By Joseph E. Stiglitz


Reviewed by Benjamin Friedman.

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.

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, what happens when people lack the key information that bears on the decisions they have to make, or when markets for important kinds of transactions are inadequate or don’t exist, or when other institutions that standard economic thinking takes for granted are absent or flawed.

The implication of each of these absences or flaws is that free markets, left to their own devices, do not necessarily deliver the positive outcomes claimed for them by textbook economic reasoning that assumes that people have full information, can trade in complete and efficient markets, and can depend on satisfactory legal and other institutions. As Stiglitz nicely puts the point, “Recent advances in economic theory”—he is in part referring to his own work—“have shown that whenever information is imperfect and markets incomplete, which is to say always, and especially in developing countries, then the invisible hand works most imperfectly.”

As a result, Stiglitz continues, governments can improve the outcome by well-chosen interventions. (Whether any given government will actually choose its interventions well is another matter.) At the level of national economies, when families and firms seek to buy too little compared to what the economy can produce, governments can fight recessions and depressions by using expansionary monetary and fiscal policies to spur the demand for goods and services. At the microeconomic level, governments can regulate banks and other financial institutions to keep them sound. 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. And governments can use a variety of devices, ranging from job creation to manpower training to welfare assistance, to put unemployed labor back to work and, at the same time, cushion the human hardship deriving from what—importantly, according to the theory of incomplete information, or markets, or institutions—is no one’s fault.

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, or for loans from banks and other private-sector lenders that look to the IMF to indicate whether a borrower is creditworthy. The organization and its officials, he argues, have ignored the implications of incomplete information, inadequate markets, and unworkable institutions—all of which are especially characteristic of newly developing countries. As a result, Stiglitz argues, 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. 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, in the countries that have followed them.

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. The most traditional and perhaps best-known IMF policy recommendation is for a country to cut government spending or raise taxes, or both, to balance its budget and eliminate the need for government borrowing. The usual underlying presumption is that much government spending is wasteful anyway. Stiglitz charges that the IMF has reverted to Herbert Hoover’s economics in imposing these policies on countries during deep recessions, when the deficit is mostly the result of an induced decline in revenues; he argues that cuts in spending or tax hikes only make the downturn worse. He also emphasizes the social cost of cutting back on various kinds of government programs—for example, eliminating food subsidies for the poor, which Indonesia did at the IMF’s behest in 1998, only to be engulfed by food riots.

High interest rates. Many countries come to the IMF because they are having trouble maintaining the exchange value of their currencies. A standard IMF recommendation is high interest rates, which make deposits and other assets denominated in the currency more attractive to hold. Rapidly increasing prices—sometimes at the hyperinflation level—are also a familiar problem in the developing world, and tight monetary policy, implemented mostly through high interest rates, is again the standard corrective. Stiglitz argues that the high interest rates imposed on many countries by the IMF have worsened their economic downturns. They are intended to fight inflation that was not a serious problem to begin with; and they have forced the bankruptcy of countless otherwise productive companies that could not meet the suddenly increased cost of servicing their debts.

Trade liberalization. Everyone favors free trade—except many of the people who make things and sell them. Eliminating tariffs, quotas, subsidies, and other barriers to free trade usually has little to do directly with what has driven a country to seek an IMF loan; but the IMF usually recommends (in effect, requires) eliminating such barriers as a condition for receiving credit. The argument is the usual one, 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. Stiglitz points out that today’s industrialized countries did not practice free trade when they were first developing, and that even today they do so highly imperfectly. (Witness this year’s increase in agricultural subsidies and new barriers to steel imports in the US.) He argues that forcing today’s developing countries to liberalize their trade before they are ready mostly wipes out their domestic industry, which is not yet ready to compete.

Liberalizing Capital Markets. Many developing countries have weak banking systems and few opportunities for their citizens to save in other ways. As one of the conditions for extending a loan, the IMF often requires that the country’s financial markets be open to participation by foreign-owned institutions. The rationale is that foreign banks are sounder, and that they and other foreign investment firms will do a better job of mobilizing and allocating the country’s savings. Stiglitz argues that the larger and more efficient foreign banks drive the local banks out of business; that the foreign institutions are much less interested in lending to the country’s domestically owned businesses (except to the very largest of them); and that mobilizing savings is not a problem because many developing countries have the highest savings rates in the world anyway.

Privatization. Selling off government- owned enterprises—telephone companies, railroads, steel producers, 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. One reason for doing so is the expectation that private management will do a better job of running these activities. Another is that many of these public companies should not be running at all, and only the government’s desire to provide welfare disguised as jobs, or worse yet the opportunity for graft, keeps them going. Especially when countries that come to the IMF have a budget deficit, a standard recommendation nowadays is to sell public-sector companies to private investors.

Stiglitz argues that many of these countries do not yet have financial systems capable of handling such transactions, or regulatory systems capable of preventing harmful behavior once the firms are privatized, or systems of corporate governance capable of monitoring the new managements. Especially in Russia and other parts of the former Soviet Union, he says, the result of premature privatization has been to give away the nation’s assets to what amounts to a new criminal class.

