Joseph Stiglitz’s lack of political savvy has produced both a withering critique of IMF-led corporate globalization and a failed vision for how to move beyond it.
Published in the Summer 2007 issue of Dissent.
Joseph Stiglitz neither looks nor behaves like a polished politician. The sixty-four-year-old professor of economics at Columbia University fits the stereotype of the rumpled academic, rushing to lectures with his jackets wrinkled and grey hair unkempt. What he says in his public addresses also runs contrary to most policy-makers’ mannered declarations. Whether out of a willful desire to act impolitic or a simple ignorance of political calculations, Stiglitz has repeatedly violated the decorum of mainstream economic discussion. And in the process he has done more than perhaps any other individual to influence the unfolding debate about globalization.
For the World Bank, Stiglitz’s former employer, and the International Monetary Fund, its sister organization and Stiglitz’s nemesis, none of the economist’s public statements appeared at a less convenient time than his April 2000 article in the New Republic. Published immediately before the largest-ever protests amassed outside the institutions’ headquarters in Washington, D.C., the piece began with two of the most damning and oft-quoted paragraphs in the literature of globalization. Stiglitz wrote:
“Next week’s meeting of the International Monetary Fund will bring to Washington, D.C., many of the same demonstrators who trashed the World Trade Organization in Seattle last fall. They’ll say the IMF is arrogant. They’ll say the IMF doesn’t really listen to the developing countries it is supposed to help. They’ll say the IMF is secretive and insulated from democratic accountability. They’ll say the IMF’s economic ‘remedies’ often make things worse—turning slowdowns into recessions and recessions into depressions.
“And they’ll have a point. I was chief economist at the World Bank from 1996 until last November, during the gravest global economic crisis in a half-century. I saw how the IMF, in tandem with the U.S. Treasury Department, responded. And I was appalled.”
Stiglitz has always been intellectually combative, but that he would become a political renegade was not clear early in his prodigious career. He trained at M.I.T. in the early 60s. By 1970, when he turned twenty-seven, was a full professor at Yale. He made his mark with groundbreaking research on the economics of information. Subsequently moving between teaching jobs at outposts such as Stanford and Princeton, he was long considered a contender for a Nobel Prize in economics, which he would ultimately win in 2001. When President Clinton took office, Stiglitz joined the Council of Economic Advisors, serving as its chair from 1995 to 1997. He then moved into dealing with international policy at the Bank.
The strident criticisms of the IMF that Stiglitz began voicing during his time in office took many beltway observers by surprise. In recent years there have been some tensions between the stern neoliberal taskmasters who staff the IMF and the somewhat softer, at times reform-minded economists at the World Bank. General agreement about policy prevails, however, differences are usually sorted out in private, and broadsides from high-ranking officials are unheard of.
In this context, some have tried to portray Joseph Stiglitz as a spy who defected across enemy lines, going public with his secrets in a tormented effort to end his complicity in an evil ideology. There are two problems with this story. First, it portrays Stiglitz as far more cunning than he actually is. Writing in the American Prospect about the economist’s time in Clinton’s cabinet, Jonathan Chait noted that Stiglitz “goes about his troublemaking with a bemused detachment, as if he were oblivious to the consequences of his heresy. Though he has become a powerful policymaker, Stiglitz behaves as though he were an obscure academic, writing and speaking for no purpose beyond his own enlightenment.” Stiglitz carried this devil-may-care recklessness and disinterest in conforming to the norms of beltway politics with him from the Council of Economic Advisors to the World Bank.
Second, the spy story suggests a sudden ideological conversion that did not, in fact, take place. Economist Ha Joon Chang, who edited a collection of Stiglitz’s speeches from his time as chief economist, entitled Joseph Stiglitz and the World Bank: The Rebel Within, has demonstrated that the future Nobel laureate was an iconoclast virtually from the start of his tenure.
During his first year as the Bank’s chief economist, Stiglitz kept relatively quiet. But in January 1998 he delivered a lecture in Helsinki, Finland, subtitled “Moving Toward the Post-Washington Consensus.” The speech, which Chang contends “now has a near-cult status,” questioned neoliberal economic prescriptions of high interest rates, deregulation, capital liberalization, and privatization for developing countries. It noted that many of the most economically successful nations in East Asia were the ones that had long ignored the IMF’s mandates. And it suggested that IMF policies helped to fuel the financial crisis that struck the region in 1997. As Left Business Observer editor Doug Henwood has remarked, “For a senior World Bank official to say these things is a bit like a Pope denying the Virgin birth.”
