Globalization and Its Discontents

• Introduction
• Remarks
• Questions and Answers

Introduction

JOANNE MYERS: On behalf of the Carnegie Council I'd like to welcome members and guests to our Books for Breakfast Program.

We are honored to have with us Joseph Stiglitz, the Nobel Prize-winning economist, to discuss his soon to be released book, Globalization and Its Discontents.

It is probably no accident that Dr. Stiglitz titled this book Globalization and Its Discontents, for, just as Freud in his 1930 treatise, Civilization and Its Discontents, discussed the clash between instinctive demands and the need for civilization to curb those aggressive urges, today globalization could also be seen as a process with its own set of conflicting forces. Globalization has changed the way societies work, the way people think, and we all agree that it is creating something new and important.

For its proponents, globalization describes the dreams of opportunity and prosperity. For its opponents, it denotes a nightmare of greed and inequality. It was expected that globalization would deliver great benefits, from trade-driven growth to political and social openness, and in some cases it has. But in many countries and in many ways, this process is not working to further the interests of the world's poor.

Our guest this morning believes that the failures which we have seen are not endemic to globalization, but, rather, are the direct results of actions taken by the major governing institutions and the powers behind them which set the rules. Whether it is the IMF, the World Bank, or the WTO, too often, Dr. Stiglitz argues, these institutions serve only the interests of the more advanced industrialized countries, to the detriment of the developing world. This has resulted in a narrow perspective shaped by a limited vision and a belief that "one size fits all," rather than a responsiveness to individual constituents.

Provocative? Yes. But not hopeless, for Dr. Stiglitz strongly believes that globalization can be a positive force around the world, particularly for the poor, but only if we dramatically alter the way these institutions operate.

The issue then becomes: how to make them work? To do this, we first need to understand why they have failed, and there is no better person to explain the workings of these institutions and the struggle over globalization than our guest this morning.

Dr. Stiglitz is one of the most prominent and original economic theorists in the world today, as evidenced by his receiving the Nobel Prize in Economics this past fall. As Chairman of the President's Council of Economic Advisors and Chief Economist and Senior Vice President of Development Economics at the World Bank, he has the opportunity to amend traditional economic thinking and to reshape traditional policy.

Throughout his time in Washington, he held a ringside seat for most of the major economic events of the last decade, including the Asian financial crisis, the transition of the former Soviet economics, as well as administration of development programs throughout the world.

Dr. Stiglitz flourished in his profession from the start. At age twenty-six, his economic genius was apparent, and he was appointed Professor of Economics at Yale. Since then, his academic career has taken him to Princeton, All Souls College Oxford, and to Stanford University, until leaving to join the U.S. Council of Economic Advisors.

Today Dr. Stiglitz holds a Chair/Joint Professorship at Columbia University in the Graduate School of Business, the Graduate Economics Department, and at the School of International and Public Affairs. He is also an advisor to many of the governments around the world.

We have all been looking forward to this moment to gain a rare glimpse behind the close doors of one of the world's most powerful institutional institutions. Join me in giving a very warm welcome to our guest, Dr. Joseph Stiglitz.

Remarks

JOSEPH STIGLITZ: Thank you very much. It's a real pleasure to be here again, particularly as some of my concerns are about ethics and fairness between the more advanced countries and the developing countries.

There have been two views on globalization. One is that it has been an unmitigated blessing. In that particular view, the problem of the discontents is: really they should be seeing psychiatrists; they don't know that they are so happy and that globalization has improved their well-being, and this discontent is a psychological phenomenon, not an economic phenomenon. The other view is that it has been a real disaster.

My view is in-between, in which I argue that some countries have benefited enormously from globalization, even some countries in the developing world, but in much of the developing world there are many people who have been hurt by globalization. And then, the question is: why, and what can we do about it?

The positive side of globalization is often underemphasized: that the globalization of knowledge has allowed standards of health to improve all over the world, which has led to increased life expectancy of enormous magnitude. We often forget about globalized civil society, the kinds of things that led to the Land Mines Treaty, the Jubilee movement which is very strong in Europe that led to debt forgiveness, that would never have occurred had there not been this kind of globalization.

