization is little more than a promise generated by free-market fundamentalists—this being a synonym for neoclassical scholars.Book Reviews LDCs. Stiglitz never really defines what he means by the term “globalization. his book can be perceived as an instructive guide to the misdeeds of neoclassical scholarship and the alibis it has provided to widespread criminal behavior. but rather. Consistent with this view. and for those who can successfully satisfy buyers’ needs. In particular. One can guess that from his standpoint. globalization stands for a world of opportunities opened to buyers and the end of privileges for sellers. 91 . As a matter of fact. the argument runs into trouble when the author suggests that the solution to neoclassical policymaking is some kind of paternalistic Third Way managed by caring and altruistic politicians devoted to achieving full employment. and sellers are free to compete in order to satisfy consumers’ needs and remunerate the scarce resources they use. Thus.S. none of the above characterizes Stiglitz’s thought. These oversights characterize both the author’s interpretations of the crises and his view about what could have been done instead. and selected bureaucrats. And he seems to be totally unaware of the fact that the alternative to mainstream economics is not enlightened and expanded governance structures. government—provoked a number of shocks that led entire countries to major crises and disasters. Western globalizers should take the blame for such failures. Once this rather bizarre definition of globalization is accepted. However. However. In other words. His account of the Russian crisis (chapter five) is a good example. he ignores the possibility of having made a mistake by equating globalization with neoclassical thinking. to echo Mises’s wording. freedom to choose and discard. whenever a country failed to grow after its rulers were exposed to neoclassical advisors.” From a free-market perspective. since they made empty promises and forced many LDCs to undertake suicidal steps toward liberalization.

the poverty gap has not been reduced. the book falls in line with the well-known mantra whereby all the evils of the developing world are the consequence of present or past Western behavior. globalization has nothing to do with fixed exchange rates and inconvertible currencies. such as import-competing industries. One wonders what happened to exchange rates. As for destabilization. without also having winners. and actually eliminates the whole question by assuming with apparent casualness that there are many different forms of free markets (chapter nine). as is probably true. Put differently. Stiglitz remarks that during the age of globalization. Surely. Stiglitz seems to be the victim of his own understanding of the free-market process. And it does not take much to see that if market forces are set free. Whatever the correct answer is. by economic freedom. But he doesn’t. when he mentions the evils of fixed exchange rates. Stiglitz should say so. have hardly been touched by globalization or. the author attributes them to the inconsistencies of the globalizers. the book ignores these basics. but policymakers do not withdraw and privileges do not disappear. One does not need a doctorate to know that free-market economics is about preventing policymakers from interfering in peaceful activities voluntarily undertaken by individuals.Journal of Libertarian Studies 18. Still. Maybe exchange rates did not depreciate enough because they were fixed and the local currency was not convertible. it is ridiculous. you can’t have imports unless you have exports to pay for them. such as exporters. While acknowledging that free capital movements and free trade have enhanced living standards in vast areas of the world. Finally. Accusing globalization for aborted economic growth in Africa since the end of colonialism is not only trite and inaccurate. Western globalizers forced LDCs to reduce their trade barriers and de facto created huge trade deficits while destroying fragile production structures. no. Western protectionism 92 . where living standards are stagnating and people keep dying because of poverty and civil wars. the system sooner or later breaks down. For instance. 1 (Winter 2004) These decisive misunderstandings are apparent from the very first pages. And if the West is guilty of providing too much aid to the leaders of poor countries. in Stiglitz’s view. Indeed. more generally. it is bad economics. or perhaps because foreign aid made sure that cheap imports could flow in. He forgets to tell the reader that most LDCs. That is not just a terminological question or a somersault in logic. Free trade (and globalization) is a game whereby you cannot have losers.

