In book: Encyclopedia of Economics and Society, Edition: 1, Chapter: Globalization and its Discontents, Publisher: Sage, Editors: Frederick Wherry, pp Globalization and Its Discontents by Joseph E. Stiglitz was published in and has. Stanford Universities among others. Joseph E. Stiglitz Globalization And Its Discontents Pdf [ TKRG]. Topics Globalization And Its Discontents. Collectionopensource. Language. AND ITS DISCONTENTS GLOBALIZATION CONTENTS Preface IX Acknowledgmems XVII 1. The Promise of Global Institutions 2. Broken Promises lJ 3.
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Contemporary Issues in Macroeconomics. Too Little, Too Late. Martin Guzman. Towards a General Theory of Deep Downturns. People, Power, and Profits: Progressive Capitalism for an Age of Discontent. April Industrial Policy and Economic Transformation in Africa. The Welfare State Revisited. Discounting for Time and Risk in Energy Policy. Robert C. How to write a great review. The review must be at least 50 characters long. The title should be at least 4 characters long. Your display name should be at least 2 characters long.
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I saw history being made and I learned a lot. I have tried to distill the essence of what I saw and learned and present it in this book. I hope my book will open a debate, a debate that should occur not just behind the closed doors of government and the international organizations, or even in the more open atmosphere of universities.
Those whose lives will be affected by the decisions about how glob- alization is managed have a right to participate in that debate, and they have a right to know how such decisions have been made in the past.
At the very least, this book should provide more information about the events of the past decade. More information will surely lead to better policies and those will lead to better results. If that hap- pens, then I will feel I have made a contribution. President Bill Clinton and World Bank President Jim Wolfensohn, in giving me opportunities to serve my country and the peoples of the developing world, also gave me an opportunity, rela- tively rare for an academic, to glimpse decision making that affc: I am indebted to hundreds of colleagues at the World Bank, not only for the vigorous discussions that we had over the years abom all the issues discussed in this book but for sharing with me their years of experience in the field.
They also helped arrange the many trips through which I could get unique perspectives on what was happening in the developing countries. Anupanl Khanna, Lawrence MacDonald. Ngozi Ojonjo-Iweala. Guillermo Perry, Boris Pleskovic.
Jo Ritzen. Halsey Rogers. Lyn Squire. Next to my colleagues at the World Bank, I perhaps interacted more with those at the ME and, while it will be clear from the ensuing pages that I often disagreed with much of what they did and how they went about doing it, I learned much from them and the long discus- ,ions we had, not the least of which was a better understanding of heir mind-sets.
I should also be clear: I ,H11 ,liso grateful to the nUlllerous government officials in the developing countries. In our long meetings, they often talked to me in confidence. Many of th05e, such as Vaclav Klaus, the former prime minister of the Czech Repub- lic, would disagree with much that I have to say, yet I learned a great deal from talking to them.
Others, such as Andrei lllarionov, cur- rently Putin's chief economic adviser, and Grzegorz W. Kolodko, for- mer deputy prime minister and finance minister of Poland, Meles Zenawi, prime minister of Ethiopia, or Yoweri Museveni. Some of those at the international economic organiza- tions who have been helpful have also asked me not to thank them, and I have honored their request. While much of my time was spent in discussions with government officials, I was also able to meet large numbers of businessmen, who also gave of their time as they described the challenges that they faced and provided their interpretations of what was going on in their countries.
While it is difficult to single out any single individual. I should mention Howard Golden. As an academic, I had my own entree into the countries 1 visited. I am particularly indebted to my colleagues at Stanford. Larry Lau. Masa Aoki. Jomo in Ma1aysia. Justin Lin in China. The hectic years at the World Bank and the Council of Economic Advisers have been followed by a more.. Jud Columbia-and my students and colleagues at those institutions-lor invaluabl UNDp, th Canadian International Development Agency, md th In writing a book like this, while I have relied mostly on my own exp A theme in this book that I hope has some resonance is the importance of open access to information: I have always believed that an active and free press is a critical check on these abuses and is necessary for democracy, and many of the reporters with whom I dealt regularly were dedicated to that mission.
I learned much from them, as we shared our interpretation of the events that were occurring. Again, at the risk of singling out a couple when so many should be recognized: Chrystia Freeland was a huge help with the Russia chapter, and Paul Blustein and Mark Clif- ford provided valuable insights on the East Asian experience. Economics is the science of choice. From the wealth of insights and information, on the subjects as complicated and fascinating as those discussed here, volumes could be written.
Unfortunately, that was one of my main challenges in writing this book: I had to let go of some of the ideas and skip some of the qualifications, as important as I thought they were.
I had grown accustomed to two forms of writing: This work represents, for me, a new genre. Nadia Roumani has been my right-hand woman for years. Noth- ing would be possible without her. Sergio Godoy and Monica Fuentes diligently checked the facts and found the statistics I needed. Leah Brooks helped a lot with the earlier drafts.
