Stiglitz

Pavel,

A follow-up on our discussion concerning the wisdom of IMF recommendations
for Russia.

Vince

---------------------- Forwarded by Vince J Kaminski/HOU/ECT on 04/18/2000
08:03 AM ---------------------------

VKaminski@aol.com on 04/15/2000 10:14:28 AM
To: vkamins@enron.com
cc:
Subject: Stiglitz

Sound the Alarm
Economist James Stiglitz rips Washington's "market Bolsheviks"

By James North

When the Asian economic crisis started to bite deeply, during the second half
of 1997, Joseph Stiglitz recalls that his children were studying the
Holocaust. Each day, he went off to his job as chief economist and No. 3 man
at the World Bank, where he and his colleagues had come up with a consensus
of how to contain the spreading crisis. Each day, he got increasingly
frustrated as the bank's proposals were overruled by its sister organization,
the International Monetary Fund, influenced strongly by what Stiglitz calls
the IMF's "largest shareholder," the U.S. Treasury Department.

Especially frightening to Stiglitz was the IMF's rescue plan for Indonesia,
East Asia's most populous country after China. The fund directed the
Indonesian government to cut social spending and raise interest rates,
policies designed to draw panicked overseas investors back into the country.
But Stiglitz argued that sudden cuts, particularly in food and kerosene
subsidies, could trigger social unrest in the fragile island nation, and that
the violence might take an ugly ethnic turn. The Chinese minority there had
already started to worry.

"My kids were writing school papers about people who remained silent during
the Holocaust in Europe," Stiglitz remembered recently. "So you ask yourself
the question: 'Do you remain silent and play the system, or do you speak
out?' Why have a job with responsibility if you don't speak out?"

The IMF imposed its plan, and just as Stiglitz and the World Bank had
predicted, ethnic conflict swept across Indonesia, leaving hundreds dead.

By then, however, the economist was speaking out on Indonesia and other
international economic matters -- an action that earned him the enmity of
Lawrence Summers, now Secretary of the Treasury, then in a lesser role at the
agency, and other officials at the Treasury and the IMF. Their hostility, he
asserts, led to his departure from the World Bank earlier this year.

Today, from the outside, Stiglitz is increasing his criticism of the U.S.
Treasury/IMF policy toward Asia, Latin America and Russia, which is still
fundamentally unchanged despite the great scare of 1997-98. Stiglitz himself
may not join the expected protests this week in Washington at the IMF/World
Bank annual meetings. But the intellectual rigor and creativity that has put
him on just about everyone's short list for the Nobel Prize in Economics will
provide powerful support for the critics.

The Malcontent

When Stiglitz left the World Bank, press accounts described him as "a
malcontent," "a great nuisance" and "a scourge of the Washington
establishment." In person, however, he seems pleasant and enthusiastic, not
sour or contentious. Even when asked about his No. 1 opponent, Lawrence
Summers, he was never hostile, maintaining a kind of bemused detachment about
the Treasury Secretary; he chuckled when he recollected how Summers "went
ballistic" after one of his critical speeches.

Joseph Stiglitz's disagreements with the so-called Washington Consensus are
intellectual and not personal. He recognizes that he leans to the liberal
side of the spectrum, but he also insists that his views are not based on
sentiment, but on what he calls "good economic science."

Stiglitz: "Do you remain silent and play the system, or do you speak out?"
Take, for instance, the World Bank's response as the Asian crisis unfolded.
After Thailand's devaluation in July 1997, the Bank started to get data
showing that the country's financial crisis was triggering a depression -- a
severe downturn that would soon spread to Indonesia, South Korea and Hong
Kong. To Stiglitz, who had earlier been chairman of President Clinton's
Council of Economic Advisers, the pattern looked familiar. "I was approaching
it much as I would if I were advising the President of the United States,
recommending stimulatory policies to counter the decline," he remembers.

Instead, the Treasury/IMF in tandem overruled the Bank and did the precise
opposite, directing the beleaguered Asian countries, as a condition for
getting the bailout emergency loans, to raise interest rates and to reduce
government spending, including the all-important food and fuel subsidies.