may harm domestic banks if they are unable to offer good enough credit conditions to borrowers. Ethiopia. As the reader soon finds out. since it is a gross mistake to consider neoclassical constructivism as a synonym for globalization. who modestly explains how he abandoned the academic world in order to solve America’s economic problems and. having done that. They are deceptive. It would be hard to deny that Botswana was right in rejecting IMF policymaking and constraints. In particular. 93 . by the World Bank and the WTO (chapter one). They are beside the point. Stiglitz describes the blind bureaucrats from the IMF. Unfortunately. But the Botswana case does not demonstrate that the country’s successes were due to socialist planning. the repented but weak employees of the World Bank. his implicit thesis is that countries that turned down IMF advice did well. or expansion in the bureaucracy. this rhetorical strategy is a recurrent feature of the book. CASE STUDIES After having suggested that globalization is the result of bad policymaking enforced by the IMF and. protectionism. It is wrong to claim that the best policy against protectionism is central planning with a human face or enlightened governance. the rest of the book is. On the other side. enhanced regulation. decided to move on to solve world poverty. On one side. but somewhat irrelevant and deceptive. and the greedy American establishment that fought communism but forgot about democracy. to a lesser extent. Another case is China (chapter three).Book Reviews hasn’t made life easy for third world countries. One case is Botswana (chapter two) which. ranks relatively high (and higher than Ethiopia) in the Index of Economic Freedom. we meet the author himself. but fought hard and almost single-handedly to stop IMF colonialism. but protectionism is the opposite of globalization. for although it is undeniable that advocating capital-markets liberalization in. Stiglitz offers various counterexamples to the development strategies recommended by the IMF. it is wrong to conclude that farmers suffer as a result. by and large. or that the political power of China was no match for any IMF bureaucrat. Nor would one claim that the Chinese leaders succeeded because they introduced further regulation and centralized planning in the past two decades. a sequence of anecdotes and case studies. say. Stiglitz’s cases are persuasive. the author faced disappointment. incidentally.

Stiglitz does not do it. presumably by reformed international agencies. social tensions. since the author frequently deals with privatization. civil servants became corrupt. foreign direct investment. Finally. 94 . the explanations lie with Western economic and political interference. social tensions erupted. the market does not yield perfect results. no. where imports are paid through foreign aid and exchange rates are irrelevant. which is the main goal of the author throughout the book. which forced good politicians to open up too quickly. • The argument is further developed in chapters four to seven. but was soon seduced by the dream of the invisible hand. jobs were destroyed. there are plenty of good things a government can do if properly enlightened and informed. foreign bankers. the IMF was originally created to get things right by following Keynesian guidelines. fairness enforced. although too much government intervention is bad. he argues. Government. and that good governments can do desirable things. It may be enough to underscore Stiglitz’s main ponts. As mentioned earlier. free capital markets.S. Rather than accomplishing its original and true mission. so free-market economics is wrong unless proper institutions are in place. 1 (Winter 2004) Indeed. POLICIES The economics of IMF policymaking occupies most of the book. either. Third. He simply states that opening up may be beneficial if some preliminary conditions are met. he never says that globalization per se is bad. it ended up colluding with Western financial capitalism and pressure groups. As a result. in which the Southeast Asian and the Russian crises are explored in detail. the reader is offered various examples: • • free trade. and poverty. and high interest rates choked development. and price liberalization. starting with the IMF and U. A review is not the right place to discuss in detail the fragility of neoclassical economics in these areas. and easy imports. in some cases leading to civil wars. First. Once again. which would be unfair to inefficient or badly located producers. He hastily concludes that whenever free-market blueprints failed. and full employment guaranteed.Journal of Libertarian Studies 18. Second. which would undermine much-needed subsidies and expose debtors to the consequences of bad reputations or bad borrowing decisions. liberalization.

Put differently. and Thailand to illustrate the catastrophe. Korea. 2003). As for the alleged domino effect. destroy the miracle. Stiglitz’s approach should no longer surprise the reader. where Stiglitz refers to fairness as one of the key elements of the social contract—the other being full employment. and 105% of its pre-crisis level. It is deplorable that the IMF played the window-dressing game first. Although Stiglitz singles out Indonesia. nor does he clarify what was written in it. but they are mere window dressing. rather than being an abuse 1 International Monetary Fund. World Economic Outlook (Sept. but the IMF delayed the moment when the distortions were exposed. the wellinformed reader cannot help remembering that in 2002.” 95 . he is persuaded that income transfers are one of the fundamental human rights. it is clear to him that governments broke the contract by not pursuing fairness. why would speculators attack these countries if they were in such healthy conditions to begin with? The truth of the matter is that globalization exposed economic distortions and malfunctions. real GDP in those three countries was respectively 99%. so violent attitudes by the residents were almost legitimized. although the reader will look in vain for a clear definition of fairness. In his view. statistical appendix: “Output. some caution is in order. 124%. and cause what the author defines as the most dramatic economic crisis since the Great Depression. Stiglitz is quite right in saying that the IMF should have kept out of the whole story.1 Never mind the figures. five years after the 1997 crisis blew up. and then provided funds to bail out selected lenders. At this stage. The redistributive patchwork advocated by Stiglitz may appear to help temporarily. and that the IMF precipitated the crisis. The author does not bother to explain by whom and where this contract was signed. Let us consider the Asian case. real GDP in developing Asia in 2002 was 33% higher than just before the crisis. Nonetheless. However. Indeed. Southeast Asia’s economies were doing fine until the West forced them to open up their capital markets. He will find just a hint in chapters three and seven. but he is wrong in saying that those countries were in good shape prior to IMF intervention. Instead. as the Asian crisis demonstrates. and can hardly fix a sick system.Book Reviews and where the virtues of gradual Keynesian transitions are opposed to the evils of IMF-style shock therapies. the author accuses the IMF of having served Western financial interests and having disregarded fairness.