Niny Khor and Ravi Singh, my research assistants at Stanford, worked hard on the penulti- mate version. This work rests on a considerable body of academic work, both my own, in conjunction with a large number of coauthors, and clut of others, again too numerous to cite. I have also benefited from innumerable discussions with colleagues around the world. I should mention Professor Robert Wade of the London School of Econom- ics, a former World Bank staff member, who has written insightfully not only about the general problems of the international economic institutions but also about several of the specific topics covered here, East Asia and Ethiopia.
The transition from Communism to a market economy has been a subject that has engaged the interest of acade- mic economists greatly over the past fifteen years. I have benefited in particular from Janos Kornai's insights.
I should also mention four other leading scholars: A central theme of this book is the value of open debate, and I have learned much from discussions with and reading those whose interpretations of events I sometimes, perhaps often, dis- agree with-in particular Richard Layard, Jeff Sachs, Anders AsIund, and Andrei Shleifer.
I have also benefited from discussions with a multitude of academicians in the economies in transition, including Oleg Bogomolov and Stanislav Menshikov in Russia. Steve Lewis, Peter Eigen, and Charles Harvey all provided me with insights into Botswana from their firsthand experiences, and Charles Harvey gave me detailed comments on chapter 2.
I am par- ticularly indebted to Andy Weiss for his practical insights into the problems of transition. Nancy Birdsall. Danny Leipziger, and Kevin Murdoch, pro- vided me with insights into the region that put me in good stead in dealing with the crisis when it occurred.
Thanks are due to Hal Varian for suggesting the title. Anyone who reads this book will also see clearly the influence of ideas concerning imperfect information and markets-central, I believe, for understanding how any market economy works, but especially developing ones. Work with Carl Shapiro, Michael Rothschild, Sandy Grossman, Steve Salop, and Richard Arnott helped provide insights into unemploy- ment, capital market imperfections, the limitations of competition, and the importance-and limitations-of institutions.
At the end of it all. Formerly uneventful meetings of obscure technocrats discussing mundane subjects such as concessional loans and trade quotas have now become the scene of raging street battles and huge demonstrations. The protests at the Seattle meeting of the World Trade Organization in were a shock.
Since then. Virtually every major meeting of the Interna- tional Monetary Fund. The death of a protestor in Genoa in was just the beginning of what may be many more casualties in the war against globalization. Riots and protests against the policies of and actions by institu- tions of globalization are hardly new.
For decades. What is new is the wave of protests in the developed countries. These protests have provoked an enormous amount of soul-searching from those in power. Even con- servative politicians such as France's president, Jacques Chirac, have expressed concern that globalization is not making life better for those most in need of its promised benefits. Almost overnight, globalization has become the most pressing issue of our time, some- thing debated from boardrooms to op-ed pages and in schools all over the world.
Opening up to international trade has helped many countries grow far more quickly than they would otherwise have done. International trade helps economic develop- ment when a country's exports drive its economic growth. Export- led growth was the centerpiece of the industrial policy that enriched much of Asia and left millions of people there far better off.
Because of globalization many people in the world now live longer than before and their standard of living is far better. People in the West may regard low-paying jobs at Nike as exploitation, but for many people in the developing world, working in a factory is a far better option than staying down on the farm and growing rice.
Globalization has reduced the sense of isolation felt in much of the developing world and has given many people in the developing countries access to knowledge well beyond the reach of even the wealthiest in any country a century ago. The antiglobalization protests themselves are a result of this connectedness.
Signed by countries as of , it reduces the likelihood that children and other innocent vic- tims will be maimed by mines. Similar, well-orchestrated public pres- sure forced the international community to forgive the debts of some ofthe poorest countries. Even when there are negative sides to glob- alization, there are often benefits.
Opening up the Jamaican milk market to U. New for- eign firms may hurt protected state-owned enterprises but they can also lead to the introduction of new technologies. Those who vilify globalization too often overlook it. But the proponents of globalization have been. To them. But to many in the developing world, globaliza- tion has not brought the promised economic benefits.
A growing divide between the haves and the have-nots has left increasing numbers in the Third World in dire poverty. Despite repeated promises of poverty reduction made over the last decade of the twentieth century.
V In Africa. While the scourge of AIDS is at the center of this decline. Even countries that have aban- doned Ati-ican socialism, managed to install reasonably honest gov- ernments, balanced their budgets, and kept inflation down find that they simply cannot attract private investors. Without this investment, they cannot have sustainable growth. If globalization has not succeeded in reducing poverty, neither has it succeeded in ensuring stability.
Crises in Asia and in Latin America have: There are fears of financial contagion spreading around the world, that the collapse of one emerging market currency will mean that others fall as well. For a while, in and , the Asian crisis appeared to pose a threat to the entire world economy.
Globalization and the introduction of a market economy has not produced the promised results in Russia and most of the other economies. These countries were told by the West that the new economic sys- tem would bring them unprecedented prosperity. Instead, it brought unprecedented poverty: The contrast between Russia's transition, as engineered by the international economic institutions, and that of China, designed by itself, could not be greater: While in China's gross domestic product GDP was 60 percent that of Russia, by the end of the decade the numbers had been reversed.
