Maverick Nobel prize-winning economist Stiglitz lifts the lid on his years as Chief Economist to the World Bank and what really goes on behind the scenes. Though he’s certainly no Marxist, his insights confirm the correctness of the Marxist outlook on the world economy and its ruling institutions. However, Stiglitz’s book is not really about globalisation. It’s about global institutions, particularly the International Monetary Fund and the World Bank. Joseph comes across in his book as a decent cove who took the top job so he could improve his fellow human beings’ lot. He did not succeed.
He asked himself "What could we do about the 1.2 billion people around the world living on less than a dollar a day, or the 2.8 billion people living on less than $2 a day - more than 45 percent of the world’s population?" His answer came back from the facts in the book - their plight actually got worse over the 1990s.
Certainly there’s a bit about the turf wars between the two bureaucracies of the IMF and the World Bank in his account. The IMF, in particular, is driven by a hard right theory called the Washington Consensus - Stiglitz describes it as ‘market fundamentalism’.
Stiglitz’s story is devastating. The IMF screwed up big time. Every chapter heading tells the tale - ‘The East Asia crisis: how IMF policies brought the world to the verge of a global meltdown’ and ‘Who lost Russia?’ are examples. The problem, according to Stiglitz, is ‘mistaken economic theories’. Is that really all there is to it?
The East Asia crisis
The East Asia crisis began in the summer of 1997 when a tidal wave of speculation drowned the Thai currency, the baht. It emerged that Thai capitalists had been borrowing from abroad like there was no tomorrow to ‘invest’ in property speculation. As a result they were running a big deficit with the rest of the world. And Western banks were happy to hurl money at them. Then the property bubble burst, as bubbles do. The collapse led to a ‘contagion’ of slump spreading throughout the region.
According to Stiglitz, in East Asia after 1997 "IMF policies not only exacerbated the downturns but were partially responsible for the onset". And he’s right. "The IMF typically provides funds only if countries engage in policies like cutting deficits, raising taxes or raising interest rates that lead to a contraction of the economy." and "Countries were told that when facing a downturn they must cut back on their trade deficit, and even build a trade surplus". This is like the medieval doctors’ remedy of bleeding a patient or applying leeches to their limbs when they were suffering from a fever. The patient stopped being feverish - sometimes by dying - because of the shortage of blood. But the fever, like the trade deficit, was just the symptom, not the disease itself. And how were the deficits to be curbed? Well, by making the people so poor (bleeding them) that they couldn’t afford to buy imports any more. As Richard Littlejohn says, ‘you couldn’t make it up’. But that’s what the IMF insisted on.
Why not stop paying? "Bankruptcy and standstills were not (and are still not) welcome options, for they meant that the creditors would not be repaid". Likewise devaluation is ruled out by IMF orthodoxy for a country in crisis. Why? Because it means creditors will be paid out in devalued coin. And tariffs? No, no. That would stop capitalists in the rich countries blowing developing country industries out of the water. "With tariffs and devaluation ruled out there were but two ways to build a trade surplus… to reduce imports - by cutting incomes, that is, inducing a major recession." These countries traded with each other heavily and so were very economically interdependent. The collapse in Thailand resounded round the region; just as drunks can support each other till one stumbles - then they all go down.
The IMF is not about ‘mistaken economic theories’. It is about the hard-faced interests of creditors. When the IMF goes in it does so to save the creditors, that is the rich financial institutions in the advanced capitalist countries not the wretched of the earth, as we shall see in Stiglitz’s case study of Russia. Does a loan shark worry if the occasional wretched victim is driven to suicide? No, ‘it’s a lesson to the others’. And if the IMF have made things much, much worse for their favourite patient - Argentina - as Joseph Stiglitz convincingly shows they have, then that’s just too bad.
The IMF’s quack remedies
Not only did the IMF crash round the third world making people poorer as a deliberate act of policy, they awarded certificates of credit-worthiness to national economies according to how emaciated they had made them. Their credit rating is an important badge for poor countries to win so western banks will keep on lending to them. Take the well-known basket case Argentina, for instance, " a country like Argentina can get an IMF ‘A’ grade, even if it has double-digit unemployment for years, so long as its budget seems in balance and its inflation seems in control."
This seems heartless lunacy to Stiglitz and, I expect to readers of this website. But, "though this be madness, yet there be method in it", to quote Shakespeare. Argentina got an IMF ‘A’ grade for starving its children. Likewise a money lender doesn’t care whether a debtor starves their children as long as they get their payments in on time.
And surely that’s the point. The IMF is not an institution for making poor people’s lives better. It’s a debt enforcer for the rich countries. With IMF ‘rescue’ operations "there were billions and billions for corporate welfare, but not the more modest millions for welfare for ordinary citizens."
