IMF vs. Stiglitz (and WB): open warfare

By Soren Ambrose, 50 Years Is Enough Network, Washington, DC USA, [3 July 2002]

It would seem that open warfare has broken out between the IMF and World Bank, or at least between the IMF and Joseph Stiglitz, the former WB Chief Economist and winner of the 2001 Nobel Prize in Economics. There have been disputes before, most of them involving Stiglitz (who was fired at the behest of then-Treasury Secretary Larry Summers in 2000). But never has there been quite this level of vitriol.

The IMF has clearly decided that it must go on the offensive to counter Stiglitzs charges in his new book, Globalization & Its Discontents. Not only did the flare-up reported below (by the Washington Post and the Financial Times) take place on Friday, but the head of IMF External Relations delivered a speech at MIT yesterday critiquing the book. How good an idea any of this was you can judge.

The IMF does not want people to think its staff is arrogant and heartless. Unfortunately for them, many of their staff are indisputably arrogant, and their policies are not only heartless but murderous. They have latched onto one comment in Stiglitzs book, seeming to allege that former IMF #2 Stanley Fischer, who has moved into a highly-paid position at Citibank, is being paid off for his service to the corporate cause. IT was probably not the best-considered sentence Stiglitz has come up with, if only because it is distracting from his real point, which we take to be that it comes naturally—as if there were no alternative --- for IMF management to work in the service of the corporate and banking elite; indeed the IMFs definition of a healthy economy is one which best serves those interests and makes their owners wealthy.

Below the stories on the exchange between Stiglitz and Rogoff is the MIT speech by Thomas Dawson. He catches Stiglitz in his one serious weakness: his refusal to criticize the World Bank, as if its policies and practices were wholly distinct from the IMFs. This of course is ridiculous, no matter how much rivalry there may be between the two institutions. Why he does that is a source of endless speculation. Was a deal made?

Otherwise, however, Stiglitzs critiques of the IMF are quite on the mark.

The WB website now has a video of the Rogoff/Stiglitz exchange, and the IMF website has the full text of Rogoffs speech.

Getting a rise out of the International Monetary Fund isnᰱt easy, writes Paul Blustein for The Washington Post (E1).

For years, as debate has raged over how best to aid countries in economic distress, the IMF has typically responded to its critics with bureaucratic detachment.

But now, after enduring extensive attacks on its performance during the Asian financial crisis and facing fresh turmoil in Latin America, the IMF appears to be reaching the boiling point—as witnessed by a rhetorical assault unleashed Friday by Kenneth Rogoff, the fundᰱs chief economist.

The target of Rogoffᰱs ire was Joseph E. Stiglitz, the Nobel Prize-winning former chief economist of the World Bank and author of Globalization and Its Discontents, a recently published bestseller that is harshly critical of the IMF. At a World Bank-sponsored launch of the book where Stiglitz and Rogoff were the featured speakers, jaws dropped among an audience of about 400, mostly PhDs from the fund and the bank, as Rogoff blasted Stiglitz in terms far more colorful than the jargon-laden language for which IMF economists are renowned.

Rogoff derided Stiglitzᰱs ideas as at best highly controversial, at worst, snake oil and cracked that we on the Planet Earth recognize Stiglitzᰱs policy prescriptions as likely to worsen countriesᰱ problems by fueling inflation.

Stiglitz did not respond directly to most of Rogoffᰱs criticisms, but in the first question from the audience a World Bank economist emotionally accused Rogoff of having engaged in an inappropriate personal attack, eliciting a smattering of applause from other bank staffers.

The episode highlights the antagonism that has long festered between the IMF and World Bank staffs as they struggle with the increasingly urgent challenge of lifting developing countries from impoverishment and rescuing them from crises.

Often confused in the public mind, and attacked in the same breath by their critics, the fund and the bank are frequently at loggerheads (though almost always in private), in part because of their overlapping roles and competing agendas. The fund provides countries with short-term loans to tide them over during periods of economic turmoil, which often means that it insists on cutbacks in public spending to force governments to live within their means. That can conflict with the bankᰱs long-term efforts to promote education, health and other programs aimed at reducing poverty.

Because the IMF generally prevails when the two institutions differ, many World Bank staffers are delighted to see Stiglitz sock it to ᰱem in his book, said one bank economist, adding: People here feel, these [IMF] guys are so arrogant—and who are they, after all the disasters in East Asia, Russia and now Argentina, to go around acting as if theyᰱre masters of the world?