The speech was just the beginning. The World Bank president, James Wolfensohn, tried to gently reign in his wayward employee and limit Stiglitz’s contact with the press. He failed. As Stiglitz’s tenure progressed, he became ever more vocal in denouncing the IMF’s handling of the East Asian financial crisis and its program of “shock therapy” in Russia. The IMF and U.S. Treasury were furious. World Bank insiders have claimed that influential and bullying Treasury Secretary Lawrence Summers delivered an ultimatum to Wolfensohn: if he wanted the White House to support him for a second term as World Bank president (and he did), Wolfensohn would have to fire Stiglitz. The chief economist’s resignation was announced in November 1999, the same month, coincidentally, that protests rocked the World Trade Organization ministerial meetings in Seattle.
Anyone who had been listening to activists and progressive intellectuals in the global justice movement would have found little that was novel in Stiglitz’s increasingly outspoken challenges to U.S. economic policy. But never had an insider of Stiglitz’s reputation so forthrightly assailed neoliberal dogma. Stiglitz’s stance lent a newfound, mainstream respectability to other critics’ long-standing arguments. It also signaled a trend. Even as Stiglitz began his assault, other prominent figures in the field, including Princeton economist Paul Krugman and Harvard economists Dani Rodrik and Jeffrey Sachs, would voice further misgivings, albeit moderate ones, about the Washington Consensus. The fortress of neoliberal credibility had been breached, and the once-indomitable ideology has never come close to regaining its former authority.
In an interview with the Financial Times, Stiglitz confirmed that pressure from Summers influenced Wolfensohn, but indicates he was not fired outright. “I was told that I could stay in the Bank,” Stiglitz said, “but if I did I would have to circumscribe my thoughts. So I chose to resign.” After his departure, the World Bank retained Stiglitz as a consultant and special advisor. That is, until his New Republic article appeared. There he flatly stated, “the older men who staff the fund—and they are overwhelmingly older men—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,” Stiglitz wrote, the IMF staff “frequently consists of third-rank students from first-rate universities.”
Lawrence Summers was reportedly seething. The Bank promptly severed all remaining ties with Stiglitz.
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In his 2002 best seller, Globalization and Its Discontents, the full shape of Stiglitz’s critique becomes clear. There, he clearly places his arguments within a framework of general support for economic globalization, writing, “I believe that globalization-the removal of barriers to free trade and the closer integration of national economies-can be a force for good and that it has the potential to enrich everyone in the world, particularly the poor. But I also believe that if this is to be the case, the way globalization has been managed, including? the policies that have been imposed on developing countries? need to be radically rethought.”
One of Stiglitz’s more interesting moves is to link his criticisms with his path-breaking early work on the economics of information. The awarding of the Nobel Prize in economics to Stiglitz in 2001 represented another epic instance of bad timing for defenders of the Washington Consensus. Just as they had hoped to discredit the renegade economist, the Nobel committee enhanced his reputation tremendously. Since Stiglitz’s earlier work was unimpeachable, critics were forced to try a different tack. They sought “to portray Stiglitz as a highly respectable ‘scientist’ gone mad in his old age,” Ha Joon Chang explains. Detractors asserted that he had strayed far from his mainstream research in making his criticisms about the international financial institutions.
Stiglitz explicitly rejects this interpretation. His long-established body of research highlighted ways in which unregulated markets can fail to work properly in real-world circumstances. At the core of neoclassical economics is the assumption that all actors in the market operate with perfect information. Stiglitz writes, “My research? showed that whenever information is imperfect-where some individuals know something that others do not (in other words, always)-the reason that the invisible hand seems invisible is that it is not there.” Asymmetric information leads to distortions in supposedly perfect markets. Thus, “without appropriate government regulation and intervention, markets do not lead to economic efficiency.”
Stiglitz carries his original critique of textbook economic models into his discussion of globalization. He does not so much reject the specific policies of neoliberalism, but rather charges that they have been deployed in far too rigid and ideological a manner. (“I believe in privatization,” he writes in one illustrative moment, “?but only if it helps companies become more efficient and lowers prices for consumers”-outcomes that are most likely to arise if the government intervenes with “strong competition policies.”) The IMF leaves little room for such measured views. It bases its prescriptions on a fundamentalist belief in the infallibility of markets and inefficiency of governments. Because markets are not perfect, the results have been disastrous.
