Avery Dickins

February 13, 2003

Stiglitz, Joseph.  2002. Globalization and Its Discontents.  New York:  W.W. Norton and Company. 

Globalization and Its Discontents is an account of Joseph Stiglitz’s experiences and insights gained through his position as chief economist and senior vice president of the World Bank from 1997 – 2000.  Before Stiglitz’s appointment at the World Bank, he served as one of three economic advisers to Clinton on his Council of Economic Advisers (1993 – 1997), and previous to that, he was a professor at Stanford.  Throughout the book, Stiglitz emphasizes that globalization is neither a good or bad thing, but that it has been managed poorly to date.  He places the blame on the bodies charged with the management of globalization, the International Monetary Fund and the World Bank.  His basic message is that the market liberalization policies advocated by the IMF do not work.  He suggests that the IMF employs theoretical models that rely on ideal conditions rather than studying the actual conditions and market operations on the ground, which he says generally fall far from the ideal.  Although his critiques are primarily directed towards the IMF, Stiglitz implicates the World Bank as an accomplice in many of policy failures.   He accomplishes his critique through an analysis of case studies, specifically focusing on the East Asia economic crisis in 1997 and the Russia crisis in 1998.  Through these examples, Stiglitz illustrates the primary problems he sees regarding the management of globalization:  the IMF’s adherence to theories based on market fundamentalism, the closed door culture and lack of intellectual debate within the IMF, its unwillingness to admit mistakes, and the linkage between IMF leaders and the corporate financial community in the United States.  He argues that ultimately all of these problems contribute to the IMF’s lack of attention to the unique problems and social issues of each country.  Stiglitz succeeds in explaining economic theories and strategies in layman’s terms (such as the advantages and dangers of privatization, foreign direct investment, and government intervention), making his critiques accessible to non–economists. 

In the first part of the book, Stiglitz introduces the IMF and the World Bank (officially named the International Bank for Reconstruction and Development).  He explains their initial establishment in 1944 at the Bretton Woods Conference as an attempt to promote global economic stability in the aftermath of the Great Depression.  Stiglitz points out that the IMF’s creation and initial mission, to prevent another global depression, was based in the belief that markets do not function well without intervention.  IMF policies target macroeconomic issues, whereas the World Bank’s mission has been to alleviate poverty, which it accomplishes by focusing on structural issues.  The two institutions became intertwined in the 1980s, when Reaganomics and Thatcherism promoted policies based on free market ideology.  Since that time, IMF policies have advocated capital market liberalization, pushing developing countries to open up their economies without first establishing sufficient protection of their industries so that they can compete with world markets.   Stiglitz argues that liberalization policies advocated by the IMF are hypocritical since most advanced countries, including the United States and Japan, built up their economies before opening them up to foreign markets so that they could compete with lower priced imports; the United States continues to protect some of its industries through subsidies. 

This insistence on free market reached its apogee in East Asia, which prior to 1997, had undergone such extensive growth over a 30-year period that it was called the “East Asia Miracle.”  But in 1997, beginning with the rapid fall of the Thai baht, the entire region fell into an economic crisis that spread from Asia to Russia and to Latin America.  Stiglitz claims that the IMF’s policy of liberalization was to blame for the spread of the crisis. The goal of the IMF’s rescue was to restore foreign confidence in Asian investments, which it enacted in two ways.  The IMF first dumped money into the East Asian countries in the form of bailouts in an attempt to sustain the exchange rate.  Stiglitz argues that rather than attracting foreign capital, the sustained rate allowed the rich to convert their money to dollars and move it abroad, resulting in capital flight. The IMF also encouraged East Asian countries to raise interest rates (up to 25 percentage points) to attract foreign capital, but this forced the many indebted domestic firms into bankruptcy, further weakening the economy.   Stiglitz argues that the main problem in East Asia was the flow of speculative money in and out of the country.  He suggests that some of the countries wanted to impose capital controls to control the flow of money in and out of the country, but many, like South Korea, were afraid to go against the IMF and so did not.  But others, such as Malaysia and China, rejected IMF policies, implemented capital controls, and gradually opened up their markets as domestic industries strengthened.  Stiglitz reports that these countries suffered less during the crisis and are now growing.  Stiglitz concludes that the IMF policies not only failed, but actually contributed to the East Asia crisis, because of their reliance on a macrolevel focus that prevented consideration of the microlevel effects that high interest rates would have on domestic businesses.  But the IMF itself refused to acknowledge most of these failures, and instead placed the blame on Asian institutions for mismanagement.

