Interview with Joseph Stiglitz
Among the economic policy elite, Joseph Stiglitz is a heretic. The most prestigious critic of the International Monetary Fund (IMF) and the "Washington consensus," Stiglitz has voiced his views in the corridors of power. In 1993, he became a member of the President's Council of Economic Advisers, and later its chairman. In that role, he cautioned against free market "shock therapy" for Russia. Then, in 1997, he became chief economist of the World Bank, where he tried to push the institution in a more progressive direction. He also stepped up his criticisms of IMF and U.S. economic policies toward Russia and East Asia. These criticisms did not endear him to Treasury Secretary Lawrence Summers, who allegedly pushed him out of the World Bank in December.
Stiglitz is a giant among economists; peers assume he will win a Nobel Prize. When he was a junior at Amherst, the economics faculty met and decided that they had nothing more to teach him. One of them was deputized to call MIT to have him admitted to study there. After two years, he went to Oxford as a research fellow, then returned to MIT as assistant professor, and from there he went to Yale. Two years later, the Yale faculty voted to make him a full professor--at twenty-six. He has taught in Nairobi and at Stanford, Oxford, and Princeton. In his field, he helped create a new branch, the economics of information, and he is a leader in the economics of the public sector.
As chairman of the Council of Economic Advisers, Stiglitz was the highest official charged with analyzing the impact of economic policies on Americans. As chief economist of the World Bank, he was the top official responsible for analyzing how economic decisions affected the world's poor. He has been strategically placed to judge the winners and losers of global economic policies.
Stiglitz is an avuncular man of fifty-seven with close-cropped gray hair and a beard. He favors a loose gray V-necked sweater over a blue shirt and black pinstriped trousers. For a Washington official, he is astonishingly amiable and inspires warm affection, almost reverence, among his staff and close associates.
I spoke with Stiglitz several times in April. He was generous with his time, unpretentious, and genial. He tends to talk not in sound bites or clichés but in professorial explanations. I spoke with him for three hours and read over his recent speeches. Here is an edited transcript of his views.
Q: What was your reaction to the protests in April against the IMF and World Bank in Washington?
Joseph Stiglitz: I thought they were very effective in conveying the sense of values and concerns that a lot of young people, and people generally in the U.S., have beyond the narrow materialistic issues. They are concerned about poor people in developing countries, about democracy and democratic participation, governance issues, and the environment. There were people advocating protectionist issues, or who were more violent than I would approve of, but the point of marches is to convey a sense of values and concerns. How can one object to Americans caring about issues that go beyond our borders, to caring about poor people?
Q: What do you think of the call to shut down the IMF and the World Bank?
Stiglitz: The world needs an international development agency. I don't think anybody really thinks that one should get rid of the World Bank. Reform is one thing, but getting rid of it I think would be wrong. The IMF is a more complicated issue. I think there is a broad sentiment among both the left and the right that the IMF may be doing more harm than good. On the right, there's the view that it represents a form of corporate welfare that is counter to the IMF's own ideology of markets. But anybody who has watched government from the inside recognizes that governments need institutions, need ways to respond to crises. If the IMF weren't there, it would probably be reinvented. So the issue is fundamentally reform.
Q: The IMF has extraordinary powers to affect countries in times of crisis. Who does it represent? Who controls it?
Stiglitz: Finance ministers and central bank governors have the seats at the table, not labor unions or labor ministers. Finance ministers and central bank governors are linked to financial communities in their countries, so they push policies that reflect the viewpoints and interests of the financial community and barely hear the voices of those who are the first victims of dictated policies.
Q: How does this play out in the IMF's decisions?
