Stiglitz

["Ian Murray" <seamus2001@xxxxxxxxx>]

< http://www.thenation.com >
FEATURE STORY | June 10, 2002

Rebel With a Cause
by EYAL PRESS


Joseph Stiglitz is--as usual--running late. It is nearing 2:30 pm on a
sunny afternoon in New York City and Stiglitz, an economist at Columbia
University, is standing on the corner of 103rd Street and West End
Avenue trying desperately to hail a cab. He needs to get across town to
the Guggenheim Museum, where in five minutes he is scheduled to deliver
an address on the state of the global economy in the aftermath of
September 11. Stiglitz has not prepared a speech--half an hour earlier,
as we were talking over lunch, he had completely forgotten the event was
today--but that is the least of his worries. For Stiglitz, getting to
appointments on time is a challenge; finding something provocative to
say once he gets there is not.

Over the past several years, Stiglitz, a celebrated theorist who was
awarded the 2001 Nobel Prize in economics for his work on asymmetric
information, has grown accustomed to being at the center of controversy.
>From 1997 to 2000, he served as senior vice president and chief
economist at the World Bank--a title that did not stop him from publicly
criticizing the bank's sister institution, the International Monetary
Fund. In a series of speeches and articles that culminated in a scathing
April 2000 essay in The New Republic, Stiglitz blasted the IMF for being
every bit as secretive, undemocratic and indifferent to the poor as its
critics claimed. Stiglitz's outspokenness, unprecedented for a
high-ranking insider, infuriated top officials at the IMF and US
Treasury Department, and eventually led James Wolfensohn, the World
Bank's president, to inform him that he would have to mute his criticism
or resign. Stiglitz chose to leave.

He has not, however, quieted down. Since trading in his job at the World
Bank for a chair at Columbia, Stiglitz has stepped up his crusade to
reshape the popular debate about globalization. At Columbia, he has
launched an organization, the Initiative for Policy Dialogue, designed
to furnish developing nations with alternative views on everything from
trade policy to financial reform. His lectures on campus draw overflow
audiences, and being purged from the World Bank seems only to have
enhanced his mystique in the developing world. He is an adviser to
several developing countries, including Serbia and Bulgaria, and he
meets informally with the leaders of many more, often dispensing advice
that puts him at odds with the IMF. He was recently flown down to Mexico
at the invitation of that country's Foreign Ministry; afterward, he went
to Ecuador to meet with leaders of that nation's central bank.

Stiglitz, 58, is hardly the first person to accuse the IMF of operating
undemocratically and exacerbating Third World poverty. But he is by far
the most prominent, and his emergence as a critic marks an important
shift in the intellectual landscape. Only a few years ago, it was
possible for pundits to claim that no mainstream economist, certainly
nobody of Stiglitz's stature, took the criticism of free trade and
globalization seriously. Such claims are no longer credible, for
Stiglitz is part of a small but growing group of economists,
sociologists and political scientists, among them Dani Rodrik of Harvard
and Robert Wade of the London School of Economics, who not only take the
critics seriously but warn that ignoring their concerns could have dire
consequences. In his new book, Globalization and Its Discontents
(Norton), Stiglitz argues that many of the complaints voiced by
protesters in recent years--that IMF structural adjustment programs have
caused widespread suffering; that free-trade agreements mainly benefit
the rich; that privatization has proved disastrous in many
countries--have a solid basis in fact. Unless the rules of global
capitalism are radically altered, he warns, the gap between the world's
rich and poor, and hence the social conditions that have fueled
instability in places like Pakistan, will not go away anytime soon.

How did an economist who until recently enjoyed the trust of the world's
most powerful financial authorities come to sympathize with their most
ardent critics? Stiglitz's break with the World Bank has earned him a
reputation in the business press and among policy elites as an enfant
terrible inclined to stir up trouble wherever he goes. His academic
peers, however, describe him in markedly different terms. "There is
something innocently nice about Joe," says Jagdish Bhagwati, one of his
colleagues in the economics department at Columbia. "He's a big puppy
dog," says Barry Nalebuff, an economist at Yale who has written papers
with him.