While Russia saw an unprecedented increase in poverty, China saw an unprecedented decrease. The critics of globalization accuse Western countries of hypocrisy, ,md the critics are right. Thc United States was, of course, one of the prime culprits, ,md this was ,m i"ue about which I felt intensely. It not only hurt the developing countries; it also cost Americans. Special conunercial and finan- cial interests prevailed-and when I moved over to the World Bank, I saw the consequences to the developing countries all too dearly.
But even when not guilty of hypocrisy, the West has driven the globalization agenda, ensuring that it garners a disproportionate share of the benefits, at the expense of the developing world. It was not just that the more advanced industrial countries declined to open up their markets to the goods of the developing countries-for instance, keeping their quotas on a multitude of goods from textiles to sugar- while insisting that those countries open up their markets to the goods of the wealthier countries; it was not just that the more advanced industrial countries continued to subsidize agriculture, making it difficult for the developing countries to compete, while insisting that the developing countries eliminate their subsidies on industrial goods.
Looking at the "terms of trade"-the prices which developed and less developed countries get for the products they produce--after the last trade agreement in the eighth , the ntt effect was to lower the prices some of the poorest countrie5 in the world received relative to what they paid for their imports.
Western banks benefited from the loosening of capital market controls in Latin America and Asia, but those regions suffered when inflows of speculative hot money money that comes into and out of a country, often overnight, often little more than betting on whether a currency is going to appreciate or depreciate that had poured into cOllntries suddenly reversed.
The abrupt outflow of money left behind collapsed currencies and weakened banking systems. The Uruguay Round also strengthened intellectual property rights. The round was concluded in Marrakech on Decem! Thr ag The World Trade Oqtanization came imo formal effect on Janu. But thest' drug companies in the developing world were making tht'st' lite-saving drugs available to their citizens at a fraction of the prict' at which the drugs were sold by the Western drug companies.
Tht're wt're thus two sides to the decisions made in the Uruguay Round. Profits of the Western drug companies would go up. Advo- catt's said this would provide them more incentive to innovate; but tht' increased protits from salt's in the developing world were small, since tew could afford the drugs, and hence the incentive effect, at best, might be limited.
The other side was that thousands were effec- tively condemned to death, because governments and individuals in developing cOllntries could no longer pay the high prices demanded. In the case of AIDS, the international outrage was so great that drug companies had to back down, eventually agreeing to lower their prices, to sell the drugs ;It cost in late But the underlying prob- lems-the tact that the intellectual property regime established under the Uruguay Round was not balanced, that it overwhelmingly reflected the interests and perspectives of the producers, as opposed to the users, whether in developed or developing countries-remain.
Not only in trade liberalization but in every other aspect of globalization even seemingly well-intentioned efforts have often backfired. When projects, whether agriculture or infrastructure, rec- ommended by the West, designed with the advice of Western advis- ers, and tinanced by the World Bank or others have failed, unless there is some form of debt forgiveness, the poor people in the devel- oping world still must repay the loans.
The crises that have brought in their wake ma"ive unemployment have, in turn, been followed by longer- term problems of social dissolution-from urban violence in Latin America to ethnic conflicts in other parts of the world, such as Indonesia. For decades, the cries of the poor in Africa and in developing countries in other parts of the world have been largely unheard in the West.
Those who labored in the developing countries knew something was wrong when they saw financial crises becom- ing more commonplace and the numbers of poor increasing. But they had no way ro change the rules or to influence the international financial institutions that wrote them. Those who valued democratic processes saw how "conditionality"-the conditions that interna- tional lenders imposed in return for their assistance-undermined national sovereignty. But until the protestors came along there was little hope for change and no outlets for complaint.
Soml'" of the pro- testors went to excesses; some of the protestors were arguing for higher protectionist barriers against the developing countries, which would have made their plight even worse. But despite these prob- lems, it is the trade unionists, students, environmentalists--ordinary citizens-marching in the streets of Prague, Seattle, Washington, and Genoa who have put the need for reform on the agenda of the developed world.
Protestors see globalization in a very different light than the trea- sury secretary of the United States, or the finance and trade ministers of most of the advanced industrial countries. The differences in views are so great that one wonders, are the protestors and the policy mak- ers talking about the same phenomena?
Are they looking at the same data? Are the visions of those in power so clouded by special and par- ticular interests? Fundamentally, it is the closer integration of the countries and peoples of the. Glohalization ha. Globalization has also led to renewed attention to long-established intt"rnational illlt'rg'Jl1ernmelltai institutions: No one wants to see their child die, when knowlt"dge and medicines are available somewhere else in the world.
It is the more narrowly defined economic aspects of globalization that have been the subject of controversy, and the international institu- tions that have written the rules, which mandate or push things like liberalization of capital markets the elimination of the rules and reg- ulations in many developing countries that are designed to stabilize the flows of volatile money into and out of the country.
There are, in addition, a host of other institu- tions that playa role in the international economic system-a num- ber of regional banks. The proper name of the World Bank-the International Bank for Recon- struction and Development-reflects its original mission; the last part, "Development," was added almost as an afterthought. At the time, most of the countries in the developing world were still colonies, and what meager economic development efforts could or would be undertaken were considered the responsibility of their European masters.