Stiglitz occasionally hints at the deeper problem with the IMF and other global capitalist institutions, as in the chapter ‘The IMF’s other agenda’. "Stan Fischer, the deputy managing director who played such a role in the episodes described in this book, went directly from the IMF to become a vice chairman at Citicorp, the vast financial firm that includes Citibank. One could only ask, was Fischer being richly rewarded for having faithfully executed what he was told to do?"
He goes on, "The IMF is pursuing not just the objectives…of enhancing global stability and ensuring that there are funds to pursue expansionary policies. It is also pursuing the interests of the financial community. That means the IMF has objectives that are often in conflict with each other." And, as an insider, he can spell it out in chapter and verse.
For instance Siglitz convincingly makes the case that removing capital controls puts small countries at the mercy of waves of speculative ‘hot’ money, and destabilises their economies. And yet the IMF in particular just takes it for granted that it’s got to happen. Is this because it’s in the interests of the bankers who run the IMF? "Surely...there must be some basis for their position, beyond serving the naked self-interest of financial markets, which saw capital market liberalization as just another form of market access".
After the East Asian catastrophe that the IMF did so much to make worse, the unfortunate countries in the region had to sell their assets at what Stiglitz calls ‘bargain basement prices’. Who conducted these sales and trousered the juicy commissions? "The sales were handled by the same foreign financial institutions that had pulled out their capital, precipitating the crisis." These Western banks are like that contract killer bloke in the ‘Road to Perdition’ who moonlights for the papers by taking photos of the deceased - who he’s just killed.
Wrong on the IMF
However, Joseph Stiglitz is dead wrong about one thing. He thinks the IMF has been subverted from its original purpose. "Over the years since its inception, the IMF has changed markedly…. Founded on the belief that there is a need for international pressure on countries to have more expansionary economic policies…". In other words Stiglitz believes the IMF was an institution founded on Keynesian principles.
And he believes Keynes to have been a great man. "In the 1930s, capitalism was saved by Keynes, who thought of policies to create jobs and rescue those suffering from the collapse of the global economy."
Actually the Great Depression bottomed out in 1933. It is true that in 1936, the year in which the first edition of Keynes’ principal work ‘The general theory of employment, interest and money’ was published, tens of millions languished in poverty and unemployment all over the world. But Keynes was regarded as a rebel against the then economic orthodoxy, and at first his book had no effect on policy. It was only during the Second World War, when workers swapped the horrors of war for unemployment, that Keynesianism became the new orthodoxy.
Keynes went to the Bretton Woods Conference at the end of the War as the most famous economist in the world. He had a plan for the international economic institutions - the IMF and World Bank - which the proceedings set up. Contrary to Stiglitz’s ‘history’ his plan was utterly rejected. Surely not because Keynes was stupid or his arguments were wrong! Keynes lost for the same reason the poor countries always lose the argument now. He was the representative of a debtor country - Britain - that had no negotiating muscle. His American counterpart Harry Dexter White bulldozed all his proposals through on behalf of the only creditor country in the world at that time. As the economic powerhouse the States could call all the shots. The IMF and World Bank were set up from the word go as muscle men for the rich and powerful.
The Russian ‘rescue’
In case you think Stiglitz is just some big softy among bourgeois economists, he is also very critical of the IMF rescue plan for Russia the following year. And he’s quite right. The Russian rouble was massively overvalued by any objective criterion in 1998, a dead parrot nailed to its perch by massive interest rates. "If for… the country as a whole, the overvalued exchange rate was a disaster, for the new class of businessmen the overvalued exchange rate was a boon. They needed fewer roubles to buy their Mercedes, their Chanel handbags, and imported Italian gourmet foods. For the oligarchs trying to get their money out of the country too, the overvalued exchange rate was a boon - it meant they could get more dollars for their roubles, as they squirreled away their profits in foreign bank accounts". So the IMF conspired with the mafia in the restoration of capitalism, as the ruin of Russia was called.
The IMF mobilized millions (of our money when it comes to it) to save the rouble from the speculators. They failed. "By lending Russia money for a doomed cause, IMF policies led Russia into deeper debt, with nothing to show for it. The cost of the mistake was not borne by the IMF officials who gave the loan, or America who had pushed for it, or the Western bankers and the oligarchs who benefited from the loan, but by the Russian taxpayer." The IMF throughout this episode "allowed a few smart money managers (more accurately white-collar criminals - if they did what they did in the…United States, they would be behind bars) to walk off with millions of dollars of others’ money." Why? As Stiglitz explains, "bankruptcy and standstills were not welcome options, for they meant that the creditors would not be repaid." The IMF was not bailing out the Russian people. On the contrary, they picked up the bill. They were bailing out their taskmasters, the Western banks.
What guarantees did the prudent and experienced bankers at the helm of the IMF demand? Just the word of a scoundrel. "When Chubais was asked if the Russian government has the right to lie to the IMF about the true fiscal situation, he literally said, ‘In such situations the authorities have to do it. We ought to. The financial institutions, despite the fact that we conned them out of $20 billion, knew that we had no other way out.’" To add insult to injury, "When the IMF was confronted with the facts - the billions of dollars that it had given (loaned) Russia was showing up in Cypriot and Swiss bank accounts just days after the loan was made - it claimed that these weren’t their dollars."