The most successful countries within the developing world have been those of East Asia. Their growth has been mainly based on globalization, export-led growth, and that globalization has led in those countries not only to enormous increases in average per capita income—eight-fold in a country like Korea—but also enormous reductions in poverty, so that the fruits of that growth have been very widely shared.

The question is: why was it successful in these countries and not so successful in so many other countries? The argument I put forward is that these countries governed globalization; they took globalization on their own terms; they made the decisions of what part of it was appropriate with the pace.

For instance, one of the things that most of the countries in the region did was to take advantage of trade. They were very aware of the importance of closing the knowledge gap, acquiring technology, but they didn't have full capital market liberalization, opening themselves up to speculative money. Their view was a very simple one: you can't build factories and create jobs if money can come in and out in one day, that that doesn't lead to increased economic strength.

So even though institutions like the IMF told them that "you won't be able to get foreign direct investment unless you have capital market liberalization," they knew differently. China is the largest recipient of foreign direct investment and it has still not opened up its markets to short-term speculative flows. The same is true of many of the other countries.

They made the decisions, the pacing, the sequencing, on their own terms, and, as a result, they were enormously successful.

Elsewhere there is a very different picture. If you look around the world as a whole, the level of global economic instability has never been higher. Over the last thirty years, there have been about 100 countries in crisis.

So, in a way, what was unusual about East Asia was that it had so few crises, that there had been no economic downturns in two of the countries that were hit in the East Asia crisis in thirty years and two countries had one-year downturns, a better performance than any of the OECD countries. So the remarkable thing was that until the East Asia crisis of 1997, there had been so few crises.

Around the world, there has been an enormous level of economic instability. Right now Argentina is getting a lot of attention, but the data are in, and we can see what has happened during that first decade of reform and globalization. Growth in Latin America during the 1990s, the decade of reform and globalization, is just a little bit over half of what it was in the 1950s, 1960s, and 1970s, pre-reform.

So if this is supposed to be success, you can imagine what the countries are saying: "We were told that democracy and globalization are supposed to bring higher economic performance. It is higher than the lost decade of the 1980s, that's true, but it's about half of what it was pre-reform."

To put it another way, most of the benefits of that growth where it has occurred, like in Mexico, have occurred to the upper part of the income distribution, the upper 30 percent, for instance, in Mexico, and most of that has been the upper 10 percent. Many of the bottom 30 percent have become worse off.

There is a clear link between these outcomes and the policies that have been pursued, so that these outcomes are not an accident. For instance, capital market liberalization was the primary factor leading to the East Asia crisis. Capital came in and then it left at such volumes that not even the United States could have escaped destabilization. Yes, there were weak banks, and that made it worse, but the instability of capital markets can hit any country. Premature capital market liberalization without the right regulatory framework makes these problems almost inevitable.

Let me give you another example of the nature of the problem. In the United States, we had a downturn in the year 2001, and both political parties agreed that we needed a stimulus. The notion that when you are in a recession you want to stimulate the economy either by increasing expenditures or cutting taxes is taught in every economics course in every school in the world.

But it is not practiced at the IMF. Their policy has been consistently to order developing countries facing an economic downturn: "contract." It's a wonderful laboratory for economists because we can see what happens, and we get a repeated verification of our theories, that contractionary fiscal policy in a recession makes it deeper.

Now, after the East Asia crisis, even the IMF agreed that it had been excessively contractionary. But what did they then do in Argentina? What are they trying to do in Bolivia and Ecuador and in Colombia? It's the same story in country after country: they tell them have contractionary monetary and fiscal policies. And the outcomes are exactly the same.

The question I got, as I traveled around in Latin America was: "Why is it that in the United States you have expansionary fiscal policy when you have a downturn? Why is the United States yelling at Japan to have more expansionary fiscal policy, have bigger deficits, and yet you tell us to have contractionary policies?"

The other reason that many countries are having problems is the widespread agreement today that the trade liberalization agenda has really been unfair. The agenda that underlay the WTO Uruguay Round in 1994 was unbalanced. One can see it so manifestly in which markets were opened and which were not, what subsidies were eliminated or not.

The subsidies to agriculture were kept, and the United States just signed a bill, increasing those levels and extending them to more commodities. The developing countries were told to open up their markets to the goods produced by the developed countries and eliminate their subsidies.