The more difficult task of ensuring global economic stability was assigned to the IMF. Those who convened at Bretton Woods bad the global depression of the s very much on their minds. Almost three quarters of a century ago, capitalism faced its most severe crisis to date.
The Great Depression enveloped the whole world and led to unprecedented increases in unemployment. The British econo- mist John Maynard Keynes, who would later be a key participant at Bretton Woods, put forward a simple explanation, and a correspond- ingly simple set of prescriptions: While the models underlying Keynes'5 analysis have subsequently been criticized and refined, bringing a deeper understanding of why market torces do not work quicldy to adjust the economy to full employment, the basic lessons remain valid.
The IMF is a public institution, established with money provided by taxpayers around the world. This is important to remember because it does not report directly to either the citizens who finance it or those whose lives it affects.
Rather, it reports to the ministries of finance and the central banks of the governments of the world. There have been some minor adjustments since, but the major developed countries run the show, with only one country, the United States, having effec- tive veto.
In this sense, it is similar to the UN, where a historical anachronism determines who holds the veto-the victorious powers of World War II-but at least there the veto power is shared among five countries.
Founded on the belief that markets often worked badly, it now champions market supremacy with ideological fervor. The IMF and the World Bank became the new missionary institutions, through which these ideas were pushed on the relucunt poor countries that often badly needed their loans and grants. The ministries of finance in poor countries wen. Hollis Chenery, one of America's most distinguished development economists, a professor at Harvard who had made fundamental contributions to research in the economics of development and other areas as well, had been Robert McNamara's confidant and adviser.
McNamara had been appointed president of the World Bank in Touched by the poverty that he saw throughout the Third World, McNamara had redirected the Bank's effort at its elimination, and Chenery assembled a first-class group of economists from around the world to work with him. In the new ideological fervor, many of the first-rate economists that Chenery had assembled left. Although the missions of the two institutions rcmained distinct, it was at this time that their activities becamc incrca.
The IMP was supposed to focus on crises; but develop- ing countries were always in need of help, so the IMP became a per- manent part of life in most of the developing world. More recently, as the crises have gotten bigger, and even the deep coffers of the IMP seemed insufficient, the World Bank was called in to provide tens of billions of dollars of emergency support, but strictly as a junior part- ner, with the guidelines of the programs dictated by the IMF.
In prin- ciple, there was a division of labor. The IMP was supposed to limit itself to matters of lIIacroecorlOmics in dealing with a country, to the government's budget deficit, its monetary policy, its inflation, its trade deficit, its borrowing from abroad; and the World Bank was supposed to be in charge of slnlClural issues-what the country's government spent money on, the country's financial institutions, its labor markets, its trade policies.
But the IMP took a rather imperialistic view of the matter: It often got impatient with the World Bank, where even in the years when free market ideology reigned supreme there were frequent controversies about what policies would best suit the conditions of the country. The IMF had the answers basically, the same ones for every country , didn't see the need for all this discussion, and, while the World Bank debated what should be done, saw itself as stepping into the vacuum to provide the answers.
The two institutions could have provided countries with alterna- tive perspectiws on some of the challenges of development and tran- sition. A half century after its founding, it is clear that theJMf In spite of the fact that our understanding of economic processes has increased enormously during the last fifty years, and in spite of IMF's effortS during the past quarter century, crises around the world have been more frequent and with the exception of the Great Depression deeper.
By some reckonings, close to a hundred countries have faced crises. And once a country was in crisis, IMF funds and programs not only failed to stabilize the situation but in many cases actually made matters worse, especially for the poor.
The IMF failed in its original mission of promoting global stability; it has also been no more successful in the new missions that it has undertaken, such as guiding the transition of countries from communism to a market economy. The Bretton Woods agreement had called for a third international economic organization-a World Trade Organization to govern international trade relations, a job similar to the IMF's governing of international financial relations.
An international organization was required not just to prevent a recurrence but to encourage the rree flow or goods and services. Today, the G-7 typically meet' together with Russia the G-R. The seVl"l1 eountrie. It does not set rules itsdf; rather, it provides a forum in which trddt" negotiations go on and it ensures that its agreements are liwd up to.
The idt"ls and intentions behind the creation of the international t"conomic institutions wt"re good ones, yet they gradually evolved ovt"r the yt"ars to become something very different. The Keynesian orientation of tht" lMF, which emphasize Lma. Treasury about the "right" policies for devdoping countries-that signaled a radi- cally dilferent approach to economic devdopment and stabilization. Many of the ideas incorporatt"d in the const"nsus were devdoped in response to the problems in Latin America, where governments had let budgets get out of control while loose monetary policies had led to rampant inflation.
A burst of growth in some of that region's countries in the decades immediatdy after World War II had not been sustained, allegedly because of excessive state intervention in the economy.
Capital market liberalization has been pushed despite the fact that there is no evidenct" showing it spurs economic growth. Forcing a developing country to open itself up to imponed products that would compete with those produced by certain of its industries, industries that were dangerously vulnerable to competition from much stronger counterpart industries in other countries, can have disastrous consequencessocially and economically. Jobs have sys- tematically been destroyed-poor farmers in developing countries simply couldn't compete with the highly subsidized goods from Europe and America-before the countries' industrial and agricul- tural sectors were able to grow strong and create new jobs.
