NEWS YOU WON'T FIND ON CNN

 

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Distillation of the book " globalization and its discontents" 

288 pages, published by penguin . in 2002 - a critical study on globalization and IMF polices.

By Joseph Stiglitz - chief economist AND senior vice president at the World Bank (1997-2000), chairman of President Bill Clinton 's council of economic advisers (1993-1997). Currently professor of finance and economics at Columbia university. NOBEL PRIZE WINNER FOR ECONOMICS IN 2001.

Distillation , prepared by Francis. N. J. Dubai.

The French intellectual - Pierre Bourdieu - says , politicians should behave more like scholars and to engage in scientific debate based on hard facts and evidence.

Privatization is a wonderful idea - (selling of government monopolies to private companies) more efficiency and lower prices for consumers -BUT ONLY IF SUPPORTED BY STRONG COMPETITION POLICIES. Simplistic standard models assume - perfect competition and perfect information ,which failed to allow for desirable government intervention ,but market is always imperfect. So the need for economics of information ( abstract mathematical economics ) in particular, asymmetries of information.

If interest rates raised to exorbitant levels , firms will be forced into bankruptcy, and this will be bad for the economy. IMF always insisted on high interest rates.
Need to reform the international institutions that are supposed to drive economic development, manage crises, and facilitate economic transition.
IMF and U.S Treasury which always emphasized transparency are the least transparent.
Those who are affected by the policies are to have a greater say in their formulation.

Inequality, unemployment, pollution are the issues mainly for government to take care of.
For that, government to be reinvented - making the government more efficient and responsive. At IMF rarely was any forecasts about, what the policies would do to poverty. Rarely were there any thoughtful discussions and analyses of the consequences of alternative policies. Countries were expected to follow IMF guidelines without debate.

IMF structural adjustment policies , designed to help a country adjust to crises as well as to more persistent imbalances -led to hunger and riots. When there were positive results , it went disproportionately to the better off, with those at the bottom facing even greater poverty. The level of pain created in developing countries are far greater than necessary. 

Global trading system also to be blamed, for hypocrisy of pretending to help developing countries by forcing them to open up their markets to goods of the advanced industrial countries while keeping their own market protected (eg. agriculture products, textile ).
Often it's a tone of voice, or a meeting behind closed doors, or a memo that determines the outcome of discussions at IMF.

Despite the repeated promises of poverty reduction made over the last decade of the 20th century , actual number of people living in poverty has actually increased by 100 million - when the world income actually increased by 2.5 % annually.
If globalization has not succeeded in reducing poverty ,neither has it succeeded in ensuring stability. Fears of financial contagion spread around the world. Collapse of one emerging market currency will mean that others fall as well.

The contrast between Russia's transition, as engineered by the international economic institutions, and that of China designed by itself could not be greater.

The critics of globalization accuse Western countries of hypocrisy, and the critics are right, the Western countries have pushed poor countries to eliminate trade barriers ,but kept their own barriers, preventing developing countries from exporting their agricultural products and so depriving them of desperately needed export income. It also cost Americans , both as consumers ,in high prices they paid, and as taxpayers , to finance the huge subsidies , billions of dollars. Special commercial and financial interests prevailed. Keeping quotas on a multitude of goods from textiles to sugar ,by the more advanced industrial countries ,while subsidizing, say, agriculture ,making developing countries difficult to compete.

After the last trade agreement in 1995 the net effect was to lower the prices ,some of the poorest countries received ,relative to what they paid for their imports. Thus some of the poorest countries were made worse off. One provision of the agreement entailed converting GATT into the WTO. Western banks benefited from loosening of the capital market, when the inflow of speculative hot money suddenly reversed, left behind , collapsed currencies and weakened banking systems.

The net effect of the intellectual property rights ,ending up in high incentive to developed countries is limited, since a few only could afford the high prices. The other side is thousands will be effectively condemned to death, because of inability to pay high prices. The interests and perspectives of only the producers protected, not that of the users.