Stiglitz: In the midst of the East Asian crisis, there were choices. One choice would have been to encourage countries to implement a bankruptcy law that could have threatened the interests of the lenders. But the mindset of IMF officials was so strong that they acted as if there were no choices.Even as debate on reforming the international economic architecture has proceeded, the people who would inevitably face many of the costs of the mistaken policy have not been invited to the discussions. Workers' rights should be a central focus of development. But nowhere, in all of these discussions, did issues of workers' rights, including the right to participate in the decisions which would affect their lives in so many ways, get raised. Conditionalities are adopted without social consensus. It's a continuation of the colonial mentality. I often felt myself the lone voice in these discussions suggesting that basic democratic principles be followed. I recommended that not only should workers' voices be heard, but they should actually have a seat at the table. You have the old boys' club discussing how the old boys' club should be reformed.
Q: Who wins when the U.S. and the IMF impose their bailouts on countries in crisis?
Stiglitz: These policies protect foreign creditors. If I came to the problem of what can I do to maintain the Thai economy from the perspective of the chairman of the collection committee of the international creditors, I might mistakenly say the most important thing is to make sure people don't abrogate their debt. Senior people in the IMF actually said that not paying the debt was an abrogation of a contract, whereas anybody who knows about capitalism knows that bankruptcy is an essential part of capitalism.
In East Asia, you had private debtors. The appropriate response when you have private debtors who can't pay is bankruptcy. It is not the nationalization of private debts, which the IMF has facilitated in many countries. Nationalization of private debts undermines prudential lender behavior and is a government intervention in the market. But that's not the view you'd take if you were chairing the creditors.
The IMF insisted that both Russia and Brazil maintain their currency at over-valued levels. Who are you protecting when you try to maintain that exchange rate by having high interest rates? You're protecting domestic and foreign firms that have gambled on the exchange rate. And who is paying the price? The small businesses that did not gamble [and no longer can afford loans], the workers who are going to be put out of jobs.
The lenders in the more advanced countries tend to recover most, if not all, of the amounts lent, with the costs of the bailout (including the costs of economic restructuring) being largely borne by workers. There is a transfer from the workers to the large international banks and other creditors in the U.S., Germany, and Japan.
Q: How else do IMF and World Bank policies affect workers?
Stiglitz: During my three years as chief economist of the World Bank, labor market issues were looked at through the lens of neoclassical economics. "Wage rigidities"--often the fruits of hard-fought bargaining--were thought part of the problem facing many countries. A standard message was to increase labor market flexibility. The not-so-subtle subtext was to lower wages and lay off unneeded workers.
They had a strategy for job destruction. They had no strategy for job creation. Many of the policies the IMF pursued as they were killing off jobs made job creation almost impossible. In the U.S., you couldn't have job creation with interest rates of 30 or 40 percent. They had a philosophy that said job creation was automatic. I wish it were true. Just a short while after hearing, from the same preachers, sermons about how globalization and opening up capital markets would bring them unprecedented growth, workers were asked to listen to sermons about "bearing pain." Wages began falling 20 to 30 percent, and unemployment went up by a factor of two, three, four, or ten.
Q: How would you define "the Washington consensus"?
Stiglitz: It is a set of policies formulated between 15th and 19th streets by the IMF, U.S. Treasury, and World Bank. Countries should focus on stabilization, liberalization, privatization. It's based on a rejection of the state's activist role and the promotion of a minimalist, noninterventionist state. The analysis in the era of Reagan and Thatcher was that government was interfering with the efficiency of the economy through protectionism, government subsidies, and government ownership. Once the government "got out of the way," private markets would allocate resources efficiently and generate robust growth. Development would simply come.
The Washington consensus also considers capital market liberalization essential, and the IMF took it as a central doctrine. Capital market liberalization includes freeing up deposit and lending rates, opening up the market to foreign banks, and removing restrictions on capital account transactions and bank lending. The focus is on deregulation, not on finding the right regulatory structure.
Q: What did the Washington consensus tell the former Communist countries to do?