Similar problems were encountered in Russia’s transition from communism.  The IMF advocated a policy of rapid privatization known as “shock therapy.”  Private enterprises are often more efficient than is the government, and privatization allows the government to focus on other issues, but the process of privatization initially produces job losses.  Massive job loss can be socially devastating if new job opportunities are not in place; Stiglitz explains that this is especially true in developing countries that have no unemployment insurance.  He argues that the manner in which privatization was enacted in Russia in 1998 led the destruction of the middle class in Russia because it produced a decline in wages and a subsequent increase in inequality.  He shows that the lack of prerequisite legal structures to regulate banks and corporations opened the doors for corruption, allowing the wealthy to profit.  The IMF attempted to bail Russia out by lending billions of dollars, but Stiglitz argues that a better plan would have been slow privatization coupled with competition since Russia is a resource rich country. 

The conditionality of IMF loans is another issue Stiglitz attacks.  In order to receive IMF money, developing countries must concede to a set of economic policies.  Stiglitz criticizes this policy at several levels:  it takes economic control out of domestic hands, governments must devote their agenda to satisfying the conditions rather than focusing on other problems, and the conditions are generalized packages that do not take into account the pertinent issues of individual countries.  Stiglitz explains how the creation of IMF conditions begins with a “cut and paste” draft (cut from a conditions template prescribed for some other country), which is followed by a three-week mission to the developing country, after which the final revision of the draft is submitted.  Stiglitz notes that although developing countries have their own economists and other specialists, the IMF rarely consults them or other external sources in its policy development.  This lack of openness and intellectual discussion in setting conditions illustrates another of one of Stiglitz’s critiques.  He argues that the IMF functions as a closed-door institution, suggesting instead that its negotiations should be transparent and multivocal.  One possible reason for the IMF’s desire to remain autonomous lies in what Stiglitz refers to as the IMF’s “new agenda” – its liaisons to the Western financial community.  Stiglitz effectively shows the extent of IMF connections to the financial community through his description of individuals who have come from private financial institutions and who often return to the financial community after their tenure at IMF (for example, Stanley Fischer served as the deputy managing director of the IMF and went from the IMF directly to a position as vice chairman at Citigroup).

Ultimately, Stiglitz levies his critiques and judgments from the advantaged position of hindsight.  But he succeeds in making the workings of the IMF more transparent to the public, drawing attention to the existence of the weaknesses of market fundamentalism, and illustrating the divide between idealized theoretical economics and reality.  In the last chapter of the book, Stiglitz offers his suggestions for how the IMF and World Bank should proceed in the future. He insists that the IMF’s focus needs to be narrowed and returned to its original mission, to manage and stabilize crises.  He argues that this will circumvent the IMF’s need to please United States financial interests and making it more accountable.  But equally as important, Stiglitz suggests that international policymakers must pay more attention to social change and to the social impacts of macrolevel economic policies.  Referring to the riots that took place in Kuala Lumpur as a result of the instability in Asia in 1997, he points out that the IMF gives money to corporate creditors, but does not provide smaller amounts for ordinary people.  In his analysis of Russia, he explains how taxpayers are the ones left in charge of repaying the IMF debt even though they received no benefit from the funding.  These case studies allow him to effectively show that economic growth and stability require not only economic change, but necessitate social and political restructuring.