Even worse, the IMP's insistence on developing countries maintaining tight monetary policies has led to interest rates that would make job creation impossible even in the best of circumstances. And because trade liberalization occurred before safety nets were put into place. Liberalization Ius thus, too often, not been followed by the promised growth, but by increased misery. And even those who have not lost their jobs have been hit by a heightened sense of insecurity.
European countries banned the free flow of capital until the seventies. Small developing countries are like small boats. Rapid capital market liberalization, in the manner pushed by the IMF, amounted to setting them off on a voyage on a rough St';]. Even in the best of circumstances, there was a high likelihood that they would be overturned when they were hit broadside by a big wave. The application of mistaken economic theories would not be such a problem if the end of first colonialism and then communism had not given the IMF and the World Bank the opportunity to greatly expand their respective original mandates.
The IMf has made mistakes in all the ,Ireas it Ius b Structural adjustment programs did not bring sustained growth even [0 those. If, for instance, markets are opened up for com- petition too rapidly, before strong financial institutions are estab- lished, then jobs will be destroyed faster than new jobs are created. In many countries, mistakes in sequencing and pacing led to rising unemployment and increased poverty.
The collapse in Argentina in is one of the most recent of a series of failures over the past few years. Given the high unemploy- ment rate for almost seven years, the wonder is not that the citizens eventually rioted, but that they suffered quietly so much for so long. Underlying the problems of the IMf and the other international economic institutions is the problem of governance: The choice of heads for these institutions symbolizes the institu- tions' problem, and too often has contributed to their dysfunction.
While almost all of the activities of the IMF and the World Bank today are in the developing world certainly, all of their lending , they are led by representatives from the industrialized nations.
They are chosen behind closed doors, - and it has never even been viewed as a prerequisite that the head should have any experience in the developing world. The problems also arise from who speaks for the country. At the IMF, it is the finance ministers and the central bank governors. At the WTO, it is the trade ministers. Each of these ministers is closely aligned with particular constituencies within their countries.
The trade ministries reflect the concerns of the business community- both exporters who want to see new markets opened up for their products and producers of goods which compete with new imports. These constituencies, of course, want to maintain as many barriers to trade as they can and keep whatever subsidies they can persuade Congress or their parliament to give them.
The fact that the trade barriers raise the prices consumers payor that the subsidies impose burdens on taxpayers is of less concern than the profits of the pro- ducers-and environmental and labor issues are of even less concern, other than as obstacles that have to be overcome. The finance minis- ters and central bank governors typically are closely tied to the flllan- cial comlllunity; they cOllle from financial tirms, and after their period of government service, that is where they return.
Robert Rubin, the treasury secretary during much of the period described in this book, came from the largest investment bank, Goldman Sachs, and returned to the firm, Citigrnup, that controlled the largest com- mercial bank, Citibank. These individuals naturally see the world through the eyes of the. For the pe. Lett with no alternatives, no way to express their concern, to press tor change, people riot. The streets, of course, are not the place where issues are discussed, policies formulated, or compromises forged.
But the protests have made government officials and economists around the world think about alternatives to these Washington Consensus policies as the one and true way for growth and development. It has become increasingly clear not to just ordinary citizens but to policy makers as well, and not just those in the developing countries but those in the developed countries as well, that globalization as it has been practiced has not lived up to what its advocates promised it would accomplish-or to what it can and should do.
In some cases it has not even resulted in growth, but when it has, it has not brought benefits to all; the net effect of the policies set by the Washington Consensus has all too often been to benefit the fewaqhe. In many cases commercial interests and values have superseded concern for the environment. It has the pouler to do enormous good.
But in much of the world it has not brought comparable benefits. For many, it seems closer to an unmitigated disaster. At that time, when transportation and conununication costs fell and previ- ously local markets expanded, new national economies formed, and with these new national economies came national companies, doing business throughout the country.
Dut the markets were not left to develop willy-nilly on their own; government played a vital role in shaping the evolution of the economy. The U. The federal government began to regulate the financial system, set minimum wages and working conditions, and eventually provided unemployment and welfare systems to deal with the problems posed by a market system.
The federal government also promoted some industries the first telegraph line, for example. The federal government played a central role not only in promoting American growth. Today, with the continuing decline in transportation and commu- nication costs, and the reduction of man-made barriers to tht' flow of goods, services, and capital though there remain serious harril.
Gllr dream is a world withollt poverty. In the center of the thirteen-story atrium there is a statue of a young boy leading an old blind man, a memorial to the eradication of river blindness onchocerciasis. Before the World Bank, the World Health Organiza- tion, and others pooled their efforts, thousands were blinded annually in Africa from this preventable disease. Across the street stands another gleaming monument to public wealth, the headquarters of the International Monetary Fund.