The rapid pace of the change has not allowed cultural adaptation. The crises that have brought in their wake massive unemployment have , in turn been followed by longer term problems of social dissolution-from urban violence in Latin America to ethnic conflicts in other parts of the world ,such as Indonesia. The conditionality - the conditions that the international interests imposed in return for their assistance - undermined national sovereignty.
The differences in views on Globalization are so great that one wonders ,are the protestors and the policy makers talking about the same phenomena.

IMF and WORLD BANK ,both originated in WORLD WAR II, as a result of U N monetary and financial conference at Bretton Woods in July 1944.The proper name of the World bank -the international bank for reconstruction and development. The more difficult task of ensuring global economic stability was assigned to the IMF.
John Meynard Keynes ( the intellectual godfather of IMF ),a key participant at Bretton Woods, put forward a simple explanation and a correspondingly simple set of prescriptions : lack of sufficient aggregate demand explained economic down turns, government policies could help stimulate aggregate demand. In cases were monetary policy is ineffective , government could rely on fiscal policies, either by increasing expenditure or by cutting taxes. While the models underlying Keynes 's analysis have subsequently been criticized and refined , bringing a deeper understanding of why market forces do not work quickly to adjust the economy to full employment , the basic lessons remain valid.

In it's original conception IMF was based on the recognition that markets often did not work well, and collective action at the global level for economic stability. The IMF is a public institution established from money, provided by the tax payers around the world, but it reports to the ministries of finance and the central banks of the governments of the world. They assert their control through a complicated voting arrangement based largely on economic power of the countries at the end of world war II , the major developed countries run the show, with only U S A having effective veto.

Now it champions market supremacy, provides funds only if countries engage in policies like cutting deficits, raising taxes , raising interest rates, which lead to contraction of economy. Ideas were pushed on reluctant poor countries, that often badly needed their loans and grants.

IMF was supposed to limit itself to matters of macroeconomics, World Bank to structural issues - what the country's government spent money on, the country's financial institutions, labour markets and it's trade policies. Since almost any structural issue could affect overall performance of the economy, it viewed everything as falling within it's domain. Always IMF had the answers , basically the same ones for every country. Both were driven by the collective will of G- 7 , the last thing they wanted was a lively democratic debate about alternative strategies.

Many of the policies that IMF pushed , in particular , premature capital market liberalization (despite having no evidence that it spurs economic growth ), have contributed to global instability. And once a country was in a crisis, IMF funds and programs not only failed to stabilize the situation but in most cases, actually made the matters worse, especially for the poor. It also failed in it's new missions - guiding the transition of the countries from communism to market economy.

Beggar - thy - neighbor , trade policies, in which countries raised tariffs to maintain their own economies but at the expense of their neighbors ,were largely blamed for the spread of depression and it's depth - so the necessity for W T O.

Many of the ideas incorporated in Washington consensus (1980 ) were developed in response to specific problems of Latin America , subsequently been deemed applicable to countries around the world - which were not applicable for countries in the early stages of development or transition. 

United States and Japan and most of the advanced countries had built up their economies by wisely and selectively protecting some of their industries until they were strong enough to compete with foreign companies. Neither blanket protectionism , nor rapid liberalization worked. Forcing a developing country to open itself to certain imports could have disastrous consequences - socially and economically- jobs have been systematically destroyed, with highly subsidized goods from Europe and America competition becomes impossible. IMF's insistence on maintaining tight monetary policies has led to interest rates that would make job creation impossible, even in the best of circumstances. Since trade liberalization occurred before safety nets were put into place ,who lost their jobs were forced into poverty, even those who did not loose their jobs ended up in heightened sense of insecurity.

European countries banned free flow of capital until the seventies. For developing countries with a barely functioning bank system ,it's risky opening their markets. It's bad economics. The influx of hot money into and out of the country creates havoc.

The application of mistaken economic theories would not be such a problem if the end of first colonialism and then communism had not given the IMF and the World Bank the opportunity to greatly expand their respective original mandate, to vastly expand their reach. Today these institutions have become dominant players in the world economy . Not only countries seeking their help but also those seeking their "seal of approval" so that they can better access international capital markets , must follow their economic prescriptions ,which reflect their free market ideologies and theories. The result for many people has been poverty and for many countries social and political chaos. The IMF has made mistakes in all the areas it has been involved in : development , crisis management and in countries making transition from communism to capitalism. Structural adjustment programs did not bring sustained growth even to those like Bolivia , that adhered to it's strictures.

