Session 8
Joseph Stiglitz, Globalization and Its Discontents, 2002
Chapters 7-9
Chapter 7 Better Roads to the Market
Two examples of countries that pursued successful “alternative” strategies (not following the
Washington Consensus): Poland and China. Both chose a more gradualist approach, as
opposed to shock therapy.
Key elements of Poland’s strategy:
 Gradual privatization while building up banking and legal system
 Emphasized importance of democratic support for reforms, benefits for unemployed,
adjusting pensions for inflation etc.
Key elements of China’s transition:
 Partial privatization, beginning w/agriculture “individual responsibility system”
 Township and village public enterprises
 Two-tier pricing (old prices under quota system AND market-set prices)
 Creation of institutional infrastructure
 Opening to foreign investment
 Prioritized creating competition & new jobs over privatization and restructuring (to
maintain social stability)
The Road to the Future : Russia
Needs to go beyond focus on macrostabilization and encourage economic growth. To do this,
Russia must:
 Create an investment-friendly environment
 Establish a federalist structure that provides incentives at all levels
 Establish political and social stability
 Collect taxes
While Russian leaders should be held accountable for failure of economic reforms, so should IMF
and Western leaders.
Chapter 8: The IMF’s Other Agenda
Market fundamentalists dominate the IMF. However, IMF needs to identify instances in which
markets fail and analyze how particular policies might avert or minimize damage done by these
failures.
Examples of inconsistencies in IMF policies:
 Intervention to sustain exchange rates (why is this intervention desirable when
intervention is so undesirable in other markets?)
 IMF’s attempts to quarantine “contagion” (economic crisis in one country spreading to
others) – but in Asian financial crisis, IMF spread the disease rather than containing it!
 Overly simplistic understanding of balance of payments deficits – need to consider what
money is actually being used for.
 By providing funds for governments to bail out Western creditors when loans aren’t
repaid, IMF has caused creditors to weaken incentives to ensure that debts will be paid.
Borrowers are encouraged to incur excess risk – don’t buy insurance b/c they count on
an IMF bailout.
 IMF began to condition approval of loans to a country on participation by the private
sector – i.e. if a country can’t raise a minimum amt of money from private banks, it might
not be able to receive funds from the IMF.
 In 1999, IMF decided to expand its role to be the “Lender of Last Resort,” a role
previously played by central banks. But countries pay IMF back first, and if more $$ is
going to IMF, less can go to private lenders. This results for need of risk premiums and
higher private sector interest rates.
What explains this lack of coherence?
IMF is pursuing interests of the financial community (esp foreign creditors), which are often in
conflict w/objective of enhancing global stability. IMF pursued the “sanctity of the credit contract”
(bail-outs to prevent bankruptcy) over the sanctity of the “social contract” – government’s
obligation to provide basic social and economic protections to its people.
Stiglitz suggests that IMF should take strategies more sympathetic to the debtors, work to get
economies back on track before building up foreign reserves, explore other ways of providing
short-term stability.
IMF blamed Asian crisis on bad policies and lack of transparency of Asian gov’ts – they were
really just trying to shift the blame for the failure of the IMF’s policies (capital market liberalization
led to speculation, financial market liberalization to bad lending).
Chapter 9: The Way Ahead
Problem is not with globalization, but the way it has been managed. Part of problem lies w/int’l
economic institutions. These institutions need to be reshaped so they can help reshape
globalization.
Government has an important role in mitigating market failures and ensuring social justice. Social
cohesion is key for economies to function.
Economists continue to disagree on role of markets vs. states. The IMF presents as “doctrine”
recommendations for which there is not widespread agreement. This is attributable to the IMF’s
market fundamentalist IDEOLOGY, which is so strong that IMF has failed to consider empirical
evidence that their policies led to instability.
Globalization has increased the need for global collective action and the importance of global
public goods. Recommendations:
 Change institutional mind-set by giving voting rights to developing countries.
 Fundamental reforms in governance of IMF and World Bank will be difficult to obtain – in
the short term: increase number of African “seats” even if it is impossible to increase
their voting rights
 Help fund a think tank to outline policy recommendations on behalf of developing
countries.
 Increase openness and transparency of the international economic institutions. Absence
of discourse means policies aren’t subject to timely criticism.
 IMF’s should be limited to core area of crisis management and stop being involved in
economies of transition and development.
Key reforms for international financial system:
 Accept dangers of capital market liberalization; with large externalities, interventions are
often desirable.
 Bankruptcy reform: IMF should not finance bailouts when private borrowers cannot repay
creditors; bankruptcy reform should recognize the special nature of bankruptcies that
arise out of macroeconomic disturbances.
 Less reliance on bailouts
 Improved banking regulation – need less ideological approach to regulation, adapted to
the capacities of each country.
 Improved risk management – one possibility is to have creditors absorb the risks of large
real interest fluctuations.
 Improved safety nets, i.e. unemployment insurance programs.
 Improved response to crises – interests of workers and small businesses need to be
balanced with those of creditors.
 Return to basic economic principles: IMF needs to return to original mandate of providing
funds to restore aggregate demand in countries facing economic recession.
Reforming the World Bank and Development Assistance
Successful countries have pursued comprehensive approach to development. Development=not
just resources and capital – also transformation of society.
Assistance should be provided based on “selectivity” (giving aid to countries with proven track
records) rather than “conditionality” (imposition of conditions, often political, on assistance)
Developing countries also need debt forgiveness in order to grow. 24 countries have now
passed the threshold for debt forgiveness, but this needs to be expanded further.
Reforming the WTO and Balancing the Trade Agenda
November 2001: Doha (Qatar) “development” round of trade negotiations finally put on agenda
the redressing of past imbalances of WTO.
WTO needs to be more balanced in addressing developing countries’ interests AND concerns
that go beyond trade (i.e. environmental concerns).
International economic justice requires developed countries to take steps to open up fair trade
w/developing countries outside of WTO framework. Example: Europe’s “Everything but Arms”
initiative allows free importing of all goods except arms from poor countries.
Toward a Globalization with a More Human Face
There needs to be a multipronged reform strategy: reform of int’l economic arrangements AND
reforms that each country can take on itself i.e. developed countries must eliminate trade barriers;
developing countries need to manage their budgets better, establish effective regulations, and set
up effective governments w/accountability, openness and transparency. Developing countries
need freedom to make their own choices. Need policies for sustainable, equitable, democratic
growth. Development is about transforming societies.