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Economist and Nobel Laureate Joseph E. Stiglitz argues that the IMF has failed its mission to secure global economic stability. He identifies the reasons for this failure with changes in the IMF’s mission and economic policies.
 

Economist and Nobel Laureate Joseph E. Stiglitz argues that many of the problems with the current phase of economic globalization can be laid at the feet of the International Monetary Fund (IMF). In his role as Senior Vice President and Chief Economist at the World Bank in the late 1990s, Stiglitz was privy to the policies and failures of the IMF.

In his book, Globalization and Its Discontents, Stiglitz lays out an argument for why the IMF has failed in its mission to ensure global economic stability.

Betrayal of Its Initial Mission

While the IMF’s initial mission was based on the assumption that markets did not always work perfectly—that is, there were times when intervention, however limited, might be needed to secure a stable global economic order—Stiglitz argues that that philosophy has changed. Now, says Stiglitz, the IMF operates largely on the untenable ideology that markets should be left to operate on their own, and that no (or very little) direction or intervention is needed.

This, argues Stiglitz, is not only a betrayal of the ideas underlying the IMF’s inception, but it is simply bad economics. The underlying belief at the creation of the IMF was that, in times of crisis, the IMF should foster expansionary economic policy—for instance, encouraging or enabling increased expenditures, lower taxes, lower interest rates—in order to stimulate the economy. In short, a country’s populace would have more money available and so increase their purchasing, thereby stimulating the economy. Now, says Stiglitz, the IMF has adopted exactly the opposite approach: providing funds for countries only if they institute contractionary policies such as cutting deficits, raising taxes, and raising interest rates.

Whereas the IMF’s initial goal was to bring a country in crisis back as close to full employment of it’s workforce as possible, it has dramatically changed course. The change of course, Stiglitz puts flatly, makes it “clear that the IMF has failed in its mission.”

Bad Economic Policies

Stiglitz argues that the IMF’s policies not only do not work, but often make matters worse for the countries in crisis. He notes several misdirected policies:

  • Capital market liberalization. The IMF pressures countries that petition for IMF loans to open their markets to outside investment capital. Rather than help matters, this approach often makes matters worse as it destabilizes the economy of the country as well as the global economy. Investors may invest huge sums in a country only to pull those investments at a moment’s notice, causing acute economic crises.
  • Latin America as the template. Stiglitz says that many of the the ideas of the “Washington Consensus” were based on the experience with Latin America. The economic growth in these countries had not been sustained, governments had let budgets run out of control, and loose monetary policy had led to rampant inflation. The belief of the Washington Consensus was that this had happened as a result of excessive government intervention in the economy. So, if government intervention was the problem, then government intervention should be limited. The Washington Consensus pushed for policies such as capital market liberalization. Stiglitz notes that even if this approach was appropriate for some Latin American countries, it did not make sense to apply this policy blindly to other countries in very different situations where this kind of policy might make matters much worse.
  • Insensitivity to strength of local markets. Stiglitz says that the IMF policy forcing rapid trade liberalization has not only not worked, but does not follow lessons learned from history. He notes the cases of the U.S. and Japan. Both countries had trade protection policies in place until their industries were strong enough to compete in a global market. However, IMF policies forcing trade liberalization on a developing country where industries are not strong enough can actually cause more harm. Local industries could not compete, and rising interest rates made job creation virtually impossible. Says Stiglitz, “Liberalization has, thus, too often, not been followed by the promised growth, but my increased misery.”

Taxation without Representation

Stiglitz notes that even though the IMF is a public institution, funded by money from taxpayers around the world, it is not held accountable to the interests of these taxpayers. He identifies the problem of governance as one of the prime “underlying factors” for problems with the IMF.

Stiglitz says that the IMF reports to ministers of finance and central banks around the world thatare in many ways insulated from the concerns of the IMF’s ultimate constituency: the global populace. Stiglitz notes that control of the IMF is accomplished through a complicated set of voting arrangements based in large part on the economic influence of the member countries. Additionally, the U.S. has effective veto power over IMF decisions.

Stiglitz says that the IMF (and later, the World Bank as it was reduced to a “junior partner” with the IMF) was driven by the collective will of the G-7 (the governments of the seven most advanced industrial countries). Open, democratic debate over IMF policies and procedures would threaten the influence of these industrial giants, which would clearly not be in their best interests. So, say Stiglitz, the current drivers of IMF policy see it in their best interest to avoid democratic accountability and dialogue.

According to Stiglitz, the IMF is dominated not merely by wealthy, industrialized nations, but—more narrowly—by the commercial and financial interests within those countries. Stiglitz says that the fact that the IMF draws on public funds to forward the interests of a select few—with no effective voice in the IMF’s policies, amounts, in his words, to “taxation without representation.”

Mandates, Policies and Leadership

Table 1 presents the initial mandates, policies and leadership of the IMF, World Bank and the WTO and how they have changed.

Table 1: Comparison of IMF, World Bank and WTO Characteristics

Organization

Mandate

Policies

Leadership

International Monetary Fund (IMF)

Ensure global economic stability. Formed at Bretton Woods conference in 1944.

IMF should focus on macroeconomic issues: e.g., budget deficits, monetary policy, and inflation.

Initially: Expansionary policies: Maintain global aggregate demand by putting pressure on countries that were allowing their economies to slump. Providing liquidity via loans to countries to increase aggregate demand.

Now: Contractionary economic policies.

Always a European. Selected “behind closed doors.” Not representative of the nations it serves.

Finance ministers and central bank governors.

International Bank for Reconstruction and Development (World Bank)

To finance the rebuilding of Europe after WWII. (1944)

World Bank should deal with structural issues: e.g., government expenditure, a country’s financial institution, labor market, trade policies.

Initially: lending to countries for specific development projects (like dams or roads).

Now: lending to provide broad-based support.

Initially separate from IMF, but an “imperialist” IMF has taken over much of the mission of the World Bank. World Bank is now (according to Stiglitz) a “junior partner” of the IMF.

World Trade Organization (WTO)

To govern international trade relations. Encourage the free flow of goods and services among countries. (1995)

Liberalize trade relations

Does not set rules for itself. A forum for trade negotiations.

Trade ministers.

 
Data and Methods:

Data Source:

Based on the author's experience as the Senior Vice President and Chief Economist at the World Bank in the late 1990s.

Funding Sources:

  • The Brookings Institution
  • Stanford University
  • Columbia University
  • Carnegie Endowment for Peace
  • Ford Foundation
  • MacArthur Foundation
  • Rockefeller Foundation
  • UNDP
  • Canadian International Development Agency
 
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Reference

Stiglitz, Joseph E. 2002. Globalization and Its Discontents. New York: Norton. Ch.8, pp.195-213.

 
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