In person, Stiglitz indeed comes across as good-natured and agreeable.
When we first met, he invited me to his house for dinner. When he spoke
about his experiences at the World Bank, his voice betrayed not a trace
of bitterness. With his scruffy gray beard and frequently disheveled
appearance--he is famous for walking around shoeless, and has trouble
keeping his shirt tucked in--Stiglitz looks like the typical
absent-minded professor. He also acts like one. Most of our interviews
began at least an hour later than originally scheduled, a pattern that
Stiglitz appeared to take in stride, as though this were an inevitable
part of being Joseph Stiglitz.

And yet beneath the mellow exterior lies a fiercely independent, and at
times disputatious, thinker. As far back as high school, when he was a
star on the debating team, Stiglitz displayed a taste for intellectual
combat, and an occasionally acid tongue. Asked once what developing
countries should do with the annual reports the IMF prepares on member
nations, Stiglitz recommended "picking it up, saying 'thank you very
much' and dropping it straight in the garbage can."

As a scholar, moreover, Stiglitz has been nothing if not iconoclastic,
devoting much of his career to challenging one of the bedrock
assumptions of neoclassical economics: that markets nearly always act
perfectly on their own. Stiglitz has argued that because of asymmetric
information--the fact that one party in an economic transaction often
knows more than the other--inefficient outcomes are common, and
therefore that government intervention is often warranted.

Stiglitz's skepticism about markets can be traced back to his childhood.
The son of an insurance agent and a public school teacher, he grew up in
Gary, Indiana, the same steel town that produced another Nobel
Prize-winning economist, Paul Samuelson. His family was middle-class,
but Stiglitz says the periodic layoffs and plant closings in Gary
sensitized him at an early age to the bruising realities of a
concept--cyclical unemployment--he would later study as a graduate
student in the economics program at MIT.

Stiglitz enrolled at MIT in 1963. Five years later, at the age of 26, he
was appointed a full professor of economics at Yale. Shortly thereafter,
he was invited by the Rockefeller Foundation to go to Kenya. Witnessing
the wrenching poverty in the slums of Nairobi sparked a lifelong
interest in development policy. But Stiglitz noticed something else as
well: In many developing countries, a seemingly inefficient system of
farming--sharecropping--continued to predominate. From the standpoint of
efficiency, this made no sense (sharecroppers have little incentive to
work hard). It did make sense, however, if there was no other way for
landlords to monitor workers' output. The problem, in other words, was
imperfect information, affecting both their behavior and contractual
relations. Over the next few decades, along with a growing school of
economists including Berkeley's George Akerlof, he would produce
rigorous mathematical models showing that asymmetric information was
pervasive and made a measurable difference in everything from the way
insurance companies operated to the way corporations treated their
workers.

The author of a dozen books and several hundred prominent articles,
Stiglitz has achieved eminence as a theorist that is not widely
disputed. "If you had asked a broad number of economists before this
year whether Joe would at some point win the Nobel Prize, literally 100
percent would have said yes," says Alan Blinder, an economist at
Princeton. Where scholars disagree is in the policy prescriptions that
should be drawn from Stiglitz's work. "There are people who would say
information may be imperfect, but that government intervention to fix
the problem will only make things worse," says Blinder.

For all his skepticism about laissez-faire economics, Stiglitz has never
been known as a radical. He is a liberal with populist leanings, not a
Marxist, and before coming to the World Bank had served as chairman of
President Clinton's Council of Economic Advisers, not a job suited for
hard-line critics of capitalism. Although he was aware of NGOs and
activists who considered the IMF and World Bank neocolonial
institutions, Stiglitz says he arrived at the World Bank full of
optimism--some would say naïve optimism--about the positive role he
could play in shaping development policy. "I didn't really take [the
criticism] at face value," he says.

