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>Subject: [ATTAC CHAT] What I learned at the world economic crisis.
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>What I learned at the world economic crisis.
>The Insider
>
>By JOSEPH STIGLITZ
>Issue date: 04.17.00
>Post date: 04.06.00
>
>
>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.
>
>The global economic crisis began in Thailand, on July 2, 1997. The
>countries of East Asia were coming off a miraculous three decades:
>incomes had soared, health had improved, poverty had fallen
>dramatically. Not only was literacy now universal, but, on
>international science and math tests, many of these countries
>outperformed the United States. Some had not suffered a single year of
>recession in 30 years.
>
>But the seeds of calamity had already been planted. In the early '90s,
>East Asian countries had liberalized their financial and capital
>markets--not because they needed to attract more funds (savings rates
>were already 30 percent or more) but because of international
>pressure, including some from the U.S. Treasury Department. These
>changes provoked a flood of short-term capital--that is, the kind of
>capital that looks for the highest return in the next day, week, or
>month, as opposed to long-term investment in things like factories. In
>Thailand, this short-term capital helped fuel an unsustainable real
>estate boom. And, as people around the world (including Americans)
>have painfully learned, every real estate bubble eventually bursts,
>often with disastrous consequences. Just as suddenly as capital flowed
>in, it flowed out. And, when everybody tries to pull their money out
>at the same time, it causes an economic problem. A big economic
>problem.
>
>The last set of financial crises had occurred in Latin America in the
>1980s, when bloated public deficits and loose monetary policies led to
>runaway inflation. There, the IMF had correctly imposed fiscal
>austerity (balanced budgets) and tighter monetary policies, demanding
>that governments pursue those policies as a precondition for receiving
>aid. So, in 1997 the IMF imposed the same demands on Thailand.
>Austerity, the fund's leaders said, would restore confidence in the
>Thai economy. As the crisis spread to other East Asian nations--and
>even as evidence of the policy's failure mounted--the IMF barely
>blinked, delivering the same medicine to each ailing nation that
>showed up on its doorstep.
>
>I thought this was a mistake. For one thing, unlike the Latin American
>nations, the East Asian countries were already running budget
>surpluses. In Thailand, the government was running such large
>surpluses that it was actually starving the economy of much-needed
>investments in education and infrastructure, both essential to
>economic growth. And the East Asian nations already had tight monetary
>policies, as well: inflation was low and falling. (In South Korea, for
>example, inflation stood at a very respectable four percent.) The
>problem was not imprudent government, as in Latin America; the problem
>was an imprudent private sector--all those bankers and borrowers, for
>instance, who'd gambled on the real estate bubble.
>
>Under such circumstances, I feared, austerity measures would not
>revive the economies of East Asia--it would plunge them into recession
>or even depression. High interest rates might devastate highly
>indebted East Asian firms, causing more bankruptcies and defaults.
>Reduced government expenditures would only shrink the economy further.
>
>So I began lobbying to change the policy. I talked to Stanley Fischer,
>a distinguished former Massachusetts Institute of Technology economics
>professor and former chief economist of the World Bank, who had become
>the IMF's first deputy managing director. I met with fellow economists
>at the World Bank who might have contacts or influence within the IMF,
>encouraging them to do everything they could to move the IMF
>bureaucracy.
>
>Convincing people at the World Bank of my analysis proved easy;
>changing minds at the IMF was virtually impossible. When I talked to
>senior officials at the IMF--explaining, for instance, how high
>interest rates might increase bankruptcies, thus making it even harder
>to restore confidence in East Asian economies--they would at first
>resist. Then, after failing to come up with an effective
>counterargument, they would retreat to another response: if only I
>understood the pressure coming from the IMF board of executive
>directors--the body, appointed by finance ministers from the advanced
>industrial countries, that approves all the IMF's loans. Their meaning
>was clear. The board's inclination was to be even more severe; these
>people were actually a moderating influence. My friends who were
>executive directors said they were the ones getting pressured. It was
>maddening, not just because the IMF's inertia was so hard to stop but
>because, with everything going on behind closed doors, it was
>impossible to know who was the real obstacle to change. Was the staff
>pushing the executive directors, or were the executive directors
>pushing the staff? I still do not know for certain.
>
>Of course, everybody at the IMF assured me they would be flexible: if
>their policies really turned out to be overly contractionary, forcing
>the East Asian economies into deeper recession than necessary, then
>they would reverse them. This sent shudders down my spine. One of the
>first lessons economists teach their graduate students is the
>importance of lags: it takes twelve to 18 months before a change in
>monetary policy (raising or lowering interest rates) shows its full
>effects. When I worked in the White House as chairman of the Council
>of Economic Advisers, we focused all our energy on forecasting where
>the economy would be in the future, so we could know what policies to
>recommend today. To play catch-up was the height of folly. And that
>was precisely what the IMF officials were proposing to do.