Stiglitz: Countries were told they had no incentives because of social ownership. The solution was privatization and profit, profit, profit. Privatization would replace inefficient state ownership, and the profit system plus the huge defense cutbacks would let them take existing resources and have a higher GDP and an increase in consumption. Worries about distribution and competition--or even concerns about democratic processes being undermined by excessive concentration of wealth--could be addressed later.
Q: How did U.S. Russia policy develop?
Stiglitz: In the early 1990s, there was a debate among economists over shock therapy versus a gradualist strategy for Russia. But Larry Summers [Under Secretary of the Treasury for International Affairs, then Deputy Secretary of the Treasury, now Secretary] took control of the economic policy, and there was a lot of discontent with the way he was driving the policy.
The people in Russia who believed in shock therapy were Bolsheviks--a few people at the top that rammed it down everybody's throat. They viewed the democratic process as a real impediment to reform.
The grand larceny that occurred in Russia, the corruption that resulted in nine or ten people getting enormous wealth through loans-for-shares, was condoned because it allowed the reelection of Yeltsin.
Q: What effect did the policies pushed by the United States and the IMF have on the Russian people?
Stiglitz: Both GDP and consumption declined. Living standards collapsed, life spans became shorter, and health worsened. Russia achieved a huge increase in inequality at the same time that it managed to shrink the economy by up to a third. Poverty soared to close to 50 percent from 2 percent in 1989, comparable to that of Latin America--a remarkable achievement in eight years.
Q: How did that happen?
Stiglitz: Put yourself in the shoes of one of these oligarchs who has been given a gift of $10 billion. Russia is in a deep depression. Nobody's investing. There is a widespread political consensus that the way you got your wealth is illegitimate. Through political connections, you got the government to give you a huge oil field. You sell oil. What do you do with the revenue? You have a choice: You can invest it in the booming New York stock market, or you can invest it in Russia, which is in a depression. If you invest it in Russia, you are risking that eventually there will be a new government that says, "Yeltsin was a crook, and you got the money in an illegitimate way." And the IMF invites you to take the money out, because free capital markets are the way of the future. Then, to make your life even easier, in August 1998 the IMF comes in and says we'll give you $5 billion or $6 billion to up the exchange rates so you can get more for your rubles to take over to Cyprus in the next day or so.
Q: What would you have done?
Stiglitz: The incentives worked.
Rather than providing incentives for wealth creation, privatization provided incentives for asset-stripping, with huge movements of capital abroad--$2 billion to $3 billion a month. Policies seemed almost deliberately designed to suppress new enterprise and job creation. The excessive focus on macrostabilization led to interest rates of 20, 30, 40, 250 percent. There is little domestic or foreign investment except in natural resources. How many Americans will start a business if the interest rates are 150 percent?
Q: How did the East Asian crisis happen?
Stiglitz: In East Asia, reckless lending by international banks and other financial institutions combined with reckless borrowing by domestic financial institutions precipitated the crisis, but workers bore the costs. The roots of the crisis in East Asia were in private sector decisions. The biggest problems were the misallocation of investment, most notably to speculative real estate, and risky financing, especially borrowing short-term debt on international markets.
Q: The first country to be hit was Thailand. What happened there?
Stiglitz: The crisis began as a currency crisis with large devaluations in Thailand in July 1997. Pressed by the U.S. Treasury and the IMF on financial and capital market liberalization, Thailand had opened itself to capital flows and foreign banks.
There was a real estate bubble. Bank contraction in Japan led to credit contraction in Thailand, and the real estate bubble burst. When capital stopped flowing in, there was pressure for the exchange rate to fall, the government tried to support it, and in a short time it spent enormous amounts of money and used up its reserves.
The IMF organized a typical rescue package, based on fiscal austerity and high interest. There were massive bankruptcies. The magnitude of unemployment was hard to believe. Real wages went down 20 to 30 percent. The crisis spread to Indonesia, Malaysia, and the Philippines, and eventually Korea. Stock markets lost 40 to 80 percent of their values, and banks failed.