The book dwells at length on Stiglitzᰱs criticism—shared by some economists, though by no means all—that the IMF erred grievously by demanding cutbacks in budget deficits and increases in interest rates by governments undergoing crises. Disputing the IMFᰱs logic that higher interest rates and lower deficits help restore financial calm in a crisis-stricken country by making it more attractive for investors to keep their money there, Stiglitz contends that such policies cause recessions to worsen and thus increase the likelihood that investors will flee.

It was not just that IMF policy might be regarded by softheaded liberals as inhumane, Stiglitz writes. Even if one cared little for those who faced starvation, or the children whose growth would be stunted by malnutrition, it was simply bad economics. IMF officials cited passages like that one—which, they said, made them sound like uncaring monsters—as justification for the severity of Rogoffᰱs counterattack.

You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a governmentᰱs debt, all that needs to be done is to increase the supply and it will sell like hotcakes, Rogoff said.

We at the IMF—no, make that we on the Planet Earth—have considerable experience suggesting otherwise, he continued. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain . . . its fiscal deficits, things generally get worse instead of better.

Perhaps most offensive to the IMF was Stiglitzᰱs implied criticism of Stanley Fischer, the IMFᰱs widely admired deputy managing director during the late 1990s, for taking a high-ranking job at Citigroup. In his book, Stiglitz asks: Was Fischer being richly rewarded for executing policies that benefited financial firms like Citigroup at the expense of poor countries?

Joe, the people in this room know Stan Fischer to be a person of unimpeachable integrity, Rogoff declared. Of all the false inferences and innuendos in this book, this is the most outrageous. Stiglitz later replied that he didnᰱt mean to impugn Fischerᰱs integrity but was simply trying to raise concerns about the appearance of conflict of interest.

Kenneth Rogoff, the head of research at the International Monetary Fund, has made an extraordinarily outspoken and personal attack on Joseph Stiglitz, the Nobel prize-winning former chief economist of the World Bank.

At a lunchtime debate last Friday at the World Bank in Washington to launch Professor Stiglitzᰱs new book, Mr Rogoff responded to Prof Stiglitzᰱs opening words with criticism of his ideas, opinions and record at the bank, and suggested that the book should be withdrawn. The World Bank is putting a video recording of the debate on its website.

The text of Mr Rogoffᰱs remarks sums up with the words: Joe, as an academic, you are a towering genius. Like your fellow Nobel prize winner John Nash, you have a ᰱbeautiful mindᰱ. As a policymaker, however, you were just a bit less impressive.

Speaking in London on Tuesday, Prof Stiglitz said he had been quite dumbfounded by the attack.

Ken Rogoff is normally a relatively mild-mannered person. This was nothing to do with what I said, nothing to do with the substantive issues. It was 90 per cent a personal diatribe.

Mr Rogoff, who has spent most of his career in academia and is an international chess grand master, is personally charming, softly-spoken and generally courteous. But his views on Prof Stiglitz reflect many years of pent-up institutional resentment. Even before resigning from the bank late in 1999, Prof Stiglitz had become known as a critic of the IMF.

His book, Globalization and its Discontents, depicts the fund as hidebound by a curious blend of ideology and bad economics, prescribing standard solutions to economic crises without considering the effects they would have on the people in the countries told to follow these policies.

At Fridayᰱs debate, in front of an audience mostly made up of World Bank and IMF staff, Mr Rogoff hit back, paying tribute first to his colleagues at the IMF as superb professionals who, he said, had been shot at, worked in brutal conditions and contracted tropical diseases while doing their jobs.

Their dedication humbles me but in your speeches, in your book, you feel free to carelessly slander them, he said. Mr Rogoff drew attention to a passage about Stanley Fischer, the former first deputy managing director of the fund who is now a vice-chairman at Citigroup.

The book says: One could only ask, was Fischer being richly rewarded for having faithfully executed what he was told to do?

Mr Rogoff said: Of all the false inferences and innuendos in the book, this is the most outrageous and suggested the book should be withdrawn until this slander is corrected.

Prof Stiglitz said he was making a point about the perception of conflicts of interest, not making any accusations about Mr Fischer personally.

Mr Rogoff also challenged Prof Stiglitzᰱs policy prescriptions, which reject cutting budget deficits and raising rates as remedies for countries in crisis. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably, he said. The laws of economics may be different in your part of the gamma quadrant.

