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FT Columnist Martim Wolf discusses the flaws in Joseph Stiglitz's new book, 'Globalisation and its discontents' 10th July 2002 Joseph Stiglitz, Nobel laureate economist, is loved on the streets and loathed in the suites. How much some people now dislike him was shown by Kenneth Rogoff, chief economist of the International Monetary Fund since 2001, in a debate on Mr Stiglitz's new book on globalisation.* Mr Stiglitz despises the fund. Mr Rogoff shows that the sentiment is fully reciprocated. Yet Mr Stiglitz is more than a great theoretical economist. He is also a former chairman of the US council of economic advisers and former chief economist of the World Bank. His arguments against current orthodoxies cannot be dismissed as the ravings of a lunatic. This is not just because of who he is, but because of the issues he raises. Far too much has gone wrong over the past two decades to permit a shred of official complacency. Mr Stiglitz's arguments can be reduced to two propositions. First, globalisation is a force for good: indeed "those who vilify globalisation too often overlook its benefits". This is right. Second, "to many in the developing world, globalisation has not brought the promised economic benefits". The blame lies partly in the self-interestedness and hypocrisy of the west. But it also lies with the "market fundamentalism" of the IMF and some governments, notably including his own In this book, Mr Stiglitz presents himself as the just man in a wicked world. IMF staff are condemned for staying in five-star hotels. From such luxury, "one can callously impose policies about which one would think twice if one knew the people whose lives one was destroying". Again, he asks of Stanley Fischer, the IMF's former number two, whether he was "richly rewarded", with his present job at Citigroup "for having faithfully executed what he was told to do". These personal attacks leave a bad taste. But there is more wrong with this book than that. I would stress three failings. First, the intellectual kernel of the book is Mr Stiglitz's attack on policymakers' inability to understand market failure. Yet he is equally guilty of failing to acknowledge government failure. Rightly, he dislikes monopolies, but government is the ultimate monopolist. Worse, many governments are corrupt, violent and incompetent monopolists. It is naive to assume that they always act in the public interest. Sometimes, they do. Often they do not. Second, Mr Stiglitz shows far too little concern for the consequences of his stance. He knows that many protesters are against global economic integration in any guise and believe the poor would be better off if they were protected from globalisation altogether. Mr Stiglitz should have taken on these viewpoints directly, but he fails to do so. Third and most important, the book is riddled with oversimplifications. To take one example, Mr Stiglitz contrasts the wise gradualism of Poland with the shock therapy of Russia. But Poland was where shock therapy, by which I mean rapid price liberalisation and monetary tightening, began. Similarly, Mr Stiglitz contrasts China's wise gradualism with Russia's allegedly speedy reforms. Yet Russia lost a state, an empire, a ruling party, an economic system and an ideology in a few months. How could a gradual Chinese path have been followed?
Self-satisfied, misleading, irresponsible and simplistic - these are charges I would make against this book. Unfortunately for the fund, that does not mean it is to be ignored. Mr Stiglitz makes some cogent points One is that the capital account liberalisation that has occurred over the past two decades has interacted with mistaken exchange rate regimes and weak financial systems to generate a series of catastrophes.
Equally, Mr Stiglitz is right that there has been systematic underestimation of the role of institutions in promoting capital account liberalisation or transition from communism. The tool-box used was too simple.
However irritating and imperfect, Mr Stiglitz's book hits some bull's-eyes. Ultimately, we will judge the IMF not by the quality of its officials' rhetoric, but by the success of its policies. The record has been mixed, at best. Mr Stiglitz is right on this. For the world's sake, the fund must do better.
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Again, on the Asian crisis of 1997 and 1998, Mr Stiglitz oversimplifies the dilemmas faced by policymakers. His preferred solution would have been a standstill on debt service, controls on capital flight and swift restructuring of private sector indebtedness. He is against big bailouts of foreign private lenders and equally opposed to the high interest rates employed to prop up exchange rates. I have (and had) much sympathy with this point of view. It was never clear why it was right to minimise the pain inflicted upon the idiots who had borrowed foreign currency, by trying to keep up the exchange rate, while maximising the pain suffered by innocents who had borrowed in domestic currency, by keeping interest rates up.Yet the governments themselves were determined to avoid a default and were, as events proved, able to repay the money they borrowed from the IMF. So there was a case for the bailouts. Moreover, since effective bankruptcy provisions did not exist in the afflicted countries, Mr Stiglitz's alternative would also have been hard to implement speedily.
The east Asian countries have, for example, failed even now to return to their earlier growth path. Mr Stiglitz is absolutely right to blame the fund (and others) for their failure either to warn or protect countries adequately against these disasters.
Last but not least, the fund remains a relatively non-transparent public institution with great discretionary power over its borrowers. It suffers from the defects of any such institution. More open debate is needed on the policies it demands. Too often, it has imposed - or is imposing - an inordinate number of conditions or simply misguided ones.