I talked to [IMF Deputy Director] Stan Fischer and others at the beginning of the crisis. They had a peculiar view: "If you're right, we'll correct the policies." But there are important irreversibilities. If you destroy a firm, you can't pull it out of bankruptcy overnight. They ignored that. They ignored that high interest rates wouldn't attract capital and increased the probability of default.
Q: What should the IMF have done in East Asia?
Stiglitz: If you had approached the problem of East Asia from the perspective of what would be best for the global economy, you would say that the countries needed more resources so they wouldn't bring down their neighbors. That was the philosophy of Bretton Woods [the founding conference for the IMF and World Bank in 1944] to stop a global slowdown.
But what did the IMF do? It went to the countries and told them to be more contractionary than they wanted, to increase interest rates enormously. It was just the opposite of the economic analysis that was the basis of the founding of the IMF. Why? In order to make sure that creditors got repaid.When you're facing the threat of recession, you need to have an expansionary monetary and fiscal policy. Pre-Keynesian, Hooverite views are dead everywhere except on 19th Street in Washington.
Q: Is there a double standard on trade liberalization?
Stiglitz: As people in Seattle were saying, the international institutions go around the world preaching liberalization, and the developing countries see that means open up your markets to our commodities, but we aren't going to open our markets to your commodities. In the nineteenth century, they used gunboats. Now they use economic weapons and arm-twisting.
When you have a march in Seattle, you hear voices saying maybe trade policies haven't been done in the interest of broader constituencies but in the interest of special interests.
All of a sudden people get woken up to a different perspective.
Q: What was your reaction to the protests against the WTO in Seattle?
Stiglitz: The Seattle march was a wake-up call to much of the world that had taken the advantages of globalization for granted, that many people saw globalization through different lenses, saw the process being pursued behind closed doors for the benefit of special interests--banks, businesses, and the rich.
Q: How were decisions on these issues made in the Clinton White House when you were on the Council of Economic Advisers?
Stiglitz: The decision-making process in the White House does not let most issues get up to the President. The Council thought opening up global markets to derivatives that would destabilize other countries wasn't likely to create a lot of jobs in the U.S. and might adversely affect U.S. interests by causing global economic instability.
Larry Summers opposed us.
Q: If there's a disagreement of this sort, doesn't the issue go to the President?
Stiglitz: Treasury made sure there was a consensus not to bring it to the President. I knew the President agreed with me. That was why some of my concerns never went to the President. But it wasn't as if I felt isolated. Treasury is only one view within the Administration, and even some people in the Treasury would agree with me. At the World Bank, Jim Wolfensohn [the president of the Bank] agreed with me on most of the substantive issues. There were other people who agreed with me strongly on the general principle of open discussions.
Q: How did top U.S. officials try to shut you up?
Stiglitz: Stan Fischer wrote an op-ed in the F.T. [Financial Times] that all he's asking countries to do is to have a balanced budget. Not since Herbert Hoover have we heard something like that! We have fought against a balanced budget amendment to the Constitution on grounds that it would eliminate the ability to use fiscal policy as an anti-cyclical device in a recession.
I wrote an op-ed saying we don't believe in a balanced budget during recession in the U.S., why should we be telling that to other countries? The reaction that I got from the U.S. Treasury and the IMF was enormous. There were phone calls to Jim Wolfensohn, mainly from the Treasury but also from the IMF, not to allow me to talk to the press. Wolfensohn, who believed I was right, tried to manage the difficult process of how do you keep at bay your largest shareholder, how do you maintain relations with your sister institution in a world of clubs in which you don't criticize each other. He told me to tone it down. I had made my point.
Q: I heard that Summers told Wolfensohn that if he didn't fire you, he wouldn't be reappointed.
Stiglitz: I heard the same rumors. I have no way of knowing. In an article in the Financial Times when I left, somebody observed that these guys are smart enough that they wouldn't leave fingerprints.
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