Book Review: Globalization and Its Discontents by Joseph E. Stiglitz

by J.G.Foulds
This book is a important contribution to the ongoing critical reassessment of the failure of the principal international financial institutions (International Monetary Fund (IMF), World Bank and World Trade Organization) to deal effectively with the most significant economic problems of the nineties, ie - in Asia, the former Soviet Union and Latin American. It is particularly harsh criticism of the IMF which the author portrays as the principal architect of these ineffectual policies and as an organization which is in need of very significant reform.

The author is a leading academic economist who for seven years in the nineties occupied senior positions within the Clinton Administration and the World Bank. Dr. Stiglitz left academia in 1993 to become Chairman of Bill Clinton’s Council of Economic Advisors. He moved to the World Bank in 1997, just in time for the financial meltdown in Southeast Asia and from both of these positions observed the botched transition of Russia from communism to capitalism. After serving as chief economist and senior vice president at the World Bank for almost three years, he left in January, 2000 to return to the academic world at Columbia University. In 2001, Dr. Stiglitz shared the Nobel Prize in Economic Science for his work in information economics. He was concerned with what goes wrong with markets when a few people in the know have much better information than the rest of us and why at times government intervention is required to lessen the negative impact of these imbalances. He is a latter day Kensyian and as such often finds himself in disagreement with the free market followers of Milton Friedman who have been calling most of the shots in global economic policy during the past 20 years.

According to Dr Stiglitz, in the broadest terms the problem with the present global economic system is that we have global economic governance without global government and as a result the people of the developing world most severely impacted by the various crises discussed in this book, have no voice at the decision making table. As originally conceived after World War II with the purpose of providing stabilizing assistance to countries with good economic fundamentals that were experiencing temporary foreign exchange difficulties, the IMF is dominated by financial institutions in the most powerful industrial countries. The United States, being the largest donor country and the only country with veto power at the IMF, plays a particularly significant roll. Lacking any more broadly based method of governance and any transparency in its decision making processes, the IMF became a tool to advance the ideology of free marketers and Regan/Thatcher capitalists in all the countries of the developing world. In the eighties, policies known as the Washington Consensus were formulated to address various economic crises being experienced in Latin America at that time. Central to this approach were policies of fiscal austerity, privatization and market liberalization. While Stiglitz agrees these were sound policies for dealing with Latin American countries which had been running large deficits year after year, they were inappropriately applied in cookie cutter fashion to many developing countries in the nineties which had a totally different set of problems, making the problems that they were intended to address much worse then otherwise would have been the case. Balanced budgets were pushed in countries which did not have a chronic budget deficit problem, high interest rates in countries which did not have an inflation problem, financial market liberalization in countries lacking an appropriate regulatory structure and privatization in countries which had no anti-competitive laws to guard against the formation of monopolies.

Individual chapters in the book are devoted to the Asian and Russian crises, the first because it was the most significant economic crises since the Great Depression and the second because it was in Dr. Stiglitz’s view the most important economic transition of all time. In Asia, in the face of recession and mounting unemployment, the IMF advocated contractionary monetary and fiscal policies, similar to those that were followed by the Hoover administration prior to the Great Depression in the US and have been shunned in the western world ever since. The resulting high unemployment in countries where there were no safety nets to help the laid-off workers keep food on the table, led to social unrest and foreign investment fleeing the country making problems even worse. According to Dr Stiglitz, countries like China, South Korea and Malaysia that refused to follow IMF guidance, came through this period in much better shape then Indonesia and Thialand who took the IMF’s medicine. In Russia, the IMF’s insistence on rapid capital market liberalization and privatization before legal infrastructures were in place, led to asset striping and money leaving the country rather then being invested in its future. This resulted in a few of Yeltsin’s friends becoming billionaires while the population as a whole slipped further into poverty. In 1989 only 2 % of the population were in poverty. By late 1998 the number had soared to 23.8 % using a $ 2/day standard. In the ten years following the fall of communism, the decline in Russian industrial output (60 %) was far greater than it had experienced in World War II (24 %). While Stiglitz admits that the IMF cannot be blamed for everything that happened, he contends that it contributed mightily to the devastation.

The final chapter of the book is presents Dr. Stiglitz's prescriptions for reform of the international financial institutions. At the top of his reform list are governance changes to insure that the voices of the developing countries are accounted for in the decision making process and that the process itself is much more transparent. He would relieve the IMF of its responsibilities for transitional economies (like those of the former members of the Communist bloc) and for structural adjustment in highly indebted developing countries, leaving it to focus on its original task of loaning hard currencies to countries with sound economies that experience temporary shortages of foreign exchange, enabling them to maintain employment, production, and imports and avoid transmitting negative trends to their trading partners. He states that there is widespread demand for change in these institutions and in response the IMF and World Bank are modifying their rhetoric to talk much more about the impact of their policies on poverty. He believes that while reform will be extremely difficult and time consuming, it is essential if globalization is to be made to work not just for the well off and developed nations but for the poor in the developing world. This book provides a wealth of information to those who are seeking change and in time should prove very influential in the reform process.