Globalization and Its Discontents

By Joseph Stiglitz

W.W. Norton 2002 Paperback Buy here

Book Review
Reviewed by Damon Chetson

"Why," asks Nobel Laureate Joseph Stiglitz at the beginning of his latest book, Globalization and Its Discontents, "has globalization- a force that has brought so much good- become so controversial?"

It's an important question, asked by an exceptionally bright economic theorist, about an issue that has captured the world's attention. But, unfortunately, this book offers few satisfying answers.

Joseph Stiglitz has made the jump from obscure technical economist and policy wonk to public intellectual through a combination of his 2001 Nobel Prize in Economics, his experience in Washington-first at the Council of Economic Advisors and later at the World Bank-and this latest book.

To his credit, Stiglitz's punchy writing, passion, and liberal use of anecdotes make the book an interesting read. While Globalization and Its Discontents tackles a difficult subject, it is not a difficult book.

The book's simplicity is part of its failure, however.

Stiglitz's bête noire is the International Monetary Fund, the international organization established in 1944 by allied governments to guide global economic reconstruction following the war and to ensure the future financial stability of governments and, thereby, world markets.

The IMF, whose member nations contribute money to the Fund and are granted voting privileges in proportion to their contributions, chiefly serves as a lender of last resort to governments on the brink of financial collapse. It also, in effect, certifies the financial worthiness of all member nations through "Article 4" consultations, during which IMF bureaucrats periodically examine governments' financial books.

Stiglitz does not object to the Fund, writing approvingly that the IMF was conceived "based on a recognition that markets often did not work well-that they could result in massive unemployment and might fail to make needed funds available to countries to help them restore their economies." (p.12)

But to his chagrin, in the years since its inception, the IMF changed markedly. During his years as chief economist for the World Bank, Stiglitz watched as the IMF "champion[ed] market supremacy with ideological fervor. Founded on the belief that there is need for international pressure on countries to have more expansionary economic policies-such as increasing expenditures, reducing taxes, or lowering interest rates to stimulate the economy-today the IMF typically provides funds only if countries engage in policies like cutting deficits, raising taxes, or raising interest rates." (p.12)

That, in a paragraph, sums up the book. Dominated by a group of "market fundamentalists" who captured the IMF in the Reagan-Thatcher 1980s, the Fund discarded old Keynesian thinking in favor of a new approach that stressed keeping inflation down and governmental budgets in balance. Those policies, writes Stiglitz, a neo-Keynesian, are exactly wrong.

Stiglitz is justifiably critical of the IMF when it imposes its advice on unwilling countries in dire straits by attaching conditions on the emergency loans the Fund extends. Accepting those conditions-usually some combination of fiscal austerity and anti- inflationary policies-is the price governments pay for both IMF loans and, often, support from the financial markets: "A public announcement by the IMF that negotiations had broken off, or even been postponed, would send a highly negative signal to markets. This signal would at best lead to higher interest rates and at worst a total cutoff from private funds." (pp. 42-43)

Those who believe in democracy and the IMF are in a bind. The imposition of IMF-approved policies on democratically-elected governments seems unjust. Indeed, both conditionality and the high-handed manner with which IMF officials seemingly dictate those policies gall critics. However, most agree that as with any creditor-debtor relationship, financial institutions have a right to impose conditions as a price for granting loans. If the IMF and financial institutions are forbidden from imposing any conditions, they can hardly be expected to continue to loan money.

How can we escape this dilemma?

Stiglitz's answers are consensus and transparency. But consensus is never defined in the book. One might ask of Stiglitz: when governments agree to IMF policies, whose viewpoints should be considered in the consensus? Does consensus generate better policy? And, if so, what institutions ought to help the various parties arrive at consensus? Those questions are largely ignored.

Instead, consensus in Globalization and Its Discontents is often another term for the policies Joseph Stiglitz himself advocates. For instance, governments that rebuke the IMF in favor of expansionary monetary policy, full employment, and increasing expenditures are the heroes of the book. Governments that go along with the IMF are either cowed into submission or wrong.

Stiglitz's demands for transparency at the IMF are more legitimate. Recent history suggests that transparent governance results in greater accountability and, at some level, improved efficiency. New Zealand's improvements in transparency were partly responsible for helping reform its bureaucracy in the early 1990s.

Beyond consensus and transparency, Stiglitz has little to recommend to those seeking advice on how to restructure the way global economic and financial policy is created. He fails because he seems to be innocent of 40 years of scholarship in public choice economics, new institutional economics, and political economy.

For instance, public choice economics suggests that consensus-building may generate worse policy by bringing to the fore groups who threaten to block reform until their demands are satisfied. Corporations may demand special tax breaks, unions may resist cuts in social welfare programs, and so forth. The resulting policy can end up being worse than doing nothing at all.

Stiglitz, moreover, is guilty of confusing IMF policy with truly free market solutions. The shock therapy, for instance, that he blames for "losing Russia" was hardly an exercise in laissez faire economics. Privatization of most industry happened in name only, leaving firms under the joint control of municipalities and private investors-a far cry from genuine privatization.

Stiglitz's confusion in this regard makes his critiques of the IMF less compelling. True "market fundamentalists," to use his term, would agree with many of his criticisms. South Korea's price for accepting IMF loans was the conversion of private corporate loans into private debt, leaving Korean taxpayers holding the bag for the mistakes of highly leveraged firms.

That response to South Korea's financial crisis is objectionable both for saddling innocent taxpayers with massive debt and for creating a moral hazard problem. Western bankers are likely to extend loans to risky firms in developing countries and those firms are likely to become too highly leveraged because they know that at the end of the day the government and the IMF will pick up the tab.

Stiglitz's implicit response is that he or economists like him ought to be in charge. But, assuming his prescriptions for world financial health are the right ones, what institutional structures will ensure good policy or good outcomes over the long haul?

A deeper question might be: why do we need the IMF anyway? A world in which governments were responsible for their own financial health would be a world without IMF-imposed policies, a world without arrogant IMF oversight of governments' financial books, and a world in which firms in developing countries could no longer expect bailouts from their governments with the help of the IMF.

It's a question that Stiglitz never considers.

Unschooled in recent work in political economy and confused about "market fundamentalism," Stiglitz does little more than note past IMF failures.