One member of the audience on Friday described the mood as a bit flabbergasted by Mr Rogoffᰱs tone.

Although Prof Stiglitzᰱs relations with the bank have not always been smooth—James Wolfensohn, its president, described him as a free spirit shortly before his departure—he is still well-regarded there, and is a member of a panel of independent advisers to Nicholas Stern, his successor as chief economist.

The first question for Mr Rogoff came from a bank economist who expressed concern at the personal nature of his attack.

Prof Stiglitz said on Tuesday: The IMF was, in front of the World Bank, confirming the view that they are not willing to engage in a substantive discussion.

1. Thank you for the invitation to talk to you this evening. Iᰱm told that your fellow MIT alum Joseph Stiglitz addressed this group a couple of years ago and used his time to say some nice things about the IMF. The organizers of this eveningᰱs entertainment thought it would be fun if I repay his kindness.

2. The title of my talk is Stiglitz, the IMF and Globalization. My preference would have been to talk about these three topics in the reverse order from which they appear in the title and to have run out of time by the time I got to the third. Instead, because Stiglitz has been so prominent in the press in recent years, and so critical of the IMF, I have to devote the bulk of my talk to responding to his attacks on us. My defense for getting into the fight is the classic one: He started it!. I hope there will be time at the end to discuss the far more important issue of how to make globalization work for all, an issue on which Stiglitz and the IMF share common ground.

3. In the very unlikely event that you havenᰱt heard of us, let me just say that the IMF is a multilateral agency with two main jobs: first, to help preserve global economic and financial stability and, second, to assist in the global war on poverty.

4. And for the few among you who may not heard of Joe Stiglitz, he is a noted academic economist. Since he addressed your group, heᰱs won the Nobel Prize, an honor his fellow economists, who rarely agree on anything, agree he completely and richly deserves. Joe has also gone from being the Chief Economist of the World Bank to Chief Critic of the IMF.

5. One of the many things that he criticizes us for is dispensing policy advice without taking on board the lessons of the academic work that won him the Nobel. Stiglitz evidently feels that being a top- notch academic economist is ample qualification for being a good policymaker. The fact is that Joe got a late start in policymaking and shows it. Policymaking requires a different skill set from academic theorizing. Joeᰱs skills as a policymaker are vastly improved by hindsight, something his former boss Jim Wolfensohn alluded to when he said about Joe: (Quote) To stand back later and say, If youᰱd done it my way everything would have been different, is a little generous to yourself. (Unquote)

6. Stiglitz has recently written a book called Globalization and its Discontents. Despite its general title, the book is mostly about the IMF, not a major critique of globalization. The Economist said in its review that a more accurate title for the book would have been The IMF and My Discontent.

7. My bean-counting assistant noted that the index to the book has some 64 references to globalization, whereas references to the IMF-almost all critical-total 340. That works out to over one alleged mistake committed by the IMF per page. Youᰱd think by sheer accident weᰱd have gotten a couple of things right.

8. Thatᰱs my bottom-line message: You canᰱt judge a book by its cover. There are two books in here: the first is a haphazard list of allegations against the IMF. Buried amidst the half-truths and some nasty (and false) allegations are a few valid criticisms of the IMF. Stiglitz tries to provide a grand theme for all this by claiming that all these mistakes are due to the IMFᰱs slavish devotion to what he calls market fundamentalism. He is simply wrong in this view. I wonᰱt have time to delve too much into specific allegations here but I will tell you (in a minute) why the overall criticism is wrong. The second book, matching the advertised title of Globalization and its Discontents, is a discussion of the benefits and risks of globalization. Stiglitzᰱs views here are quite mainstream and the IMF and many other observers would be in substantial agreement with him.

9. Let me begin with Stiglitzᰱs overarching critique of the IMF, that is it driven by market fundamentalism. Stiglitz accuses the IMF of being driven by a belief in the perfection of markets and the imperfection of governments. The accusation is simply wrong. IMF staff are well aware that they owe their jobs to the imperfections of markets.

10. What is probably true is that the staff of the IMF (and the World Bank) have over time become more confident about the ability to use markets to serve the public interest. What caused this shift? Quite simply, the evidence. Through the 1980s, central planning represented an important alternative to markets as a way of organizing economies. The collapse of the Soviet Union and the fall of the Berlin Wall suggested to many that markets, whatever their faults, were a more durable way of organizing a countryᰱs economy. This feeling was reinforced by the good economic performance of the United States and the United Kingdom, both of which had moved to more market- oriented systems during the 1980s.