Fear of default. A top priority of IMF policy, from the very beginning, has been to maintain wherever possible the fiction that countries do not default on their debts. As a formal matter, the IMF always gets repaid. And when banks can’t collect what they’re owed, they typically accept a “voluntary” restructuring of the country’s debt. The problem with all this, Stiglitz argues, is that the new credit that the IMF extends, in order to avoid the appearance of default, 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. They want, he writes, to be rescued from the consequences of their own reckless credit policies. 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.

Stiglitz’s indictment of the IMF and its policies is more than just an itemized bill of particulars. His theme is that there is a coherence to this set of individual policies, that the failings of which he accuses the IMF are not just random mistakes. In his view these policies—what he labels the “Washington consensus”—add up to something that is unattractive, if not outright repugnant, in several different ways.

First, Stiglitz repeatedly claims that the IMF’s policies stem not from economic analysis and observation but from ideology—specifically, an ideological commitment to free markets and a concomitant antipathy to government. Again and again he accuses IMF officials of deliberately ignoring the “facts on the ground” in the countries to which they were offering recommendations. In part his complaint is that they did not understand, or at least did not take into account, 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.

More specifically, he argues that the IMF ignores the need for proper “sequencing.” Liberalizing a country’s trade makes sense when its industries have matured sufficiently to reach a competitive level, but not before. Privatizing government-owned firms makes sense when adequate regulatory systems and corporate governance laws are in place, but not before. The IMF, he argues, deliberately ignores such factors, instead adopting a “cookie cutter” approach in which one set of policies is right for all countries regardless of their individual circumstances. But importantly, in his eyes, the underlying motivation is ideological: a belief in the superiority of free markets that he sees as, in effect, a form of religion, impervious to either counterarguments or counterevidence.

A further implication of this belief in the efficacy of free markets, according to Stiglitz, 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; instead the IMF recommends policies that result in steeper downturns and more widespread joblessness. He does not argue, of course, that the IMF prefers serious recessions or unemployment per se. 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. By extension, he argues, the IMF also does not act to promote economic growth (which helps to produce full employment). Again the claim is not that the IMF dislikes growth per se, but that it believes free markets are all that is needed to make growth happen.

As a further consequence of the misguided policies that follow from this “curious blend of ideology and bad economics,” Stiglitz argues, the IMF itself is responsible for worsening—in some cases, for actually creating—the problems it claims to be fighting. By making countries maintain overvalued exchange rates that everyone knows will have to fall sooner or later, 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, the IMF encourages the contagion of an economic downturn from one country to its neighbors. By making countries adopt high interest rates that stifle investment and bankrupt companies, the IMF encourages low confidence on the part of foreign lenders. At the same time, by repeatedly coming to these lenders’ rescue, the IMF encourages lax credit standards.

Second, and more darkly, the IMF, in Stiglitz’s view, systematically acts in the interest of creditors, and of rich elites more generally, in preference to that of workers, peasants, and other poor people. 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.

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. He observes that IMF officials tend to meet only with finance ministers and central bank governors, as well as with bankers and investment bankers; they never meet with poor peasants or unemployed workers. He also notes that many IMF officials come to the Fund from jobs in the private financial sector, while others, after working at the IMF, go on to take jobs at banks or other financial firms.

Here again Stiglitz’s point is that the IMF’s mistakes are not random but the systematic consequence of its fundamental biases. His argument is as much about the policies the IMF doesn’t recommend as the ones it does:

Stabilization is on the agenda; job creation is off. Taxation, and its adverse effects, are on the agenda; land reform is off. There is money to bail out banks but not to pay for improved education and health services, let alone to bail out workers who are thrown out of their jobs as a result of the IMF’s macroeconomic mismanagement.

One specific example, land reform, sharply illustrates what he has in mind. As Stiglitz points out, in many developing countries a small group of families own much of the cultivated land. Agriculture is organized according to sharecropping, with tenant farmers keeping perhaps half, or less, of what they produce. Stiglitz argues,

The sharecropping system weakens incentives—where they share equally with the landowners, the effects are the same as a 50 percent tax on poor farmers. The IMF rails against high tax rates that are imposed against the rich, pointing out how they destroy incentives, but nary a word is spoken about these hidden taxes…. Land reform represents a fundamental change in the structure of society, one that those in the elite that populates the finance ministries, those with whom the international finance institutions interact, do not necessarily like.

Stiglitz considers, and rejects, 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. Stiglitz’s view is that in recent decades the IMF “was not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community.”

Finally, 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, views that said that markets would take care of everything and government would only make matters worse; it was also a matter of values…. While misguidedly working to preserve what it saw as the sanctity of the credit contract, the IMF was willing to tear apart the even more important social contract.

Throughout the book, the sense of moral outrage is evident.