>
>I shouldn't have been surprised. The IMF likes to go about its
>business without outsiders asking too many questions. In theory, the
>fund supports democratic institutions in the nations it assists. In
>practice, it undermines the democratic process by imposing policies.
>Officially, of course, the IMF doesn't "impose" anything. It
>"negotiates" the conditions for receiving aid. But all the power in
>the negotiations is on one side--the IMF's--and the fund rarely allows
>sufficient time for broad consensus-building or even widespread
>consultations with either parliaments or civil society. Sometimes the
>IMF dispenses with the pretense of openness altogether and negotiates
>secret covenants.
>
>When the IMF decides to assist a country, it dispatches a "mission" of
>economists. These economists frequently lack extensive experience in
>the country; they are more likely to have firsthand knowledge of its
>five-star hotels than of the villages that dot its countryside. They
>work hard, poring over numbers deep into the night. But their task is
>impossible. In a period of days or, at most, weeks, they are charged
>with developing a coherent program sensitive to the needs of the
>country. Needless to say, a little number-crunching rarely provides
>adequate insights into the development strategy for an entire nation.
>Even worse, the number-crunching isn't always that good. The
>mathematical models the IMF uses are frequently flawed or out-of-date.
>Critics accuse the institution of taking a cookie-cutter approach to
>economics, and they're right. Country teams have been known to compose
>draft reports before visiting. I heard stories of one unfortunate
>incident when team members copied large parts of the text for one
>country's report and transferred them wholesale to another. They might
>have gotten away with it, except the "search and replace" function on
>the word processor didn't work properly, leaving the original
>country's name in a few places. Oops.
>
>It's not fair to say that IMF economists don't care about the citizens
>of developing nations. But 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, the economic leaders from those
>countries are pretty good--in many cases brighter or better-educated
>than the IMF staff, which frequently consists of third-rank students
>from first-rate universities. (Trust me: I've taught at Oxford
>University, MIT, Stanford University, Yale University, and Princeton
>University, and the IMF almost never succeeded in recruiting any of
>the best students.) Last summer, I gave a seminar in China on
>competition policy in telecommunications. At least three Chinese
>economists in the audience asked questions as sophisticated as the
>best minds in the West would have asked.
>
>As time passed, my frustration mounted. (One might have thought that
>since the World Bank was contributing literally billions of dollars to
>the rescue packages, its voice would be heard. But it was ignored
>almost as resolutely as the people in the affected countries.) The IMF
>claimed that all it was asking of the East Asian countries was that
>they balance their budgets at a time of recession. All? Hadn't the
>Clinton administration just fought a major battle with Congress to
>stave off a balanced-budget amendment in this country? And wasn't the
>administration's key argument that, in the face of recession, a little
>deficit spending might be necessary? This is what I and most other
>economists had been teaching our graduate students for 60 years. Quite
>frankly, a student who turned in the IMF's answer to the test question
>"What should be the fiscal stance of Thailand, facing an economic
>downturn?" would have gotten an F.
>
>As the crisis spread to Indonesia, I became even more concerned. New
>research at the World Bank showed that recession in such an ethnically
>divided country could spark all kinds of social and political turmoil.
>So in late 1997, at a meeting of finance ministers and central-bank
>governors in Kuala Lumpur, I issued a carefully prepared statement
>vetted by the World Bank: I suggested that the excessively
>contractionary monetary and fiscal program could lead to political and
>social turmoil in Indonesia. Again, the IMF stood its ground. The
>fund's managing director, Michel Camdessus, said there what he'd said
>in public: that East Asia simply had to grit it out, as Mexico had. He
>went on to note that, for all of the short-term pain, Mexico emerged
>from the experience stronger.
>
>
>But this was an absurd analogy. Mexico hadn't recovered because the
>IMF forced it to strengthen its weak financial system, which remained
>weak years after the crisis. It recovered because of a surge of
>exports to the United States, which took off thanks to the U.S.
>economic boom, and because of nafta. By contrast, Indonesia's main
>trading partner was Japan--which was then, and still remains, mired in
>the doldrums. Furthermore, Indonesia was far more politically and
>socially explosive than Mexico, with a much deeper history of ethnic
>strife. And renewed strife would produce massive capital flight (made
>easy by relaxed currency-flow restrictions encouraged by the IMF). But
>none of these arguments mattered. The IMF pressed ahead, demanding
>reductions in government spending. And so subsidies for basic
>necessities like food and fuel were eliminated at the very time when
>contractionary policies made those subsidies more desperately needed
>than ever.