11. While these monumental changes were going on in the world economy, Stiglitz was hard at work in academia illuminating in a remarkable series of papers the flaws of market economies. As the award of the Nobel Prize attests, those papers are surely important contributions. But it cannot come as a surprise that, given the sweeping historical developments that I have described, the practical lessons being applied in the policymaking realm involved making more, rather than less, use of markets to solve economic problems.

12. The great British economist John Maynard Keynes, who Stiglitz greatly admires, once said in replying to a critic: When I get new information, I change my opinions. What, sir, do you do with new information? One is tempted to ask Joe Stiglitz why, despite the new information about the fall of central planning, there has not been a transition in his views about the relative prevalence of market and government failure.

13. Other eminent economists have made the transition. Larry Summers, former U.S. Treasury Secretary and currently President of an university in Cambridge whose name escapes me, is one example. He said, in an interview, that when he was growing up Milton Friedman was the devil incarnate in his household. But now, Summers said, he has [un]grudging respect for Friedmanᰱs views about the market.

14. The IMFᰱs critics on the right find the allegation that the IMF is driven by market fundamentalism completely ludicrous. For instance, listen to what Brink Lindsey of the Cato Institute, the true home of market fundamentalism, says in his review of the book in the Wall Street Journal. Lindsey writes that for Stiglitz to accuse the IMF of market fundamentalism is misleading to the point of absurdity Thereᰱs nothing in his book that suggests even a whisper of the many profound disagreements between the disciples of Milton Friedman, as he calls them, and the IMFᰱs economists. Such disagreements do not fit well with Mr. Stiglitzᰱs ax-grinding, and so, apparently, he decided to leave them out. End of quote.

15. Not only is the overarching criticism incorrect, notes Lindsey, but the examples that Stiglitz provides of how market fundamentalism led the IMF astray are vastly over-blown. According to Stiglitz, Russiaᰱs difficult transition from communism, worsening poverty in Africa, the collapse of Argentinaᰱs economy--these all are manifestations of what happens when the IMFᰱs market fundamentalists get their way.

16. The fact is that there are all very complex situations about which there is plenty of disagreement about the right way to do things and who is to blame for things that have gone wrong. The IMF deserves its share of the blame, but so do many others. In fact, many of Stiglitzᰱs criticisms should apply with equal, if not far greater force, to our sister institution, the World Bank. Issues related to privatization, the quality of a countryᰱs institutions, consideration of alternate strategies to alleviate poverty-these are all areas where our sister institution tends to be whatᰱs called the lead agency. But, as the New York Times noted in its review, the Bank is spared the searing indictment that Professor Stiglitz reserves for the IMF Not surprisingly, part of the bookᰱs purpose seems to be an attempt to ensure that events during his World Bank tenure do not besmirch his own reputation. In the process, one suspects that some score- settling may well be in play. End of quote.

17. I mentioned that the book also contains some very nasty allegations about Fund policies, staff and officials, past and present. I will let those pass except for one that should not go unanswered, particularly before this audience. Stiglitz notes that Stanley Fischer, the former deputy head of the IMF and former MIT professor of economics, went straight from the IMF to Citigroup. Stiglitz adds: A chairman of Citigroup was Robert Rubin who, as secretary of Treasury, had a central role in IMF policies. One could only ask, Was Fischer being richly rewarded for having faithfully executed what he was told to do? End of quote. To anyone who knows Fischerᰱs utter devotion to institutions he works for, whether it was the IMF or MIT, the suggestion that he used twisted IMF policies to ensure a job at Citicorp is repugnant. Stiglitz surely knows that Fischer is regarded as a man of unimpeachable integrity and yet he cannot resist the jibe at him.

18. OK, enough of the food-fight. Let me shift to a more positive tone and acknowledge the validity of some of the criticisms Stiglitz makes of the IMF. As I noted earlier, the IMFᰱs has two main tasks: first, to help preserve global financial stability and, second, to assist the World Bank and others in the global war on poverty. The points by Stiglitz and others on some of our failures on both of these fronts are well-taken.

19. One criticism is that the U.S. Treasury and the IMF destabilized the global financial system through excessive zeal in encouraging countries to open up to short-term foreign capital [flows] in the mid-1990s. The critics say that the entry, and often the subsequent hasty exodus, of foreign capital into economies which are too small or whose financial sectors are ill-equipped to regulate and absorb the capital can be devastating. We agree and weᰱre changing our advice to countries accordingly. For instance, three weeks ago, unnoticed by anyone in the international media but the Dow Jones newswires, we advised Sri Lanka against opening up its capital account [until its financial sector was further strengthened].