That would soon change. In March of 1997, barely a month into his job,
Stiglitz flew to Addis Ababa to meet with a group of Ethiopian officials
who had become embroiled in a bitter dispute with the IMF. Several
months earlier the IMF had suspended Ethiopia's lending program after
growing dissatisfied with the way its economy was being run. Stiglitz
found the suspension baffling, for the Ethiopian economy appeared to be
in good shape: Inflation was low, output was rising and, after decades
of famine, the government had launched a rural development program
focusing on the needs of the poor. The IMF, however, claimed that
Ethiopia was too dependent on foreign aid, which could dry up and then
cause a budget crisis, and had failed to meet certain conditions on its
loans, such as deregulating its financial market.

Upon returning to Washington, Stiglitz pointed out that the Ethiopian
government had resisted financial deregulation for good reason: In
neighboring Kenya, the policy had led to higher interest rates, which
devastated poor farmers. For several weeks, he waged an intense--and, in
the end, successful--internal campaign to get the IMF program restored.
But the experience left him deeply embittered. "I found the whole thing
astonishing," he says. "Not just the policies but the way the IMF
interacted with this country, basically just telling Ethiopia what to do
regardless of what its leaders thought."

No sooner had the Ethiopia dispute been settled than the 1997 Asian
financial crisis struck--and the tension between Stiglitz and the IMF
deepened. To Stiglitz, the crisis, which began with the collapse of the
Thai currency and soon spread to Malaysia, Korea, Indonesia and the
Philippines, highlighted the danger of lifting constraints on short-term
capital flows, a policy that both the IMF and US Treasury Department had
enthusiastically promoted in the 1990s. Throughout Asia, governments
that had followed their advice were reeling as investors whisked
billions of dollars in speculative capital out of their countries
overnight. Some nations that had maintained capital controls, such as
India and Chile, avoided such problems while enjoying robust growth.

Stiglitz was not the only economist to question the orthodox view: In a
widely cited article in Foreign Affairs, Jagdish Bhagwati, a prominent
free-trader, blasted the "Wall Street-Treasury Complex," which had
pushed unfettered capital flows for its own enrichment. But while
Stiglitz expressed his views in more measured tones, being an insider
made them far more explosive. In late 1997 the London Economist ran an
article contrasting Stiglitz's position with that of the IMF and
Treasury Department. The article, he would later learn, prompted an
irate telephone call from Lawrence Summers, then Deputy Treasury
Secretary, now president of Harvard, to James Wolfensohn. (Summers may
have been especially angry because the article pointed out that he, too,
had questioned the wisdom of liberalization before joining the Treasury
Department, only to reverse course.)

Stiglitz had still not said anything directly critical of the IMF. When
the IMF called on South Korea and other crisis-wracked nations to raise
interest rates and cut spending as conditions for receiving loans,
however, his frustration reached the boiling point. The IMF claimed
these austerity measures would stabilize local currencies and restore
investor confidence (not coincidentally, many of these investors might
also be bailed out). But in meetings with top IMF officials, Stiglitz
pointed out that most East Asian nations already had balanced budgets
and high interest rates. Adopting austerity measures could spur massive
unemployment and bankruptcy; Western nations facing recessions would
never consider such policies. In response, Stiglitz says, IMF officials
told him countries needed to "feel the pain" in order to recover.

Stiglitz did not wait long to strike back. In a speech delivered in
January 1998 in Helsinki, he declared that the solutions to the problems
facing developing countries "will not be found in the Washington
Consensus," whose rigid insistence on fighting inflation and "getting
government out of the way" had failed to foster egalitarian development.
At a press conference several months later, Stiglitz denounced the IMF's
response to the Asian crisis as an abject failure. "Who is paying the
price?... Workers who are going to be put out of jobs." Unemployment
indeed increased fourfold in Korea, threefold in Thailand and tenfold in
Indonesia, where cuts in food subsidies sparked riots.