Successful economic programs require extreme care in sequencing - the order in which reforms occur , and pacing. Failure in that will lead to rising unemployment and poverty. If markets are opened too rapidly ,before strong financial institutions are established , jobs will be destroyed faster than new jobs are created. 

Head of IMF always a European, that of World Bank an American , chosen behind closed doors. The problems also arise from who speaks for the country. The policies of the international economic institutions are all too often closely aligned with the commercial and financial interests of those in advanced industrial countries. The current system run by IMF is one of taxation without representation. The globalization as it has been practiced has not lived up to what its advocates promised it would accomplish - or what it can or it should do. The net effect of the policies set by Washington consensus has all too often been to benefit the few at the expense of many, the well-off at the expense of poor. In many cases commercial interests and values have superseded concern for the environment , democracy , human rights and social justice.

Government to play a vital role in shaping the evolution of the economy. 
The U.S government obtained a wide economic latitude when the courts broadly interpreted the constitutional provisions that allows federal government to regulate interstate commerce - regulate financial system , set minimum wages and working conditions and eventually provided unemployment and welfare system to deal with problems posed by market system. The federal government also promoted some industries ( telegraph ) , and encouraged others , like agriculture , by providing extension services to train farmers, set up universities to do research. The federal government played a central role not only in promoting American growth. It provided land grants , that provided minimum opportunity for all Americans . 


Modern high-tech warfare is designed to remove physical contact: dropping bombs from 50,000 feet ensures that one does not " feel " what one does. Modern economic management is similar, from one's luxury hotel, one can callously impose policies about which one would think twice, if one knew the people whose lives, one was destroying.

The term macro refers to the aggregate behavior, the overall levels of growth, unemployment, and inflation and a country can have low inflation but no growth and high unemployment. To most economists, such a country would rate as having a disastrous macroeconomic framework. To most economists inflation is not so much an end in itself , but a means to an end, it is because excessively high inflation often leads to low growth, and low growth leads to high unemployment., that inflation is so frowned upon. But for the IMF , a country like Argentina, can get " A" grade even if it has double digit unemployment for years , so long as its budget seems in balance and its inflation seems in control.

IMF is opaque, rather than transparent, and not only does far too little information radiate from inside to the outside world, perhaps even less information from outside is able to penetrate the organization. The opaqueness also means that it is hard for information from the bottom of the organization to percolate to the top. The fund casts itself as the monopoly supplier of " sound " advice. 
In the standard competitive model - the model that underlies the IMF's market fundamentalism - demand always equals supply. If the demand for labor equals supply, there is never any involuntary unemployment. Someone who is not working has evidently chosen not to work. In this interpretation , unemployment in the great depression, when one out of every four people was out of work, would be the result of a sudden increase in the desire for more leisure. It might be of some interests to psychologists, why there was this sudden change in the desire for leisure, or why those who were supposed to be enjoying this leisure seemed so unhappy, but according to standard model these questions go beyond the scope of economics. For IMF unemployment is the result of greedy unions, politicians interfering with workings of free markets by demanding excessively high wages. Obvious implication - if there is unemployment wages should be reduced.

IMF wanted a central role in shaping policy, it could do this because market fundamentalism, their ideology required, little consideration of a country's particular circumstances and immediate problems. Suffering and pain became part of the process of redemption, evidence that a country was on the right track. Sometime pain is necessary, but it is not a virtue in it's own right. Well designed policies can often avoid much of the pain : and some forms of pain - the misery caused by abrupt cuts in food subsidies , for example, which leads to rioting , urban violence and the dissolution of the social fabric - are counter-productive.

IMF is not particularly interested in hearing the thoughts of it's client countries on such topics as development strategy or fiscal austerity. All too often, the fund's approach to developing countries has had the feel of a colonial ruler. The IMF could not only cut off it's own funds , but could use it's bully pulpit to discourage investments from private market funds by telling private sector financial institutions of the doubts about the "client's" economy. Other donors ( the World bank , the European Union, and many other countries ) make access to their funds ,contingent upon IMF approval. Recent relief have effectively given IMF even more power, because unless IMF approves the country's economic policy , there will be no debt relief. This gives IMF enormous leverage.