>
>By January 1998, things had gotten so bad that the World Bank's vice
>president for East Asia, Jean Michel Severino, invoked the dreaded
>r-word ("recession") and d-word ("depression") in describing the
>economic calamity in Asia. Lawrence Summers, then deputy treasury
>secretary, railed against Severino for making things seem worse than
>they were, but what other way was there to describe what was
>happening? Output in some of the affected countries fell 16 percent or
>more. Half the businesses in Indonesia were in virtual bankruptcy or
>close to it, and, as a result, the country could not even take
>advantage of the export opportunities the lower exchange rates
>provided. Unemployment soared, increasing as much as tenfold, and real
>wages plummeted--in countries with basically no safety nets. Not only
>was the IMF not restoring economic confidence in East Asia, it was
>undermining the region's social fabric. And then, in the spring and
>summer of 1998, the crisis spread beyond East Asia to the most
>explosive country of all--Russia.
>
>The calamity in Russia shared key characteristics with the calamity in
>East Asia--not least among them the role that IMF and U.S. Treasury
>policies played in abetting it. But, in Russia, the abetting began
>much earlier. Following the fall of the Berlin Wall, two schools of
>thought had emerged concerning Russia's transition to a market
>economy. One of these, to which I belonged, consisted of a melange of
>experts on the region, Nobel Prize winners like Kenneth Arrow and
>others. This group emphasized the importance of the institutional
>infrastructure of a market economy--from legal structures that enforce
>contracts to regulatory structures that make a financial system work.
>Arrow and I had both been part of a National Academy of Sciences group
>that had, a decade earlier, discussed with the Chinese their
>transition strategy. We emphasized the importance of fostering
>competition--rather than just privatizing state-owned industries--and
>favored a more gradual transition to a market economy (although we
>agreed that occasional strong measures might be needed to combat
>hyperinflation).
>
>The second group consisted largely of macroeconomists, whose faith in
>the market was unmatched by an appreciation of the subtleties of its
>underpinnings--that is, of the conditions required for it to work
>effectively. These economists typically had little knowledge of the
>history or details of the Russian economy and didn't believe they
>needed any. The great strength, and the ultimate weakness, of the
>economic doctrines upon which they relied is that the doctrines
>are--or are supposed to be--universal. Institutions, history, or even
>the distribution of income simply do not matter. Good economists know
>the universal truths and can look beyond the array of facts and
>details that obscure these truths. And the universal truth is that
>shock therapy works for countries in transition to a market economy:
>the stronger the medicine (and the more painful the reaction), the
>quicker the recovery. Or so the argument goes.
>
>Unfortunately for Russia, the latter school won the debate in the
>Treasury Department and in the IMF. Or, to be more accurate, the
>Treasury Department and the IMF made sure there was no open debate and
>then proceeded blindly along the second route. Those who opposed this
>course were either not consulted or not consulted for long. On the
>Council of Economic Advisers, for example, there was a brilliant
>economist, Peter Orszag, who had served as a close adviser to the
>Russian government and had worked with many of the young economists
>who eventually assumed positions of influence there. He was just the
>sort of person whose expertise Treasury and the IMF needed. Yet,
>perhaps because he knew too much, they almost never consulted him.
>
>We all know what happened next. In the December 1993 elections,
>Russian voters dealt the reformers a huge setback, a setback from
>which they have yet really to recover. Strobe Talbott, then in charge
>of the noneconomic aspects of Russia policy, admitted that Russia had
>experienced "too much shock and too little therapy." And all that
>shock hadn't moved Russia toward a real market economy at all. The
>rapid privatization urged upon Moscow by the IMF and the Treasury
>Department had allowed a small group of oligarchs to gain control of
>state assets. The IMF and Treasury had rejiggered Russia's economic
>incentives, all right--but the wrong way. By paying insufficient
>attention to the institutional infrastructure that would allow a
>market economy to flourish--and by easing the flow of capital in and
>out of Russia--the IMF and Treasury had laid the groundwork for the
>oligarchs' plundering. While the government lacked the money to pay
>pensioners, the oligarchs were sending money obtained by stripping
>assets and selling the country's precious national resources into
>Cypriot and Swiss bank accounts.
>
>The United States was implicated in these awful developments. In
>mid-1998, Summers, soon to be named Robert Rubin's successor as
>secretary of the treasury, actually made a public display of appearing
>with Anatoly Chubais, the chief architect of Russia's privatization.
>In so doing, the United States seemed to be aligning itself with the
>very forces impoverishing the Russian people. No wonder
>antiAmericanism spread like wildfire.
>
>At first, Talbott's admission notwithstanding, the true believers at
>Treasury and the IMF continued to insist that the problem was not too
>much therapy but too little shock. But, through the mid-'90s, the
>Russian economy continued to implode. Output plummeted by half. While
>only two percent of the population had lived in poverty even at the
>end of the dismal Soviet period, "reform" saw poverty rates soar to
>almost 50 percent, with more than half of Russia's children living
>below the poverty line. Only recently have the IMF and Treasury
>conceded that therapy was undervalued--though they now insist they
>said so all along.
