Session 8 Joseph Stiglitz, Globalization and Its Discontents, 2002 Chapters 7-9

Chapter 7 Better Roads to the Market Two examples of countries that pursued successful alternative strategies (not following the Washington Consensus): Poland and China. Both chose a more gradualist approach, as opposed to shock therapy. Key elements of Polands strategy: Gradual privatization while building up banking and legal system Emphasized importance of democratic support for reforms, benefits for unemployed, adjusting pensions for inflation etc. Key elements of Chinas transition: Partial privatization, beginning w/agriculture individual responsibility system Township and village public enterprises Two-tier pricing (old prices under quota system AND market-set prices) Creation of institutional infrastructure Opening to foreign investment Prioritized creating competition & new jobs over privatization and restructuring (to maintain social stability) The Road to the Future : Russia Needs to go beyond focus on macrostabilization and encourage economic growth. To do this, Russia must: Create an investment-friendly environment Establish a federalist structure that provides incentives at all levels Establish political and social stability Collect taxes While Russian leaders should be held accountable for failure of economic reforms, so should IMF and Western leaders. Chapter 8: The IMFs Other Agenda Market fundamentalists dominate the IMF. However, IMF needs to identify instances in which markets fail and analyze how particular policies might avert or minimize damage done by these failures. Examples of inconsistencies in IMF policies: Intervention to sustain exchange rates (why is this intervention desirable when intervention is so undesirable in other markets?) IMFs attempts to quarantine contagion (economic crisis in one country spreading to others) but in Asian financial crisis, IMF spread the disease rather than containing it! Overly simplistic understanding of balance of payments deficits need to consider what money is actually being used for. By providing funds for governments to bail out Western creditors when loans arent repaid, IMF has caused creditors to weaken incentives to ensure that debts will be paid. Borrowers are encouraged to incur excess risk dont buy insurance b/c they count on an IMF bailout. IMF began to condition approval of loans to a country on participation by the private sector i.e. if a country cant raise a minimum amt of money from private banks, it might not be able to receive funds from the IMF. In 1999, IMF decided to expand its role to be the Lender of Last Resort, a role previously played by central banks. But countries pay IMF back first, and if more $$ is

going to IMF, less can go to private lenders. This results for need of risk premiums and higher private sector interest rates. What explains this lack of coherence? IMF is pursuing interests of the financial community (esp foreign creditors), which are often in conflict w/objective of enhancing global stability. IMF pursued the sanctity of the credit contract (bail-outs to prevent bankruptcy) over the sanctity of the social contract governments obligation to provide basic social and economic protections to its people. Stiglitz suggests that IMF should take strategies more sympathetic to the debtors, work to get economies back on track before building up foreign reserves, explore other ways of providing short-term stability. IMF blamed Asian crisis on bad policies and lack of transparency of Asian govts they were really just trying to shift the blame for the failure of the IMFs policies (capital market liberalization led to speculation, financial market liberalization to bad lending). Chapter 9: The Way Ahead Problem is not with globalization, but the way it has been managed. Part of problem lies w/intl economic institutions. These institutions need to be reshaped so they can help reshape globalization. Government has an important role in mitigating market failures and ensuring social justice. Social cohesion is key for economies to function. Economists continue to disagree on role of markets vs. states. The IMF presents as doctrine recommendations for which there is not widespread agreement. This is attributable to the IMFs market fundamentalist IDEOLOGY, which is so strong that IMF has failed to consider empirical evidence that their policies led to instability. Globalization has increased the need for global collective action and the importance of global public goods. Recommendations: Change institutional mind-set by giving voting rights to developing countries. Fundamental reforms in governance of IMF and World Bank will be difficult to obtain in the short term: increase number of African seats even if it is impossible to increase their voting rights Help fund a think tank to outline policy recommendations on behalf of developing countries. Increase openness and transparency of the international economic institutions. Absence of discourse means policies arent subject to timely criticism. IMFs should be limited to core area of crisis management and stop being involved in economies of transition and development. Key reforms for international financial system: Accept dangers of capital market liberalization; with large externalities, interventions are often desirable. Bankruptcy reform: IMF should not finance bailouts when private borrowers cannot repay creditors; bankruptcy reform should recognize the special nature of bankruptcies that arise out of macroeconomic disturbances. Less reliance on bailouts Improved banking regulation need less ideological approach to regulation, adapted to the capacities of each country. Improved risk management one possibility is to have creditors absorb the risks of large real interest fluctuations. Improved safety nets, i.e. unemployment insurance programs. Improved response to crises interests of workers and small businesses need to be balanced with those of creditors.

Return to basic economic principles: IMF needs to return to original mandate of providing funds to restore aggregate demand in countries facing economic recession.

Reforming the World Bank and Development Assistance Successful countries have pursued comprehensive approach to development. Development=not just resources and capital also transformation of society. Assistance should be provided based on selectivity (giving aid to countries with proven track records) rather than conditionality (imposition of conditions, often political, on assistance) Developing countries also need debt forgiveness in order to grow. 24 countries have now passed the threshold for debt forgiveness, but this needs to be expanded further. Reforming the WTO and Balancing the Trade Agenda November 2001: Doha (Qatar) development round of trade negotiations finally put on agenda the redressing of past imbalances of WTO. WTO needs to be more balanced in addressing developing countries interests AND concerns that go beyond trade (i.e. environmental concerns). International economic justice requires developed countries to take steps to open up fair trade w/developing countries outside of WTO framework. Example: Europes Everything but Arms initiative allows free importing of all goods except arms from poor countries. Toward a Globalization with a More Human Face There needs to be a multipronged reform strategy: reform of intl economic arrangements AND reforms that each country can take on itself i.e. developed countries must eliminate trade barriers; developing countries need to manage their budgets better, establish effective regulations, and set up effective governments w/accountability, openness and transparency. Developing countries need freedom to make their own choices. Need policies for sustainable, equitable, democratic growth. Development is about transforming societies.