Stiglitz and the Limits of 'Reform'


By Doug Henwood

The Nation
September 2000

It's global protest time again. When Bill Gates and other members of the global elite gathered in mid-September for the World Economic Forum in Melbourne, Australia, thousands of union members and activists filled the streets to protest the effects of unfettered free trade. The next opportunity to trouble a convocation of the world's bigwigs is in Prague at the end of September, when the World Bank and International Monetary Fund hold their annual meetings. In April, their midyear meetings brought thousands to Washington and shut down the city.

There's a long-standing split among those who protest and criticize these institutions - and their close relative, the World Trade Organization - between those who'd reform them and those who'd prefer to shut them down. Two forced departures from the World Bank have made the limits of reform irrefutably clear.

The first was the exit of former chief economist Joseph Stiglitz at the end of 1999. Stiglitz had made one too many public criticisms of the economic policies preferred by the bank and its ultimate master, the US government. And more recently, Ravi Kanbur, an outside economist whom Stiglitz brought aboard to supervise the writing of the bank's annual World Development Report, resigned "in anger" (as the New York Times put it) in June when he was ordered to revise the document to conform to the party line that growth is the highest good of economic policy.

Stiglitz was appointed to his World Bank post in December 1996. Long regarded as one of the leading theorists in his field - and frequently tipped as a future Nobelist - he served on Bill Clinton's Council of Economic Advisers from 1993 until his move over to the bank. Despite this respectable pedigree, Stiglitz started causing trouble almost from the first.

He attracted worldwide notice with a January 1998 lecture in Helsinki in which he criticized the "Washington consensus" - the austerity, privatization and deregulation agenda that had become the standard policy prescription for much of the world - as misguided and often disastrous. He pointed out that the historically unprecedented rapid economic growth in East Asia - and with it the increases in life expectancy, literacy and other social indicators - was the result of the sort of state intervention that the bank frowns on. He also pointed out that the 1997 financial crisis that interrupted that growth was in large part the result of the reckless decisions of private investors. But instead of drawing the proper conclusions, Stiglitz noted, market ideologues were using the crisis to discredit state intervention and promote more market liberalization. He further argued that moderate inflation is pretty harmless, budget deficits aren't necessarily evil, privatization isn't a panacea and deregulation of domestic and international financial markets can do serious harm. For a senior World Bank official to say these things is a bit like a Pope denying the Virgin birth.

As his tenure progressed, Stiglitz elaborated on these themes. He publicly rued the fact that workers and small businesses were "getting screwed" because they were inadequately represented in decision-making. He criticized the IMF - without mentioning it by name - for making the Asia crisis worse by imposing austerity programs instead of stimulating imploding economies and shoring up social safety nets. He proposed that restricting the freedom of global capital movements could make the world less crisis-prone. He mused that the disastrous results of economic reform in Russia were "not just due to sound policies being poorly implemented" but to "a misunderstanding of the foundations of a market economy"earning him a public rebuke from World Bank president James Wolfensohn.

The accumulation of sacrileges became too much, and Stiglitz's "resignation" was announced last November, an occasion that led Treasury Secretary Lawrence Summers to praise Stiglitz as a "major creative and intellectual force." The Clinton Administration said it had played no role in the exit. In fact, according to World Bank insiders Summers informed Wolfensohn that if he wanted another term as World Bank president, Stiglitz had to go - so Stiglitz went.

Stiglitz was kept on as a consultant, but his contract was terminated in May. It's said the last straw was an article he wrote for The New Republic that, aside from reiterating his policy criticisms, contained this, passage: "The older men who staff the fund ... act as if they are shouldering Rudyard Kipling's white man's burden. IMF experts believe they are brighter, more educated, and less politically motivated than the economists in the countries they visit. In fact, the economic leaders from those countries are ... brighter or better-educated than the IMF staff, which frequently consists of third-rank students from first-rate universities." Policy disputes are one thing, but this was just too harsh a truth to utter in public.

Ravi Kanbur was an inconvenient leftover from the Stiglitz days. Together they had opened up the drafting of the World Bank's annual World Development Report, its flagship document. A draft was posted on the web, and public comments were actively sought. Its drift was that contrary to standard development doctrine, growth wasn't enough to lift the poor out of poverty - policy had to be actively tilted in their favor. (It should be remembered that we're not talking about people who skip a meal now and then: The bank's definition of poverty is an income of less than $1 a day, a ration on which 1.2 billion of the world's people subsist.) This openness was a departure from past practice, in which the reports were written by staff economists under the supervision of elite journalists on loan from The Economist or the Financial Times.

The US government, in the person of Summers, was outraged by Kanbur & Co.'s draft. As one participant in the process put it, the Clinton Administration had essentially embraced the trickle-down economics that Democrats had run against for decades. Kanbur was ordered to rewrite the report to be more "pro-growth." He resigned instead. In the final version, among other changes, discussion of the importance of income distribution to poverty reduction largely disappeared.

A lot of bank staffers were upset by the departures of Stiglitz and Kanbur (though even Stiglitz's supporters concede he was a poor manager), but the public executions were a clear warning to any future dissenters. None of the sources for this article, for example, wanted to be quoted by name, even though the bank's mission statement swears that it is an institution based on an ethic of "personal honesty, integrity, commitment; working together in teams - with openness and trust; empowering others and respecting differences."

Though ostensibly multilateral institutions, and formally part of the United Nations, the World Bank and IMF are essentially run by the US government. As MIT economist Rudiger Dombusch put it a few years ago, "The IMF is a tool of the United States to pursue its economic policy offshore." The bank has a reputation for being a bit softer than its neighbor across Washington's 19th Street; it is, by its mission and by the preferences of many of its staffers, devoted to poverty reduction and economic development, while the IMF is the guardian of financial stability and political orthodoxy. There are some good people with good intentions working for the bank; the fund is staffed mainly by disciplinarians. But the fates of Stiglitz and Kanbur make it clear that there are severe limits on how much good can be talked about, much less done, by the World Bank.

Treasury Secretary Summers, who purged Stiglitz and Kanbur, was himself chief economist at the World Bank from 1991 to 1993. In that role, Summers made headlines when a memo attributed to him - suggesting that Africa was "vastly under-polluted" and that "the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable" - was leaked to the press. This past April, when I asked Summers whether Africa was still vastly underpolluted, he said, after conceding that this was a "fair if not friendly question," that it's long established that he was merely being ironic and provocative. He also praised the 'moral energy" of the protesters who'd come to Washington to complain about the World Bank and the IMF, unaware that I'd overheard him just an hour earlier celebrating the "proactive" arrest of hundreds of them who hadn't committed any crime.

Neither Stiglitz nor Kanbur is a radical by any standard; both are humane reformers who sincerely care about the world's poor. But even that was too much for the World Bank and the IMF. The impeccable logic by which they operate will hear no appeals; their decisions are final.

Doug Henwood is editor of the Left Business Observer.

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