“The IMF has made mistakes in all the areas it has been involved in,” he writes, “development, crisis management, and in countries making the transition from communism to capitalism.” Such errors included “forcing liberalization before safety nets were put in place?; forcing policies that led to job destruction before the essentials for job creation were in place; forcing privatization before there were adequate competition and regulatory frameworks.”
Problems with “pacing” and “sequencing” were especially significant in Russia, where the IMF pushed rapid privatization. Without proper banking systems, competition policy, or government regulation, sales of state industries swiftly devolved into a process of “briberization.” A new class of criminal oligarchs took over state monopolies, forcefully shut out rivals, and fostered rampant government corruption.
With regard to trade policy, Stiglitz points out that the United States and other wealthy nations long protected their infant industries from foreign competition, and even today, while preaching “free trade,” they shield and subsidize domestic enterprise, especially agriculture. The East Asian economies that have most successfully entered the global marketplace did so by carefully controlling the timing of trade liberalization and adopting policies that would ease its social impact.
Beyond questions of pacing, Stiglitz takes the IMF to task for shutting out contrary viewpoints. When he started interacting with the institution, he saw that “Decisions were made on the basis of what seemed a curious blend of ideology and bad economics, dogma that sometimes seemed to be thinly veiling special interests?. There was a single prescription. Alternative opinions were not sought…. Ideology guided policy prescriptions and countries were expected to follow the IMF guidelines without debate.”
The 1997 Asian financial crisis provides a central illustration of ideology gone awry. Although there was little economic evidence showing the benefits of capital market liberalization, and ample evidence suggesting the dangers of speculative “hot money,” the IMF nevertheless pushed the policy aggressively in East Asia. Short-term capital rushed in when it looked like quick profits could be made on speculative real estate investments. But it rushed out just as quickly when there were rumors of economic trouble, provoking a region-wide crisis.
Amid the panic, the IMF stepped in with its standard prescriptions of high interest rates and fiscal austerity. These policies were ostensibly designed to control inflation and resurrect business confidence. But they had the opposite effect. Limiting the supply of money caused more local businesses and banks to fail—and ignited food riots in places like Indonesia—heightening the sense of meltdown. The idea of combating recession with budget cuts recalled Herbert Hoover’s economic thinking, and it never would have been accepted in the United States. But in Asia, the IMF callously argued that the pain of social unrest was part of the tough medicine that the countries would have to swallow.
The impact of IMF failures across the globe, Stiglitz tells us, has been great. Country after country ended up suffering social and political turmoil, a devastated middle class, and little economic growth. “Even those countries that have experienced some limited growth have seen the benefits accrue to the well-off, especially the very well-off-the top 10 percent-while poverty has remained high, and in some cases the income of those at the bottom has even fallen.” The IMF’s original mission was to foster international economic stability. But in this, too, it failed miserably. Despite heralded advances in economic science that are supposedly guiding policy, crises have appeared more frequently, and have done more damage, than before the Bretton Woods system existed.
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The New York Review of Books held that Globalization and Its Discontents “certainly stands as the most forceful argument that has yet been made against the IMF and its policies.” It is hard to disagree. Stiglitz’s blows are still sore subjects at the institution, and many of his arguments, particularly those regarding the perils of unregulated short-term capital flows, have become accepted as new consensus positions among mainstream economists.
To supplement his attacks on market fundamentalism, Stiglitz has more recently sought to present a positive agenda, a vision for Making Globalization Work—the title of the new book he released in fall 2006. Yet here the same thing that made Stiglitz dangerously effective as a critic-his disregard for political considerations-limits him as reformer.
Making Globalization Work is in part a non-technical version of Fair Trade For All, published in 2005, which he wrote with fellow economist Andrew Charlton. It also expands upon policy recommendations mentioned briefly in Globalization and Its Discontents. By the end of that book, Stiglitz makes clear that he fancies himself a modern-day Keynes, an economist willing to use government intervention to rescue the capitalist system from its own shortcomings. In addition to calling for more regulation and improved safety nets, he supports demands for debt relief and increased aid for poor countries. He proposes increased transparency and more democratic representation at the international financial institutions. Finally, in language that sounds rather tepid, especially given the vigor with which he had just slammed the IMF, he advocates “a balanced view of the role of government, one which recognizes both the limitations and failures of markets and government, but which sees the two as working together, in partnership.”