Joseph Stiglitz is not a socialist. One of his chapters is entitled ‘Better roads to the market’. Though he agrees with privatization (or ‘briberization’ as he tells us it is called) in Russia and Eastern Europe in principle, he believes the way it was carried out was botched. The least unsuccessful of the East European economies is Poland. "former deputy premier and finance minister Grzegorz W. Kolodko has argued that the success of his nation was due to its explicit rejection of the doctrines of the Washington Consensus.". And Stiglitz concludes that in the case of Russia, in taking the ‘best’ advice from the West’s economic establishment, "must treat what has happened as pillage of national assets, a theft for which the nation can never be recompensed."
Stiglitz’s comments on opening up to foreign capital give the lie to the notion that the power of nation states being washed away by the tide of money of ‘globalisation’. On the contrary the imperialist powers use the global institutions - the Bank, IMF and the World Trade Organisation - to jemmy open the markets of the poor countries. The French government, for instance went out to bat for their water company Suez Lyonnnaise, which unexpectedly found itself in a bum deal when it bought in to an Argentinian water utility. The French government used its influence to see Suez Lyonnnaise alright - at the expense of the Argentinian people, of course. Free markets? They’re OK for suckers.
‘Do what we say, not what we do’ is imperialism’s watchword. Look at Botswana. "Shortly after independence, the (diamond) cartel paid Botswana $20 million for a diamond concession in 1969, which reportedly returned $60 million in profits a year. In other words the payback period was four months!" An IMF economist advised Botswana, strictly off the record, that this was not a good deal. The Bank demanded it be understood the economist was not advising Botswana on behalf of the World Bank. Botswana replied, ‘that is precisely why we are listening to him.’
Or let’s look at Haiti for another instance of the lunacy of market fundamentalism. Haiti had their arms twisted to lift all controls on imports of grain. American grain imports poured in, all propped up with massive subsidies from the American government, and sank the small farmers. According to the neoliberals, the resources thus ‘liberated’ should have automatically ‘flowed’ to some other and more productive use. Strangely, they didn’t. The ‘resources’ (peasants) starved and starve still. As Stiglitz puts it, "….moving resources from low-productivity uses to zero productivity does not enrich a country, and this is what happened all too often."
Joseph Stiglitz presents a trenchant critique of economic orthodoxy in practice. He shows the economic theory they operate on is rubbish. He is not always clear that ‘mistaken economic theories’ are not the root of the problem. The economics is indeed rubbish, but it is rubbish that well serves the interests of the rich and powerful. Joseph Stiglitz has done us all a favour by showing the squalid, self-serving nature of our ruling financial institutions.
February 3, 2003
It’s official - capitalism doesn’t work
By Mick Brooks
In his book ‘the Wealth of Nations’ (regarded as the founding classic of bourgeois economics) Adam Smith gives us his alternative to planning the economy, as we socialists advocate. It is the ‘invisible hand’ of self-interest. We look to get our daily bread from the butcher, baker and brewer not by appealing to their altruism but by reminding them (if they need reminding) that it is in their interests to produce the goods and sell them to us.
Smith says, "by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention".
Got it? Self-interest means chasing the money. You can’t make money in the end, Adam Smith asserts, unless you produce something someone wants enough to pay for.
We have a very slight problem. Capitalism doesn’t present the fine picture of the harmonisation of interests Adam Smith paints, where all’s for the best in the best of all possible worlds. What’s wrong with the theory of the invisible hand?
In a recent article in the Guardian, Joseph Stiglitz quotes the research of a psychologist Kahneman who "shows not only that individuals sometimes act differently than standard economic theories predict, but that they do so regularly, systematically and in ways that can be understood and interpreted through alternative hypotheses, competing with those utilised by orthodox economists." Stiglitz goes on to draw the conclusion that last year’s Nobel prize winners "implied that markets were not, in general efficient…Adam Smith’s invisible hand - the idea that free markets lead to efficiency as if guided by unseen forces - is invisible, at least in part because it is not there." The article is entitled ‘There is no invisible hand’!
The problem, as Stiglitz sees it, is that people don’t always know what’s best for them. And the people who want to find out what they want so they can supply it are also not omniscient, as economists say in the trade (that means they don’t have all the information in the world before them). What sort of doctor would let you dose yourself up against an illness with pills that were yellow, just because that was your favourite colour?
But if you don’t always know what’s best, what chance has anyone else got of guessing? Adam Smith’s homely example of the village alewife and baker is profoundly misleading. They might know what people want, but that’s because they know everyone in the village, not because of ‘market signals’. What chance do modern multinationals have of reading our minds? Perhaps that’s why they spend so much money on advertising and such like in trying to tell us what to like.
If the invisible hand doesn’t work, that means socialist planning is on the agenda.