IMF staff monitored progress , not just on the relevant indicators for the sound macro management - inflation, growth , unemployment - but on intermediate variables , such as the money supply , often only loosely connected to variables of ultimate concern.

Conditionality - refers to more forceful conditions , ones that often turn the loan into a policy tool. If the IMF wants a nation to liberalize it's financial markets, for instance , it might pay out the loans in installments , tying subsequent installments to verifiable steps toward liberalization. The conditions went beyond economics into areas that properly belong in the realm of politics . 

Europe's independent central bank exacerbated Europe's economic slow down in 2001, as it responded peevishly to the natural political concerns, over the growing unemployment, it refused to allow interest rates to fall, as it had a mandate to focus on inflation , a policy which the IMF has advocated around the world ,but one that can stifle growth or exacerbate an economic downturn

In the midst of Korea's crisis , the Korean central bank was told not only to be more independent but to focus exclusively on inflation, although Korea had not had a problem with inflation, and there was no reason to believe that mismanaged monetary policy had anything to do with the crisis. The IMF simply used the opportunity that the crisis gave it, to push it's political agenda.

The FED , America's central bank , has a mandate to focus not just on inflation, but also on unemployment and growth. Yet here was the IMF - partially under the influence of the U.S Treasury - imposing a political condition on Korea that most Americans would have found unacceptable for themselves.

While conditionality did engender resentment , it did not succeed in engendering development. Studies at the World Bank and elsewhere showed just that conditionality did not ensure that money was well spent and countries would grow faster but that there was little evidence it worked at all. There are several reasons for the failure of conditionality. The simplest has to do with the economists' basic notion of fungibility, which simply refers to the fact that, the money going in for one purpose frees up other money for another use. : the net impact may have nothing to do with the intended purpose. Such conditions were seen as the intrusion by the new colonial power on the country' own sovereignty. The policies could not withstand the vicissitudes of political process.

IMF pretend that it was above politics , yet it was clear that it's lending program was , in part , driven by politics. The Kenya and Russia cases . Political judgments often entered into IMF advice. The IMF pushed privatization, in part because it believed government could not in managing enterprises, insulate themselves from political pressures. The very notion that one could separate economics from politics, or a broader understanding of society, illustrated a narrowness of perspective . If policies imposed by lenders induce riots, as happened in country after country, then economic conditions worsen as capital flees and businesses worry about investing more of their money. Such policies are not a recipe , either for successful development or for economic stability.


The complaints against the IMF imposition of conditions extended beyond what conditions and how they were implemented, but were directed at how they were arrived at as well. Even countries not borrowing money from IMF can be affected by its views - through "article 4 " surveillance consultations. IMF 's predictions are always predictable, increase interest rates to slow down the economy. Had IMF ' s advice been followed the U.S would not have experienced the boom in American economy over the 1990 s- a boom that brought unprecedented prosperity and enabled the country to turn around it's massive fiscal deficit into a sizeable surplus. The lower unemployment also had profound social consequences - issues to which IMF paid little attention anywhere. The low unemployment rate encouraged individuals to take risks, to accept jobs without job security; and that willingness has proven an essential ingredient in America's success in the so-called New Economy. The United States ignored IMF' s advice. Neither the Clinton administration nor the Federal Reserve paid much attention to it.

In spite of the repeated discussions of openness and transparency, IMF still does not formally recognize the citizen's " basic right to know"; there is no freedom of information act to which an American or citizen of any other country can appeal,to find out, what this international public institution is doing.

Fiscal austerity, privatization , market liberalization were the three pillars of Washington consensus advice throughout 1980's and 1990's. These policies were pushed too far , too fast, and to the exclusion of other policies that were needed. Fiscal austerity pushed too far ,under the wrong circumstances , can induce recessions, and high interest rates may impede fledgling business enterprises. IMF pursued privatization and liberalization , at a pace and in a manner that often imposed very real costs on countries, ill-equipped to incur them..

The most efficient steel mills in the world are those established and run by the Korean and Taiwanese governments. 