In his new book, Stiglitz reiterates his argument that “the problem is not with globalization itself but in the way globalization has been managed.” He then presents a more elaborate platform of reforms, many based on the economic idea that government should provide incentives that will guide the market to work in the public interest. For example, Stiglitz proposes that “all the countries of the world impose a common tax on carbon emissions” in order to control global warming. “Firms and households would respond to this tax by reducing usage, and thereby admissions.” States could use the revenue from the tax to reduce taxes in other areas, like income or savings, and thus stimulate the economy. All this is in the interest of business and government, he explains, because the long-term costs of global warming (more Katrinas, for starters) will be much more expensive than a common tax.
Among other measures, Stiglitz contends that developed countries should move away from putting neoliberal conditions on their loans to poor nations and create mechanisms for international bankruptcy. In the realm of trade policy, he contends that the U.S. and its wealthy allies should end their hypocritical subsidies for agriculture. In fact, he argues, they should unilaterally open their markets to imports from poor nations, leading by positive example. Moreover, they should design a “balanced intellectual property regime” that creates prizes to encourage innovation but gives poorer countries more access to new technology and allows them to distribute life-saving drugs. Most ambitiously, he proposes a common fund to replace the currently unstable global reserve system, a change that would create capital for social initiatives. Everybody wins from these actions, Stiglitz contends, because “with prosperity, the developing countries will provide a robust market for the goods and services of the advanced industrial countries.”
As such proposals suggest, Stiglitz’s approach is to tinker with the current economic structure, hoping to increase efficiency and create growth with benefits that are more evenly distributed than in the past. He exhibits a resolute faith that the tools of contemporary economic science can produce better solutions to global problems. Indeed, most of Stiglitz’s ideas would be welcome suggestions within a moderate medium-term program for change.
The problem comes with Stiglitz’s disconnection from real-world politics. On repeated occasions, he forthrightly acknowledges that globalization has been managed by and for the rich and powerful. In Globalization and Its Discontents he insightfully observed that many of the IMF’s ideological blind spots formed when it mistook the interests of Wall Street for the national interest of the United States and the general interest of the international community. Since controlling inflation was a priority of the financial community, it is not surprising that it ranked high among IMF concerns-and that maintaining full employment did not. But since the Fund’s economists maintain close ties with Wall Street, and sometimes are “richly rewarded” with lucrative jobs there upon retiring to the private sector, the conflation of interests has only hardened with time.
Yet Stiglitz never seems to take to heart his own acknowledgements that globalization is fraught with special interests. His logic is almost tautological: The advanced industrial nations have not created a fair set of rules in the past, so he proposes that they do so in the future, for fairness’s sake. Poor countries are woefully underrepresented in economic decision-making, and big business consistently blocks reforms. Still, Stiglitz chides protesters in Making Globalization Work for having too one-sided a view of corporations and for portraying them as villains. It is as if his slogan for action is “even-handedness gets the goods.”
Upton Sinclair once famously remarked, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” The wisdom in this maxim bears heavily on Stiglitz’s drive to create a “change in mind-set” among finance ministers and other international elites. As Making Globalization Work progresses, the author’s dance between acknowledging political barriers and retreating into wishful thinking grows tiresome. During one such two-step, he explains: “Those who benefit from the current system will resist change, and they are powerful. But forces for change have already been set in motion.” The passive voice in the second sentence is not incidental. A sense of uncertain passivity pervades his political thinking; he has trouble understanding or often even identifying the forces that can make change possible. And so he writes in blurry strokes: “There will be reforms, even if there are piecemeal ones. ?There are many things that must be done.”
If only we could sidestep politics, Stiglitz’s prescriptions suggest, then impartial policy-makers could weigh the objective merits of different ideas, adopt the best ones, and make the global economy work for all. This liberal scientific fantasy underlies Stiglitz’s political program and is its core weakness.
One might propose a corollary to Stiglitz’s thesis about asymmetrical information in economic markets, one concerning the asymmetrical power in political life. It would hold that whenever the playing field for disputes is tilted-where some individuals have more power than others (in other words, always)-fairness cannot be expected to win out over arrangements that benefit the powerful. Such is certainly the case with globalization. There is no cause to doubt Stiglitz’s good intentions and genuine concern for the poor, and there is ample reason to appreciate his contributions as a critic of neoliberal extremism. But those who are working to fundamentally alter the balance of power between the world’s dominant nations and those at the periphery, between the elite and the impoverished, and between corporations and working people can be forgiven if they base their more thorough-going visions of change on something other than the yet-to-surface enlightened self-interest of those who would save capitalism from itself.
Research assistance for this article provided by Sean Nortz. Photo credit: Jérémy Barande / Ecole polytechnique Université Paris-Saclay.