Stiglitz and the Limits of 'Reform'

By Doug Henwood
The Nation
September 2000

It's global protest time again. When Bill Gates and other members of the global elite gathered
in mid-September for the World Economic Forum in Melbourne, Australia, thousands of union
members and activists filled the streets to protest the effects of unfettered free trade. The
next opportunity to trouble a convocation of the world's bigwigs is in Prague at the end of
September, when the World Bank and International Monetary Fund hold their annual
meetings. In April, their midyear meetings brought thousands to Washington and shut down
the city.

There's a long-standing split among those who protest and criticize these institutions - and
their close relative, the World Trade Organization - between those who'd reform them and
those who'd prefer to shut them down. Two forced departures from the World Bank have
made the limits of reform irrefutably clear.

The first was the exit of former chief economist Joseph Stiglitz at the end of 1999. Stiglitz had
made one too many public criticisms of the economic policies preferred by the bank and its
ultimate master, the US government. And more recently, Ravi Kanbur, an outside economist
whom Stiglitz brought aboard to supervise the writing of the bank's annual World Development
Report, resigned "in anger" (as the New York Times put it) in June when he was ordered to
revise the document to conform to the party line that growth is the highest good of economic
policy.

Stiglitz was appointed to his World Bank post in December 1996. Long regarded as one of
the leading theorists in his field - and frequently tipped as a future Nobelist - he served on Bill
Clinton's Council of Economic Advisers from 1993 until his move over to the bank. Despite
this respectable pedigree, Stiglitz started causing trouble almost from the first.

He attracted worldwide notice with a January 1998 lecture in Helsinki in which he criticized
the "Washington consensus" - the austerity, privatization and deregulation agenda that had
become the standard policy prescription for much of the world - as misguided and often
disastrous. He pointed out that the historically unprecedented rapid economic growth in East
Asia - and with it the increases in life expectancy, literacy and other social indicators - was the
result of the sort of state intervention that the bank frowns on. He also pointed out that the
1997 financial crisis that interrupted that growth was in large part the result of the reckless
decisions of private investors. But instead of drawing the proper conclusions, Stiglitz noted,
market ideologues were using the crisis to discredit state intervention and promote more
market liberalization. He further argued that moderate inflation is pretty harmless, budget
deficits aren't necessarily evil, privatization isn't a panacea and deregulation of domestic and
international financial markets can do serious harm. For a senior World Bank official to say

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these things is a bit like a Pope denying the Virgin birth.

As his tenure progressed, Stiglitz elaborated on these themes. He publicly rued the fact that
workers and small businesses were "getting screwed" because they were inadequately
represented in decision-making. He criticized the IMF - without mentioning it by name - for
making the Asia crisis worse by imposing austerity programs instead of stimulating imploding
economies and shoring up social safety nets. He proposed that restricting the freedom of
global capital movements could make the world less crisis-prone. He mused that the
disastrous results of economic reform in Russia were "not just due to sound policies being
poorly implemented" but to "a misunderstanding of the foundations of a market
economy"earning him a public rebuke from World Bank president James Wolfensohn.

The accumulation of sacrileges became too much, and Stiglitz's "resignation" was announced
last November, an occasion that led Treasury Secretary Lawrence Summers to praise Stiglitz
as a "major creative and intellectual force." The Clinton Administration said it had played no
role in the exit. In fact, according to World Bank insiders Summers informed Wolfensohn that if
he wanted another term as World Bank president, Stiglitz had to go - so Stiglitz went.

Stiglitz was kept on as a consultant, but his contract was terminated in May. It's said the last
straw was an article he wrote for The New Republic that, aside from reiterating his policy
criticisms, contained this, passage: "The older men who staff the fund ... act as if they are
shouldering Rudyard Kipling's white man's burden. IMF experts believe they are brighter, more
educated, and less politically motivated than the economists in the countries they visit. In fact,
the economic leaders from those countries are ... brighter or better-educated than the IMF
staff, which frequently consists of third-rank students from first-rate universities." Policy
disputes are one thing, but this was just too harsh a truth to utter in public.

Ravi Kanbur was an inconvenient leftover from the Stiglitz days. Together they had opened
up the drafting of the World Bank's annual World Development Report, its flagship document.
A draft was posted on the web, and public comments were actively sought. Its drift was that
contrary to standard development doctrine, growth wasn't enough to lift the poor out of poverty
- policy had to be actively tilted in their favor. (It should be remembered that we're not talking
about people who skip a meal now and then: The bank's definition of poverty is an income of
less than $1 a day, a ration on which 1.2 billion of the world's people subsist.) This openness
was a departure from past practice, in which the reports were written by staff economists under
the supervision of elite journalists on loan from The Economist or the Financial Times.

The US government, in the person of Summers, was outraged by Kanbur & Co.'s draft. As
one participant in the process put it, the Clinton Administration had essentially embraced the
trickle-down economics that Democrats had run against for decades. Kanbur was ordered to
rewrite the report to be more "pro-growth." He resigned instead. In the final version, among
other changes, discussion of the importance of income distribution to poverty reduction largely
disappeared.

A lot of bank staffers were upset by the departures of Stiglitz and Kanbur (though even
Stiglitz's supporters concede he was a poor manager), but the public executions were a clear

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warning to any future dissenters. None of the sources for this article, for example, wanted to
be quoted by name, even though the bank's mission statement swears that it is an institution
based on an ethic of "personal honesty, integrity, commitment; working together in teams -
with openness and trust; empowering others and respecting differences."

Though ostensibly multilateral institutions, and formally part of the United Nations, the World
Bank and IMF are essentially run by the US government. As MIT economist Rudiger
Dombusch put it a few years ago, "The IMF is a tool of the United States to pursue its
economic policy offshore." The bank has a reputation for being a bit softer than its neighbor
across Washington's 19th Street; it is, by its mission and by the preferences of many of its
staffers, devoted to poverty reduction and economic development, while the IMF is the
guardian of financial stability and political orthodoxy. There are some good people with good
intentions working for the bank; the fund is staffed mainly by disciplinarians. But the fates of
Stiglitz and Kanbur make it clear that there are severe limits on how much good can be talked
about, much less done, by the World Bank.

Treasury Secretary Summers, who purged Stiglitz and Kanbur, was himself chief economist
at the World Bank from 1991 to 1993. In that role, Summers made headlines when a memo
attributed to him - suggesting that Africa was "vastly under-polluted" and that "the economic
logic behind dumping a load of toxic waste in the lowest wage country is impeccable" - was
leaked to the press. This past April, when I asked Summers whether Africa was still vastly
underpolluted, he said, after conceding that this was a "fair if not friendly question," that it's
long established that he was merely being ironic and provocative. He also praised the 'moral
energy" of the protesters who'd come to Washington to complain about the World Bank and
the IMF, unaware that I'd overheard him just an hour earlier celebrating the "proactive" arrest
of hundreds of them who hadn't committed any crime.

Neither Stiglitz nor Kanbur is a radical by any standard; both are humane reformers who
sincerely care about the world's poor. But even that was too much for the World Bank and the
IMF. The impeccable logic by which they operate will hear no appeals; their decisions are
final.

Doug Henwood is editor of the Left Business Observer.

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