There are some preconditions that have to be satisfied before privatization can contribute to an economies growth. And the way privatization is accomplished makes a great deal of difference. The problems that arose from these failures have created antipathy to the very idea of privatization. IMF simply assumed that markets arise quickly to meet every need, when in fact , many government activities arise because markets have failed to provide essential services.

When many European countries created their social security systems and unemployment and disability insurance systems, there were no well-functioning private annuity markets, no private firms that would sell insurance against these risks that played such an important role in individual's lives. Even when United States created its social security system , much later , in the depths of Great Depression as part of the New Deal , private markets for annuities did not work well-and even today one cannot get annuities that insure one against inflation. Again in the United States, one of the reasons for the creation Federal national Mortgage Association ( Fannie MAE ) was that private market did not provide mortgages at reasonable terms to - low and middle-income families. In developing countries, these problems are even worse; eliminating the government enterprise may leave a huge gap - and even if eventually the private sector enters , there can be enormous suffering in the meanwhile. 

There is a natural reason why IMF has been less concerned about competition and regulation that it might have been. Privatizing an unregulated monopoly can yield more revenue to the government, and IMF focuses more on macroeconomic issues, such as the size of the governments deficit, than on structural issues, such as the efficiency and competitiveness of the industry. Private firms do not take into account the social costs - urban violence , increased crime, social and political unrest- associated with unemployment due to privatization. Privatization often destroys jobs , rather than creating new ones. Timing and sequencing is everything.
Privatization is often referred to as " briberization" for the corruption involved. Russia provides a devastating case study of the harm of " privatization at all costs ". They failed to realize that without the appropriate legal structures and market institutions, the new owners might have the incentive to strip the assets rather than use them as a basis for expanding industry.

The most successful developing countries , those in East Asia ,opened themselves to the out side world ,but did, so slowly and in a sequenced way. These countries took advantage of globalization to expand their exports and grew faster as a result. But they dropped protective barriers carefully and systematically, phasing them out only when new jobs were created. They ensured that there was capital available for new job and enterprise creation; they even took an entrepreneurial role in promoting new enterprises. China is just dismantling it's trade barriers, twenty years after it's march to the market began, a period in which it grew extremely rapidly.

The western countries pushed trade liberalization for the products that they exported, but at the same time continued to protect those sectors (agriculture, textile etc. ) in which competition from developing countries might have threatened their economies. Markets were opened mainly for the services exported by the advanced countries - financial services and information technology - but not for maritime and construction services, where developing countries might have been able to gain a toehold.

In the 19th century the Western powers - many of which had grown through , using protectionist policies - had pushed unfair trade treaties. The most outrageous , perhaps , followed the opium wars, when United Kingdom and France ganged up against a weak China , and together with Russia and United States forced it in the Treaty of Tientsin in 1858 , not just to make trade and territorial concessions, ensuring it would export the goods the West wanted at low prices ,but to open it's market to opium, so that millions in China become addicted. 

Matters are perhaps worse still when the United States acts unilaterally. The U.S Trade representative or the Department of Commerce , often prodded by special interests within the United States , brings an accusation against a foreign country; there is then a review process - involving only the U.S Government - with a decision made by the U.S ,after which sanctions are brought against the offending country. The U.S sets itself up as prosecutor , judge, and jury. 

China with its per capita income of $450 is not only a developing country , but a low income developing country. In 1994 Uruguay Round negotiations , Mickey Kantor , U.S Trade representative insisted that China is a developed country , hence to open it's market faster. Also demanded America be treated as if it were a less developed country , that it be given not just 10 years but an additional four years for lowering it's barriers against textile imports.
U.S treasury insisted on a provision for faster liberalization of China's financial market. It was made to serve the narrow interests of the financial community in the U.S , which Treasury vigorously represents. Whereas the more advanced industrial countries did not attempt capital market liberalization until late in their development - European nations waited until the 1970's to get rid of their capital market controls - the developing nations have been encouraged to do so quickly. To the consequences - economic recession - of banking crises brought on by capital market deregulation , the poor countries have no safety net to soften the impact. Capital market liberalization entails stripping away the regulations intended to control the flow of hot money in and out of the country - short term loans and contracts that are usually no more than bets on exchange rate movements. This speculative money cannot be used to build factories or create jobs - companies don't make long-term investments using money that can be pulled out on moment's notice. China which received the largest amount of foreign investment , did not follow any of the Western prescriptions( other than macro stability ) -prudently forestalling full capital market liberalization. While China demonstrated that capital market liberalization was not needed to attract funds, given the high savings rates in East Asia , the region hardly needed additional funds.