20. Our handling of financial crisis in Asia has also come for criticism from Stiglitz and others. Weᰱve acknowledged that we made mistakes in our initial response to the crisis. As anyone who has been centrally involved in crisis situations will tell you, battlefield medicine is never perfect. We were surprised by the speed and virulence with which the crisis spread to many countries in the region. Our most glaring error, according to many observers, was to recommend excessive belt-tightening to Thailand at the start of the crisis. However, once the scope of the crisis became evident, we quickly changed course. Indeed, IMF-supported programs in Thailand and other crisis countries were soon marked by large budget deficits, in part because of increases in spending on social safety net programs. This is exactly the kind of easing of fiscal policy Stiglitz advocates.

21. There is another, more technical, debate about the appropriateness of the IMFᰱs advice on monetary policy during the Asian crisis. The IMF and many others continue to disagree with Stiglitzᰱs assertion that it is obvious that monetary policy must also be eased at the onset of a financial crisis. As Larry Summers noted recently, when a countryᰱs exchange rate is declining rapidly because capital is trying to leave the country, and the countryᰱs financial institutions are in real trouble, there is a fundamental conflict between restoring external confidence by raising interest rates and providing for financial repair through increased liquidity. Itᰱs a classic problem of a single instrument and multiple targets. Confidence is widely recognized as essential in combating financial crises.

22. The experience of more recent financial crises, such as the one in Argentina, suggest that our existing mechanisms to resolve crises in a rapid and orderly fashion do not work smoothly. One problem is that governments do not deal with their sovereign debt problems promptly; the situation is often allowed to fester until a crisis is precipitated. Our current deputy head Anne Krueger has suggested creating a statutory mechanism to secure a more orderly and timely restructuring of unsustainable sovereign debts. [The mechanism being proposed is to empower a super-majority of creditors to take key decisions in the restructuring process in negotiation with the debtor.] Stiglitz has been quite supportive of the general idea of having a sovereign debt restructuring mechanism.

23. With respect to our other main task, poverty alleviation, Stiglitz notes that the IMF and the World Bank have recently launched a new approach. This is a more participatory approach, one which involves the countryᰱs government and its civil society at an early stage in measuring the size of the poverty problem and in devising development strategies to reduce poverty. We get a rare compliment here when Stiglitz says that even though participatory assessments are not yet being perfectly implemented they are a step in the right direction.

24. As promised, let me finish with a brief discussion of globalization, the supposed subject of the book. Stiglitz provides a mainstream, but nonetheless eloquent and clear, description of the benefits of globalization. He notes that opening up to international trade has helped many countries grow far more quickly than they would otherwise have done. Because of globalization many people in the world live longer than before and their standard of living is far better. People in the West may regard low-paying jobs at Nike as exploitation but, says Stiglitz, working in a factory is a far better option for many that growing rice on the farm. It is also the case, says Stiglitz, that globalization has reduced the sense of isolation felt in much of the developing world and has given many people in the developing world access to knowledge well beyond the reach of even the wealthiest in any country a century ago. With all of this, we couldnᰱt agree more.

25. However, the benefits of globalization are spread very unevenly. In Africa the high expectations that people had for the continent following colonial independence remain unfulfilled. Growth in many countries in Latin America has yet to be placed on a secure footing. India is only just emerging from decades of economic slumber. As a consequence, many millions of people throughout the developing world remain mired in poverty. People disagree on the solutions to this problem. Even Larry Summers, not easily stumped, admits that he doesnᰱt have it all figured out; however, he thinks that in the developing world, far more people are poor because of too little globalization rather than too much, and far more people are poor because of a lack of economic reform rather than because of excessively rapid economic reform. Others such as Stiglitz feel that there has been too much of a one-size-fits all approach taken to development, and that market reforms have been pushed with excessive zeal and haste; he says that countries must be free to experiment with alternatives and follow paths that best suit their situations and needs.

26. While there are no easy answers, one concrete step could be taken to help the situation considerably, and that is for developed countries to lower the trade barriers they have against precisely those products in which the developing countries have a comparative advantage. On this particular issue, the relevant portions of Stiglitzᰱs book read like passages from speeches by the IMFᰱs Managing Director.

27. Let me end on that note of harmony.