The marble atrium inside, graced with abundant flora, serves to remind visiting finance ministers from countries around the world that the IMF representli the centers of wealth and power. These two institutions, often confused in the public mind, present marked contrasts that underline the differences in their cultures, styles, and missions: There is more dun svmbolism in this difference: Hion unless one gets out to the countryside.
The unemployed are people, with families, whose lives are affected-sometimes devastated-by rhe economic policies that outsiders recommend, and, in the case of the [ME etfectively impose. Modern high-tech warfare is designed to remove physical contact: Modern economic manage- ment is similar: Statistics bear out what those who travel outside the capital see in the villages of Atrica, Nepal, Mindanao, or Ethiopia; the gap between the poor and the rich has been growing, and even the number in absolutely poverry-living on less than a dollar a day-has increased.
Even where river blindness has been eliminated, poverry endures- this despite all the good intentions and promises made by the devel- oped nations to the developing nations, most of which were once the colonial possessions of the developed nations.
Mind-sets are not changed overnight, and this is as true in the developed as in the developing countries. Giving developing coun- tries their freedom generally after little preparation for autonomy often did not change the view of their former colonial masters, who continued to feel that they knew best. The colonial mentality-the "white man's burden" and the presumption that they knew what was best for the developing countries-persisted. With the domestic economy so well under control, I felt that the greatest challenges for an economist now lay in the growing problem of world poverty.
What could we do about the 1. What could I do to bring to reality the dream of a world without poverty? How could I embark on the more modest dream of a world with less poverty?
I saw my task as threefold: I knew the tasks were difficult, but I never dreamed that one of the major obstacles the developing countries faced was man-made, totally unnecessary, and lay right across the street--at my "sister" institution, the IME I had expected that not everyone in the interna- tional financial institutions or in the governments that supported them was committed to the goal of eliminating poverty; but I thought there would be an open debate about strategies--strategies which in so many areas seem to be failing, and especially failing the poor.
In this, I was to be disappointed. Ethiopia and the Struggle Between Power Politics and Poverty After four years in Washington, I had become used to the strange world of bureaucracies and politicians.
But it wa. CI O". Mdes's forces won in A doctor by training, Mdes had formally studied economics bt'c. He showed a deeper understanding of economic principles- Jnd cercainly a greater knowledge of the circumstances in his coun- try-than many of the international economic bureaucrats that I had to deJI with in the succeeding three years. Mdes combined these intellectual attributes with personal integrity: His political opponents came mostly from the long-dominant groups around the capital who had lost political power with his accession, and they raised questions about his commitment to democratic principles.
However, he was not an old- iashioned autocrat. The new constitution even gave each region the right to vote democratically to secede, ensuring that the political elites in the capital city, whoever they might be, could not risk ignoring the concerns of ordinary citizens in every part of the country, or that one parr of the country could not impose its views on the rest. The government actually lived up to its commitment, when Eritrea declared its independence in Subsequent events--such as the government's occupation of the university in Addis Ababa in the spring of , with the imprisonment of some students and professors-show the precariousness, in Ethiopia as else- where, of basic democratic rights.
When I arrived in , Meles was engaged in a heated dispute with the IMF, and the Fund had suspended its lending program. There was no infla- tion; in fact, prices were falling.
Output had been growing steadily since he had succeeded in ousting Mengistu. After years of war and rebuilding, international assistance was beginning to return to the country. The IMF has a distinct role in international assistance. It is sup- posed to review each recipient's macroeconomic situation and make sure that the country is living within its means.
If it is not, there is inevitably trouble down the road. In the short run, a country can live beyond its means by borrowing, but eventually a day of reckoning comes, and there is a crisis. The IMF is particularly concerned about inRation.
Of course, there arc other dimensions to good macroeconomic policy besides inRation. The term macro refers to the a. To most econo- mists, such a country would rate as having a disastrous macroeco- nomic framework. To most economists, inRation is not so much an end in itself, but a means to an end: But the IMF often seel11s to confuse means with ends, thereby losing sight of what is ultimately of concern.
If coun- tric's h. Ethiopia had formulated a rural development strategy, focusing its Jttt'ntion on the poor, and especially the 85 percent of the popula- tion living in the rural sector.
It had dramatically cut back on military expenditures-remarkable for a government which had corne to power through military means-because it knew that funds spent on weapons were funds that could not be spent on fighting poverty. But the IMF had suspended its program with Ethiopia, in spite of the good macroeconomic performance, saying it was worried about Ethiopia'S budgetary position.
Tht' Ethiopian government had two revenue sources, taxes and ton: A government's budget is in balance so long as its revenue 'Iources equal its expenditures. Ethiopia, like many devel- oping countries, derived much of its revenues from foreign assistance.
The IMF worried that if this aid dried up, Ethiopia would be in trouble. Hence it argued that Ethiopia's budgetary position could only be judged solid if expenditures were limited to the taxes it collected. The obvious problem with the IMF's logic is that it implies no poor country can ever spend money on anything it gets aid for. If Sweden, say, gives money to Ethiopia to build schools, this logic dic- tates that Ethiopia should instead put the money into its reserves.