>
>Today, Russia remains in desperate shape. High oil prices and the
>long-resisted ruble devaluation have helped it regain some footing.
>But standards of living remain far below where they were at the start
>of the transition. The nation is beset by enormous inequality, and
>most Russians, embittered by experience, have lost confidence in the
>free market. A significant fall in oil prices would almost certainly
>reverse what modest progress has been made.
>
>East Asia is better off, though it still struggles, too. Close to 40
>percent of Thailand's loans are still not performing; Indonesia
>remains deeply mired in recession. Unemployment rates remain far
>higher than they were before the crisis, even in East Asia's
>best-performing country, Korea. IMF boosters suggest that the
>recession's end is a testament to the effectiveness of the agency's
>policies. Nonsense. Every recession eventually ends. All the IMF did
>was make East Asia's recessions deeper, longer, and harder. Indeed,
>Thailand, which followed the IMF's prescriptions the most closely, has
>performed worse than Malaysia and South Korea, which followed more
>independent courses.
>
>
>I was often asked how smart--even brilliant--people could have created
>such bad policies. One reason is that these smart people were not
>using smart economics. Time and again, I was dismayed at how
>out-of-date--and how out-of-tune with reality--the models Washington
>economists employed were. For example, microeconomic phenomena such as
>bankruptcy and the fear of default were at the center of the East
>Asian crisis. But the macroeconomic models used to analyze these
>crises were not typically rooted in microfoundations, so they took no
>account of bankruptcy.
>
>But bad economics was only a symptom of the real problem: secrecy.
>Smart people are more likely to do stupid things when they close
>themselves off from outside criticism and advice. If there's one thing
>I've learned in government, it's that openness is most essential in
>those realms where expertise seems to matter most. If the IMF and
>Treasury had invited greater scrutiny, their folly might have become
>much clearer, much earlier. Critics from the right, such as Martin
>Feldstein, chairman of Reagan's Council of Economic Advisers, and
>George Shultz, Reagan's secretary of state, joined Jeff Sachs, Paul
>Krugman, and me in condemning the policies. But, with the IMF
>insisting its policies were beyond reproach--and with no institutional
>structure to make it pay attention--our criticisms were of little use.
>More frightening, even internal critics, particularly those with
>direct democratic accountability, were kept in the dark. The Treasury
>Department is so arrogant about its economic analyses and
>prescriptions that it often keeps tight--much too tight--control over
>what even the president sees.
>
>
>Open discussion would have raised profound questions that still
>receive very little attention in the American press: To what extent
>did the IMF and the Treasury Department push policies that actually
>contributed to the increased global economic volatility? (Treasury
>pushed liberalization in Korea in 1993 over the opposition of the
>Council of Economic Advisers. Treasury won the internal White House
>battle, but Korea, and the world, paid a high price.) Were some of the
>IMF's harsh criticisms of East Asia intended to detract attention from
>the agency's own culpability? Most importantly, did America--and the
>IMF--push policies because we, or they, believed the policies would
>help East Asia or because we believed they would benefit financial
>interests in the United States and the advanced industrial world? And,
>if we believed our policies were helping East Asia, where was the
>evidence? As a participant in these debates, I got to see the
>evidence. There was none.
>
>Since the end of the cold war, tremendous power has flowed to the
>people entrusted to bring the gospel of the market to the far corners
>of the globe. These economists, bureaucrats, and officials act in the
>name of the United States and the other advanced industrial countries,
>and yet they speak a language that few average citizens understand and
>that few policymakers bother to translate. Economic policy is today
>perhaps the most important part of America's interaction with the rest
>of the world. And yet the culture of international economic policy in
>the world's most powerful democracy is not democratic.
>
>This is what the demonstrators shouting outside the IMF next week will
>try to say. Of course, the streets are not the best place to discuss
>these highly complex issues. Some of the protesters are no more
>interested in open debate than the officials at the IMF are. And not
>everything the protesters say will be right. But, if the people we
>entrust to manage the global economy--in the IMF and in the Treasury
>Department--don't begin a dialogue and take their criticisms to heart,
>things will continue to go very, very wrong. I've seen it happen.
>
>
>
>
>JOSEPH STIGLITZ is professor of economics at Stanford University (on
>leave) and a senior fellow at the Brookings Institution. From 1997 to
>2000, he was chief economist and vice president of the World Bank. He
>served on the president's Council of Economic Advisers from 1993 to
>1997.
>
>
>from http://www.thenewrepublic.com/041700/stiglitz041700.html
>
>
>
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