Today, Stiglitz still cannot hide his astonishment at these contractionary
policies. The Washington Consensus argued that the measures were necessary to
restore overseas investor confidence, stabilize falling exchange rates and
attract capital back into the afflicted countries. But he points out that
their economic models were far too narrow, and therefore doomed to fail.

For example, the Treasury/IMF strategy ignored the potential for
bankruptcies. The sky-high interest rates forced even sound companies in
Thailand and Indonesia to the wall, which wasn't the best way to re-inspire
foreign investors. At the same time, the sharp cuts in government spending
stimulated violence across Indonesia, which did not build confidence
overseas, either.

Stiglitz insists that "these political and social concerns are not outside
the economic model." He knew that over the years, unrest had been frequent in
the developing world following the imposition of austerity plans. Indeed,
austerity-inspired uprisings are routinely called "IMF riots." But when he
raised his doubts, within channels, he says, "It was like hitting your head
against the wall."

Stiglitz has other pungent criticisms of the Washington Consensus:

He questions the Treasury/IMF insistence that emerging nations end
restrictions on capital flows. He points out that vulnerability to hot money
can worsen crises, emphasizing that some countries, such as China, have
achieved significant rates of growth without making their currencies fully
convertible.

He continues to criticize Western policy toward Russia. He argues that the
crash privatization program, in a country with no working democratic, legal
or financial regulatory system, created a corrupt new oligarchy that blocks
economic growth. He is particularly biting about the IMF's 1998 Russian
bailout. "Was this a good investment?" he asks. "You put in $6 billion ...
that enables the oligarchs to take out $6 billion in capital flight the next
day. Clearly the country is worse off, and everybody knew it was going to
happen."

He has strong objections to the IMF's policy of "conditionality" -- of making
loans to countries contingent on far-reaching internal changes. "Of course,
any lender will need evidence the loan can be repaid," he recognizes. "But
the conditionalities the IMF imposes have gone well beyond anything required
for repayment."

Now that Stiglitz is outside the system, he's expanding his critique. He will
divide his time between the Brookings Institution in Washington, teaching at
Stanford and working on a book about his experiences on the inside.

Not surprisingly, he comes down hardest on the U.S. Treasury/IMF
policymakers. They embody what Stiglitz calls "the theory of escalating
commitment." By that he means, "The cost of continuing mistakes is borne by
others, while the cost of admitting mistakes is borne by yourself."

Finally, he asserts, Treasury/IMF bureaucrats are following the dictates of
an ideology, not testing economic models in a scientific way.

Stiglitz uses the term "market Bolsheviks" to describe the advisers who
helped bring Russia to its economic knees in the 1990s -- people who believed
fervently in a rigid fundamentalist doctrine and tried to force an entire
society to conform to it, just as their central planning predecessors had
done back in Lenin's day.

The economist savors one final irony. IMF policy makers never apply their
anti-state orthodoxy to their own organization. "Intellectual consistency,"
he says, "should lead them to ask themselves, 'If we believe that government
bureaucrats are always incompetent, then why are we an exception?

He points out that the spread of democracy, accountability, good governance
and transparency are applauded around the world, at least in theory, and
asks: "Is it right for an international organization to be the instrument of
political change? Those of us who are committed to democracy are very
uncomfortable with a bunch of international bureaucrats playing the role of
God. Sometimes, they may play the role in the right way, but they can also
overturn democratically elected governments."

In a sense, Joseph Stiglitz resembles another economist, who worked for the
British Treasury and attended the 1919 Versailles peace negotiations after
the First World War. John Maynard Keynes was so disturbed at what he saw
there that he resigned his post and wrote The Economic Consequences of the
Peace, an impassioned polemic that eerily predicted that the harsh and
punitive economic settlement the Allies had imposed on Germany would create
terrible unrest and "sow the decay of the whole civilized life of Europe."

"What was great about Keynes was the combination of someone who used analytic
powers but who didn't distance himself from the human cost," Stiglitz
observes. "During the Vietnam War, we tried to distance ourselves by talking
about body counts. In economics, we talk about unemployment rates, so we
don't see the people. The challenge is, how do you remain analytically
honest, but not lose the human dimension?"

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