All countries have, or should have, reserve accounts that hold funds for the proverbial rainy day. Gold is the traditional reserve, but today it has been replaced by hard currency and its interest-bearing relatives. The most common way to hold reserves is in U. Treasury bills. But this is not why international donors give aid. Meles put the matter more forcefully: The IMF view was not rooted in a long-held concern about pro- ject sustainability.
Sometimes countries had used aid dollars to con- struct schools or clinics. When the aid money ran out, there was no money to maintain these facilities. The donors had recognized this problem and built it into their assistance programs in Ethiopia and elsewhere. But what the IMF alleged in the case of Ethiopia went beyond that concern. The Fund contended that international assis- tance was too unstable to be relied upon.
To me, the IMf's position made no sense, and not just because of its absurd implications. I knew that assistance was often far more stable than taX revenues, which can vary markedly with economic conditions. When I got back to Wash- ington, I asked my staff to check the statistics, and they confinned that international assistance was more stable than taX revenues.
Using the IMF reasoning about stable sources of revenue, Ethiopia, and other developing countries, should have counted foreign aid but not included tax revenues in their budgets. And if neither taxes nor for- eign assistance were to be included in the revenue side of budgets. But the IMf's reasoning was even more flawed.
There are a num- ber of appropriate responses to instability of revenues, such as setting aside additional reserves and maintaining flexibility of expenditures. Ethiopia's government officials understood what was at issue, they understood the concern about what might happen if eitller tax revenues or foreign as.
Irk 10, repJYlllent. I, too, would have advised them to repay, p,micul. They objected not to the logic of the strategy, but to the tJct that Ethiopia had undertaken this course without IMF approval.
Bur why should a sovereign country ask permission of the IMF for ewrY action which it undertakes? For years, the mantra at the 19th Street headquarters of the IMF in Washington had been accountability and judgment by results.
The results of Ethiopia's largely self-determined policies should have demonstrated convincingly that it was a capable master of its own destiny. But the IMF felt countries receiving money from it had an obligation [0 report everything that might be germane; not to do so was grounds for suspension of the program, regardless of the reason- ableness of the action. Good capital mar- kets are the hallmark of capitalism, but nowhere is the disparity between developed and less developed countries greater than in their capital markets.
Ethiopia's entire banking system measured, for instance. The IMF wanted Ethiopia not only to open up its financial markets to Western I competition but also to divide its largest bank into several pieces. In a world in which U. When global financial institutions enter a country, they can squelch the domestic competi- tion. And as they attract depositors away from the local banks in a country like Ethiopia, they may be far more attentive and generous when it comes to making loans to large multinational corporations than they will to providing credit to small businesses and farmers.
The IMF wanted to do more than just open up the banking sys- tem to foreign competition. It wanted to "strengthen" the financial system by creating an auction market for Ethiopia's government Treasury bills-a reform, as desirable as it might be in many coun- tries, which was completely out of tune with that country: It also wanted Ethiopia to "liberalize" its financial mar- ket, that is, allow interest rates to be freely determined by market forces--something the United States and Western Europe did not do until after , when their markets, and the requisite regulatory apparatus, were far more developed.
The IMF was confusing ends with means. One of the prime objectives of a good banking system is to provide credit at good terms to those who will repay. In a largely rural country like Ethiopia, it is especially important for farmers to be able to obtain credit at reasonable terms to download seed and fertilizer.
The Ethiopian banking system was at least seemingly quite efficient, the difference between borrowing and lending rates being far lower than those in other developing countries that had followed the IMF's advice.
Still, the Fund was unhappy, simply because it believed interest rates should be freely determined by international market forces, whether those markets were or were not competitive. The IMF had insisted on tiruncial market liberalization, believing that competition.
The results were dis- ,lstrouS: In the end, interest rates increased, not decreased. Understandably, the gov- ernment of Ethiopia was wary. Committed to improving the living standards of its citizens in the rural sector, it feared that liberalization would have a devastating effect on its economy. Those farmers who had previously managed to obtain credit would find themselves umble to download seed or fertilizer because they would be unable to get cheap credit or would be forced to pay higher interest rates which thev could ill afford.
This is a country wracked by droughts which result ill massive starvation. Its leaders did not want to make matters worse.
The Ethiopians worried that the IMf's advice would cause tarmers' incomes to fall. Faced with Ethiopian reluctance to accede to its demands, the IMF suggested the government was not serious about reform and, as I have said, suspended its program.
Happily, other economists in the World Bank and I managed to persuade the Bank management that lending more money to Ethiopia made good sense: World Bank lending tripled. In order to turn the situation around I had, with the invaluable help and support of colleagues, mounted a deter- mined campaign of "intellectual lobbying.
I used what influence I could through my connections with the Clinton administration, including talking to America's representative on the Fund. Assistance was restored, and I would like to think that my efforts helped Ethiopia. I learned, however, that immense time and effort are required to effect change, even from the inside, in an international bureaucracy.
Such organizations are opaque rather than transparent, and not only does far too little information radiate from inside to the outside world, perhaps even less information from outside is able to penetrate the organization. The opaqueness also means that it is hard for information from the bottom of the organization to percolate to the top. There was clear evidence the IMF was wrong about financial market liberalization and Ethiopia's macroeconomic posi- tion, but the IMF had to have its way.