Today, of course, most of the affected countries have recovered, leading
the IMF's defenders to argue that in the end, its prescriptions worked.
"In the countries where IMF guidance was followed promptly and without
fail, recovery was faster," argues MIT's Rudiger Dornbusch. Not so,
counters Stiglitz: A study by Dani Rodrik found that nations that defied
the IMF and kept interest rates low, such as Malaysia, recovered more
quickly than those that heeded its advice, such as Indonesia.

To some degree, the mounting criticism from Stiglitz and other quarters
has had an impact. IMF officials recently acknowledged the potential
risks of capital market liberalization, and both the IMF and World Bank
have begun speaking more openly about debt relief and poverty reduction.
But while the rhetoric has changed, Stiglitz maintains that a
doctrinaire ideology of "free-market fundamentalism" continues to shape
policy. The IMF and World Bank are pushing developing countries to
privatize their pension systems, for example, which is highly
controversial in the First World. The IMF demanded fiscal austerity in
Argentina, where unemployment had reached 20 percent and, in December,
sparked riots that led to the government's collapse. It preaches the
gospel of free trade to developing countries--even though most Western
countries built their economies by protecting certain industries and
continue to subsidize some domestic producers. The blind push to
privatize and deregulate has not only failed to fuel sustainable
development, Stiglitz contends, but reflects an idealized vision of how
markets function that neither economic theory nor concrete experience
supports.

Such statements have made Stiglitz a hero to critics of globalization,
some of whom believe institutions like the World Bank and IMF should
simply be abolished. Stiglitz himself, however, believes these
institutions should be reformed, not eliminated. He also believes the
spread of global capitalism has enormous potential to benefit the poor.
As an example of a country that has successfully integrated into the
global marketplace--but in a manner that defies the conventional wisdom
of the Washington Consensus--Stiglitz points to China. China has adopted
privatization and lowered trade barriers, he argues, but in a gradual
manner that has prevented the social fabric from being torn apart in the
process. With little advice from the IMF, it has achieved high growth
rates while reducing poverty. In a series of papers presented while he
was the World Bank's chief economist, Stiglitz pointedly contrasted this
record with that of Russia, which, following a decade of "shock therapy"
and IMF reforms, has seen poverty rise from 2 percent to 50 percent and
life expectancy plummet.

Stiglitz's interpretation is an important corrective to the standard
free-market view (which portrays China, misleadingly, as a model student
of Western economic reform). Some critics of globalization, however,
believe a more measured assessment of China is warranted. "Stiglitz is
certainly right to point to China as a country that has refused to
follow IMF dogma yet achieved fast growth," says John Cavanagh of the
Institute for Policy Studies. "But China is an environmental nightmare.
It is a country that systematically represses human rights and workers'
rights. To people in the global justice movement, it is not the
blueprint of a successful society."

Stiglitz's optimism about China, says Cavanagh, underscores the
limitations of his critique of globalization. "Stiglitz is part of a
school of economists who have begun to question some of the central
precepts of globalization," he says, "but not the overall framework."
Stiglitz does, in fact, take pains to ground his critique of the
Washington Consensus in conventional economic terms, emphasizing that
even by standard measures, such as growth, the IMF's prescriptions have
often failed.

On the other hand, as Cavanagh acknowledges, Stiglitz has done more to
damage the IMF's reputation than any other living economist. And he has
not limited his criticism to discrete events such as the Asian financial
crisis. While at the World Bank, Stiglitz delivered a series of
prominent speeches arguing that growth should not be the sole measure of
success, and that developing countries should be able to decide for
themselves which policies to adopt. It is a theme he elaborates in his
new book, in which he argues that a central goal of development policy
should be to benefit and empower the poor.

In retrospect, the only thing Stiglitz seems to regret about his tenure
at the World Bank is that he did not speak out sooner. "It took me a
while to realize that there was no interest in having a debate about
these policies. It was, 'This is how we do things and that is it.' When
it became clear to me that some of these things were surely wrong, it
seemed derelict not to speak out."

