In his well-argued brief for free trade, economist and Nobel Prize winner, Joseph E. Stiglitz provides the reasons underlying the well-publicized controversies over globalization that have plagued recent meetings of the International Monetary Fund (IMF), the World Trade Organization (WTO), and the World Bank. Stiglitz's background as a scholar (Columbia), member of President Clinton's Council of Economic Advisors, and former chief economist and senior vice-president of the World Bank positioned him well to tackle this most contentious of global issues. An internationalist, he nevertheless, understands the concerns of farmers, laborers, and common folk most affected by the decisions of international corporations and governments. Based largely on his personal experience, as well as international agency reports, Stiglitz argues that globalization is good if done right; removal of free trade barriers and integration of national economies are good if used to enrich everyone, particularly the poor. Everyone's needs should be addressed--he argues--not just those of people in power--either in the international agencies or national governments involved. Central to his purpose here is to stimulate a debate that will hopefully lead to a broad consideration of these needs.
It was during his first visit to Ethiopia while at the World Bank, that Stiglitz became fully immersed in what he describes as the "astonishing world of IMF politics and arithmetic." He soon sensed that the IMF often confused means with ends, thus losing sight of ultimate concerns. The Ethiopian government's steep reduction in military expenses notwithstanding, the IMF suspended its aid program to that country due to budgetary considerations. It reasoned that Addis Ababa should limit expenditures to taxes it collected, forgetting that other governments had given it funds for specific purposes. The IMF apparently believed such funds should be stuck into the government's reserves, as foreign assistance was too unstable.
Taking issue with the IMF's decision, Stiglitz maintained that foreign aid funds were more stable than tax revenues. Furthermore, if the government failed to build schools with funds supplied for that purpose, donors would not provide additional monies. Both the author and the Ethiopians could not understand why the IMF did not want the country to build schools and health clinics from funds given for that purpose.
The IMF also insisted that Ethiopia liberalize its banking system to lower interest rates on loans. Addis Ababa resisted this demand based on neighboring Kenya's similar experience in which fourteen banks had failed in 1993-94 alone, which resulted in an increase--not a lowering--of interest rates. The Ethiopians understandably worried that a drop in their farmers' incomes would make it impossible for them to buy seed or fertilizer. The author thinks his discussion with American IMF members may have helped to restore the international organization's assistance to Ethiopia.
Stiglitz then demonstrates how IMF and U. S. Treasury policies helped create the economic crises in East Asia and Russia. He pointed out that even though "expansionary fiscal policy was one of the few ways out of recession, the U. S. Treasury and the IMF advocated the equivalent of a balanced budget amendment for Thailand, Korea, and other East Asian countries." The IMF also pushed for higher interest rates that exacerbated weak financial institutions and over-leveraged firms, thereby increasing the number of banks facing non-performing loans.
The IMF then insisted that banks quickly meet capital delinquency problems or shut down. Korea ignored this advice, recapitalized its two largest banks, and recovered in a relatively short period of time. Thailand, however, languished after following the IMF's advice. Indonesia suffered food riots. Both China and India pursued their own course of action and prospered. Malaysia experienced the shortest downturn after rejecting IMF strategies.
Stiglitz maintains that IMF insistence on Russia's maintaining an overvalued currency--supporting that with billions of dollars of loans--ultimately crushed its economy. After its final devaluation in 1998, inflation did not soar as the IMF had feared, and the Russian economy experienced its first significant growth.
The author reminds his readers that the Fund was initially intended to put international pressure on countries to pursue expansionary policies. He concludes, however, that the Fund reversed course and coerced governments to implement more restrained ones instead. Thus IMF strategies made bad situations even worse. When the Fund requires states to tighten their belts, reductions in national income result in reduced imports and weaken neighboring exporting countries.
Among those reforms Stiglitz considers essential for the international financial system are: accepting the dangers of market liberalization and short-term capital flows and making them perform better; using bankruptcy reforms and standstills to complement restructuring and responsible lending practices, rather than IMF bailouts; improving IMF's response to crises, using its funds to restore aggregate demand during recessions; improving banking regulations; establishing more effective risk management, with developed countries and international financial institutions providing loans that mitigate risks against large real interest fluctuations; providing international assistance in improving safety nets such as unemployment insurance; and restoring the IMF's original mandate of providing funds to reestablish aggregate demand in countries facing recession.
While focused on ways to improve the IMF, Stiglitz also recommends reforms in the World Bank and WTO. Convinced that globalism is in every country's interest, he concedes the futility of world government if multilateralism is ignored. Unfortunately, that has been the case, he concedes, with the more frequent use of unilateralism by the world's richest and most powerful country.