It seemingly would not listen to others, no matter how well informed, no matter how disinterested. Matters of substance became subsidiary to matters of process.
Whether it made sense for Ethiopia to repay the loan was less impor- tant than the f. Even matters like the repayment of the loan-though properly not some- thing on which the IMF should have taken a position at all, so long as Ethiopia's action enhann'd rather than subtracted from its ability to repay what was owcd--could have been referred to olltsiders. It is lurd ,'wn tor a moderate-sized institution like the IMF to kn,'w.
Some of the b.. Ar rhe Council, our models said they were wrong, but they were nor terribly interested in our input. We were right, and the IMF was wrong: Based on their faulty analysis ot the!
Fortunately, the Fed paid no memion [0 the IMF recommendation. Other countries could not Ignore it so easily. Bur [0 the 1M F the lack of detailed knowledge is of less moment, bt'clus,: The problems ot" this approach become particularly acute when facing the chal- knges ot" the de! The institution does not rt: Development issues are complicated; in many ways developing countries present far greatt: This is because in dcvdoping nations, markets are often absent, and when present, often work imperfecrly.
Information problems abound, and cultural mores may significantly affect economic behavior. In some of the universities from which the IMF hires regularly, the core curricula involw lI10dds in which there is never any unemployment. After all, in the standard competitive model-the model that underlies the IMF's market fundamental- ism-demand always equals supply.
If the demand for labor equals supply, there is never any involJltrlary unemployment. Someone who is not working has evidently chosen not to work. In this interpreta- tion, unemployment in the Great Depression, when one out of four people was out of work, would be the result of a sudden increase in the desire for more leisure. It might be of some interest to psycholo- gists why there was this sudden change in the desire for leisure, or why those who were supposed to be enjoying this leisure seemed so unhappy, but according to the standard model these questions go beyond the scope of economics.
While these models might provide some amusement within academia, they seemed particularly ill suited to understanding the problems of a country like South Africa, which has been plagued with unemployment rates in excess of 25 percent since apartheid was dismantled. The IMF economists could not, of course, ignore the existence of unemployment. Because under market fundamentalism-in which, by assumptioll, markets work perfectly and demand must equal supply for labor as for every other good or factor--there cannot be unem- ployment, the problem cannot lie with markets.
It must lie e1se- where--with greedy unions and politicians interfering with the workings of free markets, by demanding--and gettingexces. There is an obvious policy implication-if there is unemployment, wages should be reduced. Such poli- cies are far more likely to be crafted by highly educated, first-rate economists already in the country, deeply knowledgeable about it and working daily on solving that country's problems.
It wanted. Soaring interest fdtes might, today, lead to star- vation. Suffering and pain became part of the process of redemption, evidence that a country was on the right track. To me, sometimes pain is necessary, but it is not a virtue in its own right. Well-designed policies can often avoid much of the pain; and some forms of pain-the misery caused by abrupt cuts in food subsidies, for example, which leads to rioting, urban violence, and the dissolution of the social fabric-are counter- productive.
The IMF has done a good job of persuading many that its ideo- logically driven policies were necessary if countries are to succeed in tht" long run. One doesn't, of course, need a sophisticated financial institution staffed by Ph.
But IMF retorm programs go well beyond simply ensuring that countries live within their means. A good example is Botswana, 2, miles south of Ethiopia, a small country of t. It was largely agricultural, lacked water, and had a rudimentary infrastruc- ture.
But Botswana is one of the success stories of development. Although the country is now suffering from the ravages of AIDS, it averaged a growth rate of more than 7. Botswana was helped by having diamonds, but countries like Congo Republic formerly Zaire , Nigeria, and Sierra Leone were also rich in resources. In those countries, the wealth from this abundance fueled corruption and spawned privileged elites that engaged in internecine struggles for control of each country's wealth.
Botswana's success rested on its ability to maintain a political consensus, based on a broader sense of national unity. That political consensus, nec- essary to any workable social contract between government and the governed, had been carefully forged by the government, in collabora- tion with outside advisers, from a variety of public institutions and private foundations, including the Ford Foundation.
They discussed the program with senior Botswana officials, including cabinet ministers and members of Par- liament, with open seminars as well as one-to-one meeting;. Part of the reason tor this success was that the senior people in Botswana's government took great care in selecting their advisers.
He turned out to do a splendid job. Of course, no success is without blemishes. On another occasion, the Bank of Botswana allowed the IMF to pick somebody to be director of research, and that turned out, at least in the view of some, to he far less successful. However, while that may have been Keynes's intent when he pushed tor the establishment of the IMF, the institution does not now conceive of itself as a deficit financier, committed to maintaining economies at full employment.
Rather, it has taken on the pre-Keynesian position of fiscal austerity in the face of a down- turn. Botswana tightened its belt, pulled together, and got through the crisis, But because of the broad understanding of economic policies that had been developed over the years and the consensus-based approach to policy making, the austerity did not ClUSe the kinds of cleavages in society that have occurred so fre- quentlv elsewhere under IMF programs.