the main problem with the book appears to be its title. especially when politicians are of good quality. 1 (Winter 2004) by some at the expense of others. the author neglects the distinction. GENERAL ISSUES As a matter of fact. be restricted to the provision of sound information and unconditional aid. Globalization is about deregulation and low taxation. First. Global governance by enlightened and compassionate international bodies is desirable. They have aggravated the economic conditions in many LDCs. The IMF and the Washington consensus are therefore guilty. and from the U. rather than to globalization. opening up (globalization) should not be rejected in principle. As for the meaning of the expression “good government. and raised bad feelings against anything coming from the West. irrespective of IMF intervention. since they forced national governments to renege upon the social contracts.S. but decisions about its timing. despite their past misdeeds. but only if they guarantee 96 . one is left wondering about who decides what is fair.S. Stiglitz does not consistently advocate a worldwide governance scheme for globalization. Third. Stiglitz says very little about globalization. and features should be a matter for each national government to decide. if the reader forgets about the author’s flights into morality. government. which are the core components of many IMF policies and macro-rescue plans in the past three decades. As has been argued above. Stiglitz considers privatization and liberalization attractive. From a policymaking viewpoint. Second. and whether Stiglitz would be willing to accept the notion of fairness that many national governments have enforced in the past decades.” he recommends fairness as the primary criterion to be taken into account for any development policy (chapter three). however. international agencies have done a poor job by trying to enforce neoclassical recipes. and develops three main theses. depth. Nevertheless. in his opinion. international agencies per se are not a bad idea. and what he says rests on questionable foundations. no. but each government should also be free to act as it judges appropriate. fixed exchange rates. These are not quite the same thing as active central banking.Journal of Libertarian Studies 18. in particular. which should have been related to the economics and politics of international agencies (the IMF in particular) and of the U. Once again. and high taxation. and they demonstrate an ability to preserve consensus. Consistent with his assumption about fairness. Their primary goal should.

and whether it can provide suitable incentives for entrepreneurial activities or fairness to those layers of the population who cannot protect themselves against inflation. He also deserves credit for hinting that those consultants also helped centralized policy-making retain its coercive power so that rent-seeking and collusion with the policymaker continued to be the winning strategy (chapter seven). and we leave it to the reader to evaluate the extent to which money printing can solve the problems of faulty management and bad government. bad entrepreneurs should not be allowed to fail. It is not a new thesis. alternative systems have not come to the surface. Put differently. it is hardly surprising that under such conditions. a little inflation is preferable to widespread poverty and civil war. globalization is about the freedom to opt out of the proposed policies. neither from neoclassical nor from Keynesian quarters. he argues. Stiglitz succeeds in showing the game and excels in describing it (see 97 . notions such as fairness and social consensus. but nevertheless treacherous. After all.Book Reviews extra jobs at fair conditions. Hence. almost bordering on demagoguery. Stiglitz deserves credit for pointing out that Western consultants have contributed to suffocating or destroying those rules. This justifies Professor Stiglitz when he correctly criticizes IMF policymaking and inconsistencies (chapter eight). We do not know how people want to behave. ONE CONCLUDING REMARK This book illustrates and contributes significantly to one gross misconception about globalization: Globalization does not identify policies. Freemarket globalizers have nothing to say about that. Of course. and it also explains why he is in trouble when he suggests recipes that go beyond generic. and believe that nobody has. where he confronts the legitimacy of property rights with that of the social contract. but it is puzzling to see that the author believes this to be the essence or the consequence of globalization. globalization in Russia and in some other countries of the Soviet Empire was never the name of the game. On the contrary. Instead. his thesis in favour of conditional globalization and of policies aimed at spreading the costs if anything undesirable happens—including bad lending and investment. Therefore. but should be rescued through money printing. or how much they are willing to pay for them. a market system rests on widely accepted behavioral rules. As the Russian case demonstrates. what kind of safeguards they prefer to have. See for instance chapter eight.

colombatto@unito. ENRICO COLOMBATTO University of Turin enrico. no.it 98 . but equally frequently fails to call it by its proper name: neoclassical constructivism. 1 (Winter 2004) chapters six and seven).Journal of Libertarian Studies 18.

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