Rebel With a Cause (Page 3)

No sooner had the Ethiopia dispute been settled than the 1997 Asian financial crisis struck--and the tension between Stiglitz and the IMF deepened. To Stiglitz, the crisis, which began with the collapse of the Thai currency and soon spread to Malaysia, Korea, Indonesia and the Philippines, highlighted the danger of lifting constraints on short-term capital flows, a policy that both the IMF and US Treasury Department had enthusiastically promoted in the 1990s. Throughout Asia, governments that had followed their advice were reeling as investors whisked billions of dollars in speculative capital out of their countries overnight. Some nations that had maintained capital controls, such as India and Chile, avoided such problems while enjoying robust growth.

Stiglitz was not the only economist to question the orthodox view: In a widely cited article in Foreign Affairs, Jagdish Bhagwati, a prominent free-trader, blasted the "Wall Street-Treasury Complex," which had pushed unfettered capital flows for its own enrichment. But while Stiglitz expressed his views in more measured tones, being an insider made them far more explosive. In late 1997 the London Economist ran an article contrasting Stiglitz's position with that of the IMF and Treasury Department. The article, he would later learn, prompted an irate telephone call from Lawrence Summers, then Deputy Treasury Secretary, now president of Harvard, to James Wolfensohn. (Summers may have been especially angry because the article pointed out that he, too, had questioned the wisdom of liberalization before joining the Treasury Department, only to reverse course.)

Stiglitz had still not said anything directly critical of the IMF. When the IMF called on South Korea and other crisis-wracked nations to raise interest rates and cut spending as conditions for receiving loans, however, his frustration reached the boiling point. The IMF claimed these austerity measures would stabilize local currencies and restore investor confidence (not coincidentally, many of these investors might also be bailed out). But in meetings with top IMF officials, Stiglitz pointed out that most East Asian nations already had balanced budgets and high interest rates. Adopting austerity measures could spur massive unemployment and bankruptcy; Western nations facing recessions would never consider such policies. In response, Stiglitz says, IMF officials told him countries needed to "feel the pain" in order to recover.

Stiglitz did not wait long to strike back. In a speech delivered in January 1998 in Helsinki, he declared that the solutions to the problems facing developing countries "will not be found in the Washington Consensus," whose rigid insistence on fighting inflation and "getting government out of the way" had failed to foster egalitarian development. At a press conference several months later, Stiglitz denounced the IMF's response to the Asian crisis as an abject failure. "Who is paying the price?... Workers who are going to be put out of jobs." Unemployment indeed increased fourfold in Korea, threefold in Thailand and tenfold in Indonesia, where cuts in food subsidies sparked riots.

Today, of course, most of the affected countries have recovered, leading the IMF's defenders to argue that in the end, its prescriptions worked. "In the countries where IMF guidance was followed promptly and without fail, recovery was faster," argues MIT's Rudiger Dornbusch. Not so, counters Stiglitz: A study by Dani Rodrik found that nations that defied the IMF and kept interest rates low, such as Malaysia, recovered more quickly than those that heeded its advice, such as Indonesia.

To some degree, the mounting criticism from Stiglitz and other quarters has had an impact. IMF officials recently acknowledged the potential risks of capital market liberalization, and both the IMF and World Bank have begun speaking more openly about debt relief and poverty reduction. But while the rhetoric has changed, Stiglitz maintains that a doctrinaire ideology of "free-market fundamentalism" continues to shape policy. The IMF and World Bank are pushing developing countries to privatize their pension systems, for example, which is highly controversial in the First World. The IMF demanded fiscal austerity in Argentina, where unemployment had reached 20 percent and, in December, sparked riots that led to the government's collapse. It preaches the gospel of free trade to developing countries--even though most Western countries built their economies by protecting certain industries and continue to subsidize some domestic producers. The blind push to privatize and deregulate has not only failed to fuel sustainable development, Stiglitz contends, but reflects an idealized vision of how markets function that neither economic theory nor concrete experience supports.

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