Bankers prefer to lend to those who do not need their funds. In the times of downturn countries cannot expect foreigners to make up for a short fall in domestic funds.
Argentina . Before the collapse in 2001, the domestic banking industry had become dominated by foreign -owned banks. Small and medium size firms complained of lack of access to capital. And the lack of growth - to which the lack of finance contributed - was pivotal in that country's collapse. Countries need to impose requirements , similar to those in America's Community Reinvestment Act ,to ensure that as they open their markets up, their small businesses are not starved of capital. 

Foreign direct investment often flourishes only because of special privileges extracted from the government. Often those privileges are the result of corruption. It comes only at the price of undermining democratic processes . This is particularly true for investments in mining, oil, and other natural resources. 

Economic theory and history show how disastrous it can be to ignore sequencing.
Development economics stresses on universal primary education. What the simplistic statistical studies ignored is the power of systemic change. Abolishing subsidies is not only a bad social policy , it was bad economic policy. The social contract that binds citizens together and with their government is to be recognized. When government policies abrogate that social contract, citizens may not honor their "contracts". There had to be active programs to help the poor. 

It is important not only to look at what IMF puts on its agenda, but what it leaves off. Stabilization is on the agenda ;job creation is off. Taxation and it's adverse effects, are on the agenda ;land reform is off. There is money to bail out banks but not to pay for improved education and health services , let alone workers who are thrown out of their jobs as a result of IMF's macroeconomic mismanagement. Land reform represents a fundamental change in the structure of the society. One that the elite won't like. Land reform preceded several of the most successful instances of development, such as those in Korea and Taiwan.

IMF underestimated the long-term social and political costs of policies that devastated the middle-class. The middle classes have traditionally been the group that has pushed for the rule of law, universal public education, creation of a social safety net. These are essential elements of a healthy economy and the erosion of the middle-class has led to concomitant erosion of support,for these important reforms. Alternative strategies made use of markets ,but recognized that there was an important role for government. They saw change not just as a matter of economics ,but as part of broader evolution of society. Government policies played an important role in enabling the East Asian nations to accomplish saving heavily and investing them well. Governments helped shape and direct markets.

IMF itself had become a part of the country's problem, rather than part of the solution. Economic and social storm that hit their nation ,was addressed by ordinary people as well as government officials, and business men in developing countries as IMF - they way one would say "the plague" or "the great Depression". History is dated by "before" and "after " the IMF, just as countries that are devastated by an earthquake or some other natural disaster date events by " before" or "after" the earthquake.

In East Asia , IMF insisted on increasing interest rates to fifty times greater. If Clinton worried a lot about the adverse effects of half a point increase , in a country with one of the best business environments in the world, how IMF can be justified. And in the IMF model - as in the models of most of the macroeconomic text books written two decades ago - bankruptcy plays no role. Highly leveraged companies are particularly sensitive to interest rate increase, especially to the extremely high levels urged by IMF, they go bankrupt quickly.
The fund recognized that the underlying problems in East Asia were weak financial institutions and over leveraged firms; yet it pushed high interest rate policies that actually exacerbated those problems. The consequences were precisely as predicted . IMF had engineered a simultaneous contraction in the aggregate demand and supply. Higher interest rates did not attract more capital into the country . On the contrary , the higher interest rates made the recession worse and actually drove the capital out of the country.