Not surprisingly, those on the receiving end of Stiglitz's criticisms
hold a different view. "There was plenty of internal debate" about
policy, says Stanley Fischer of the IMF. "But to have vociferous public
criticism from someone inside the institution--it was surprising and
strange."

Says World Bank president Wolfensohn, "Joe's character is to go straight
out.... Institutionally, it's important that when we are projecting the
decided view of the institution, we all stick together."

Notwithstanding such pressure, a growing number of people within the
World Bank seem to be questioning the official wisdom--and to be paying
the price. In June 2000 the economist Ravi Kanbur resigned from the bank
after reportedly feeling pressure to tone down the emphasis on poverty
reduction in the annual World Development Report. More recently, the
World Bank launched a disciplinary investigation into the conduct of
William Easterly, a staff economist who had published an editorial in
the London Financial Times (based on his book, The Elusive Quest for
Growth) that questioned the effectiveness of IMF and World Bank
development assistance projects in the postwar era. "The World Bank is
like a church--it has a dogma," says David Ellerman, another staff
economist, who recently published an editorial in a World Bank
newsletter calling for greater tolerance for dissenting opinions. "The
problem is that we are dealing with some of the most complex issues
facing mankind."

Now that he is no longer bound by institutional constraints, Stiglitz is
speaking his mind more than ever. His message is at once simple and
incendiary. As he declared recently before a packed hall at Columbia's
School of International and Public Affairs, "Countries have to own their
development strategies.... Development is not just the accumulation of
capital--it is about a transformation of society, a change in ways of
thinking. That can't come if countries have everything dictated to
them."

Stiglitz was there to talk about his new organization, the Initiative
for Policy Dialogue, through which he hopes to do nothing less than end
the World Bank and IMF's fifty-year monopoly on development policy. The
IPD will, among other things, bring together task forces of economists
to outline alternative approaches to a range of policy questions (trade,
macroeconomic policy, pension reform). It will also oversee country
dialogues, in which economists, policy-makers and members of civil
society from developing countries will debate strategies and ideas. Such
dialogues have already taken place in Serbia, Vietnam, Ethiopia and the
Philippines.

Though ambitious, there is something amorphous about the IPD's mission.
The organization does not, for example, put forward a clear-cut,
alternative blueprint to the policies of the Washington Consensus. There
are also questions about whether Stiglitz, whose lack of management
skills was notorious at the World Bank, is capable of running such an
organization effectively.

If the IPD's agenda seems nebulous, however, that's in part because its
founder does not really believe in blueprints. The whole problem with
the Washington Consensus, Stiglitz argues, is that it represents
"cookie-cutter" economics: a uniform set of prescriptions imposed
regardless of history, social conditions, institutional factors,
information asymmetries. In a forthcoming essay on the ethics of serving
as an economic adviser, Stiglitz argues that rather than prescribe
solutions, economists should emphasize choices, underscoring the risks
and trade-offs of pursuing various alternatives. As a rallying point for
activists, promoting dialogue and highlighting alternatives may seem
frustratingly murky. Yet there is also something potentially radical
about it. At bottom, it is an argument for an end to unilateral rule by
global elites, and for greater democracy in economic decision-making. It
also puts the lie to the notion that in a global marketplace, there is
only one true road to prosperity.

As Stiglitz notes, during the 1990s the number of people living in
extreme poverty (less than $2 per day) increased by nearly 100 million.
Other studies show that in places like Latin America, the policies of
the Washington Consensus have not even succeeded in promoting growth,
much less in reducing inequality. The events of September 11 bring home
the fact that addressing such issues is important for security reasons
as well as for moral ones. The point has not been lost on Stiglitz.
"Clearly, terrorists can be people like bin Laden who come from
upper-income families," he told me. "Nevertheless, abject poverty and
economies without jobs for males between the ages of 18 and 30 are
particularly good breeding grounds for extremism. Solving the economic
problems doesn't eliminate the risk of terrorism, but not solving them
surely enhances it."