In 1997 Japan offered $100 billion to help create an Asian Monetary Fund, in order to finance the required stimulative actions. But the treasury did everything it could to squelch the idea. IMF joined in. while IMF was a strong advocate of competition in the markets, it did not want competition in it's own domain. With Japan and possibly China , as the likely major contributors to the Asian Monetary Fund, their voices would predominate , providing a real challenge to American "leadership" and control. When the offer was scaled down to $30 billion , it was accepted. But even then the United States argued that the money should be spent not to stimulate the economy through fiscal expansion, but for corporate and financial restructuring - effectively , to help bail out American and other foreign banks and other creditors. Three years after the crisis ,the countries of East Asia set up more modest version of the Asian Monetary Fund , under the name " Chang Mai" initiative. 

Capital controls never discouraged foreign investors ; they are concerned with economic stability. It is no accident that the two large developing countries spared the ravages of global economic crisis - India and China - both had capital controls. While developing world countries with liberalized capital markets actually saw their income decline , India grew at a rate in excess of 5 % and China at close to 8 %. China achieved this by following the prescriptions of economic orthodoxy. These were not Hooverite IMF prescriptions ,but the standard prescriptions , that economists have been teaching for more than half a century. : when faced with an economic downturn, respond with expansionary macroeconomic policy. China fully appreciated the systemic consequences of macroeconomic policies, consequences that the IMF policies habitually overlooked. It is no accident that the only major East Asian country , China, to avert the crisis, took a course directly opposite that advocated by IMF, and the country with the shortest downturn, Malaysia, also explicitly rejected an IMF strategy. 

Around the world very little new investment is financed by raising new equity, interest rates at exorbitant levels make borrowing riskier. Capital will not flow freely. In this way IMF policies lead to less efficient resource allocation, particularly capital allocation, which is the scarce resource in developing countries .

The IMF worried that a devaluation of the Ruble would set off a round of inflation. Its insistence on Russia maintaining an overvalued currency, and its supporting that with billions of dollars of loans ultimately crushed the economy. The leaders of the 1917 Revolution recognized that what was at stake was more than a change in economics; it was a change in society in all of its dimensions. So too , the transition from communism to market economy, was more than just an economic experiment: it was a transformation of societies and of political and social structures. Part of the reason for the dismal results of the economic transition was the failure to recognize the centrality of these other components.

There has to be due recognition of the importance of the institutions. Most important are legal and regulatory frameworks, to ensure that contracts are enforced, that there is an orderly way of resolving commercial disputes, that when borrowers cannot pay what is owed, there are orderly bankruptcy procedures, that competition is maintained, and that banks that take deposits are in a position to give the money back when they ask.

Many years later , the wisdom of the gradualist approach is at last being recognized: the tortoises have overtaken the hares.

Job cuts help overall efficiency, only if they result in workers moving from low productivity jobs to high productivity jobs.
The stabilization / liberalization / privatization program was not a growth program. It was intended to set the preconditions for growth. Instead it set the preconditions for decline. Not only was investment halted, but capital was used up- savings vaporized by inflation, the proceeds of privatization of foreign loans largely misappropriated. 

Small non strategic countries like Kenya were denied loans because of corruption while countries such as Russia , where the corruption was on far larger scale were continually lent money. Russia was a naturally resource-rich ( eg. Uranium ) country. In spite of strong opposition from its own staff, the bank was under enormous political pressure from Clinton administration to lend money to Russia.

Capital market liberalization may not have contributed to global economic stability, but it did open up vast new market for Wall Street. Simplistic free market ideology provided the curtain , behind which ,the real business of the "new" mandate could be transacted. The change in mandate and objectives, while it may have been quiet, was hardly subtle: from serving global economic interests, to, serving the interests of global finance. From the start one should have been suspicious of the IMF/Treasury arguments. For a variety of reasons ,markets are not self regulating, at least in the relevant time ( as Keynes famously put it " in the long run we are all dead " ) - there are booms and busts - so the government has an important role in promoting economic stability. A particular view of the role of the government and markets have come to prevail - a view which is not universally accepted within the developed countries, but which is being forced upon the developing countries and economies in transition. There needs to be a change in mind-set.
IMF comes by its penchant for secrecy naturally : central banks , though public institutions , have traditionally been secretive. Within the financial community, secrecy is viewed as natural. 
How could an organization with such talented (and high paid ) government bureaucrats make so many mistakes ?.IMF and World Bank still have disclosure standards far weaker than those of governments and democracies like U.S, Sweden, Canada. They attempt to hide critical reports; it is only their inability to prevent leaks that often forces the eventual disclosure. Is there something systematically wrong with its models ? Or is it trying to deliberately mislead policy making? 


While developed countries preached that developing countries should not subsidize their industries , they continued to provide billions in subsidies to their farmers. They preached the virtues of competitive markets , but were quick enough to push for global cartels in steel and aluminum. Though there is intellectual property rights, much of the most crucial research , such as that in basic science and mathematics is not patentable. It is clear that less developed countries may not have the legal and financial resources to challenge bio - piracy. 
IMF often talked , take the pain; the deeper the pain, the stronger the subsequent growth. People today would suffer, but their children would be better off. Unfortunately the evidence does not support IMF's theory. Economic policy should be directed at minimizing the duration and depth of economic downturn.
IMF was reflecting the interests and ideology of the Western financial community. Modes of operation which were secretive , insulated the institution and it's policies from the kind of intensive scrutiny that might have forced it to use models and adopt policies appropriate to the institution in East Asia.
The American slowdown of 2000 - 2001 has been traced to excessive market exuberance. Marked fluctuations in the economy can arise even in the absence of mismanagement of financial institutions and monetary policy. 
IMF annul report for 2000 recognized that an expansionary fiscal policy is behind the recovery from the crisis of Korea, Malaysia, and Thailand. 
A deeper econometric study and more data is required to disentangle the effect of capital controls on foreign direct investment from other factors that affect foreign direct investment.
In the West ,the largest gains in productivity are associated not with privatization, but with corporatization , ie imposing hard budget constraints and commercial practices on enterprises while they still remain state-owned.

Further readings
1. " externalities in Economies with imperfect information and incomplete markets" -B.Greenwald and J.E.Stiglitz
2. rethinking east asian miracle - J.E.Stiglitz and S.Yusuf
3. the role of government in East Asian economic development: comparative institutional analysis ( oxford university press 1998 ) - Masahiko Aoki etc.
4. the asian financial crisis: causes ,cures, and Systemic implications - morris Goldstein
5. chastening : inside the crisis that rocked the global financial system and humbled the IMF - paul blustein
6. the wrong medicine for asia - J.Sachs 1997
7. emerging financial markets - D.beim and c.calomiris
8. the determinants of banking crises; evidence from developing and developed countries.- A.Demirguc-kunt and E.Detragiache
9. the end of market fundamentalism - eisuke sakakibara
10. new bridges across the chasm: macro and micro strategies for Russia and other transitional economies - d.ellerman and j.e.stiglitz
11. Chinese reforms from a comparative perspective - a.hussain ,n.stern, j.e.stiglitz
12. sale of the country - chrystia freeland ---reg. Russia
13. kpitalizm: russia's struggle to free it's economy - r.brady
14. who lost Russia - john Lloyd
15. russia's meltdown:anatomy of IMF failure - a.cohen
16. failed crusade - s.f.cohen
17. the tragedy of russia's reforms - : market bolshevismgainst democracy - p.reddaway and d.glinski
18. russia's unfinished revolution: political change from gorbachev to putin - micheal Mcfaul
19. gorbachev ,yeltsin and putin : political leadership in russia's transition - archie brown and liliia
20. the new Russia : transition gone awry - Lawrence r.klien and marshall pomer
21. russia's virtual economy - c.g.gaddy and b.w.ickes , (for the implications and costs that barter imposes on Russian economy ).
22. russia should put it's people first - george w.kolodko
23. privatization : an economic analysis - j.Vickers and g.yarrow
24. economic perspectives on privatization - j.Vickers and g.yarrow
25. using tax policy to curb speculative short-term trading - j.e.stiglitz
26. a proposal for international monetary reform - j.tobin ( tobin tax = tax on cross border financial transactions )
27. tobin tax : coping with financial volatility - m.ul haq, i.kaul, i.grunberg
28. the east asian miracle : economic growth and public policy : by world bank
29. trade policy and economic growth : a skeptic guide to the cross-national evidence - f.Rodriguez and d.rodrik
30. towards a new paradigm for development : strategies, policies and processes - j.e.stiglitz


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