We always talk about the gains from trade, and I remember, being in the White House, we were so proud about what the United States got from the Uruguay Round, what the EU got, billions of dollars. But the poorest region in the world not only got a smaller share of the gains, what you would expect, but the poorest region of the world, sub-Saharan Africa, was actually worse off by about 2 percent because of these terms of trade.

There were other issues. Maybe a hint of what the problem is that two of the important advances in the Uruguay Round, so-called, were opening up discussions of services and intellectual property rights.

Which services were opened up? Financial services and IT, areas that were of concern to the United States and the other advanced industrial countries.

Services that were not even discussed were maritime or construction services that require unskilled labor and which are of concern to the developing world. They were not on the agenda, and very little could be done about that.

Take intellectual property. Within our own country, we recognize that the intellectual property law is not a natural law, it's manmade law, and it balances out interests of consumers and users. But that's not the way the Trade-Related Intellectual Property Agreement (TRIP), at the Uruguay Round was made. When that was under discussion, even in the White House there was much opposition to what the U.S. Trade Representative (USTR) was doing.

Both the Council of Economic Advisors and the Office of Science and Technology Policy thought that the USTR's position was unbalanced. Our view was that the concerns of researchers were not adequately reflected.

What is the most important input into research? Knowledge. And intellectual property, in effect, increases the price of this critical input into production. A panel at the National Academy of Science is currently discussing how to make our intellectual property regime in the United States work more effectively at promoting advances in knowledge, and there is a real concern that our hands will be tied by what the U.S. Government pushed in the Uruguay Round, that the views of researchers were not adequately represented.

The Council of Economic Advisors was also concerned that some of the poorest people in the world would be denied access to drugs. The issue did not get popular attention until the AIDS issue in South Africa, but now we all recognize how dangerous and unbalanced that was, so there has been a retreat from it.

If two offices within the White House couldn't have any influence over the USTR in the negotiations, how can poor developing countries have any meaningful say in the outcome of these bargaining processes?

In The New York Times yesterday, I saw that a patent was granted to a five-year-old for a particular method of swinging on a swing. I was thinking of writing an Op-Ed explaining how countries around the world will be worried that a multinational is going to go and say, "You're swinging in a way that is covered by a U.S. patent, you have to pay a royalty for swinging," and try to collect from the parents of kids around the world.

The question then is: why has globalization failed for so many people? One of the things I look at is development, the transition from communism to a market economy, and at the crises, as in East Asia, and ask what are the common patterns in these failures, to see if one can build up a picture of what is the nature of the failure, then to try to explain why those failures occur.

I discuss Russia in one chapter. The magnitude of that failure is not fully grasped by at least most Americans. The movement from communism to a market economy, from a system that we all agree was terribly inefficient to a more efficient system should, by any grounds, have led to an increase in income. You don't go from an inefficient to efficient system and have income fall. And yet, income in most of the countries fell dramatically, in the case of Russia about 30-to-40 percent. There are some measurement problems, but there is absolutely no doubt, confirmed by socio-economic indicators, that it fell significantly.

And poverty, which is measured somewhat more accurately, went from 2 percent to over 40 percent. In that sense, it was worse than anybody thought. Even the communists said that capitalism would be a disaster, and it was a worse disaster than even they thought it would be.

So there is this pattern of failure, and the question is why.

Let me first say that it wasn't economic science, which had clear views that were opposite to the policies pursued by the IMF.

Since 1930, the understanding that there should be stimulus when economies are going into an economic downturn has been well accepted, and in the United States we had a big fight over the balanced budget amendment on the grounds that you don't have balanced budgets in a recession, that you want to be able to have deficits in those situations.

Before the East Asia crisis, there was lots of evidence, even at the World Bank, showing that capital market liberalization led to increased instability, and none that it led to faster growth; in fact, there is evidence to the contrary.

This was not a science-based policy recommendation. You couldn't say to these countries, "Here's overwhelming evidence. If you do this, you will grow faster and you will be more stable." Quite the contrary.

One of the underlying problems is that the policies that were pushed were based on a set of views of economics that is sometimes called market fundamentalism, a view that markets by themselves work efficiently and are self-adjusting.

The irony was that in this period, beginning around 1970, is when economic science began to point out all the reasons why that doctrine was wrong. The work on asymmetric information, for which I got the Nobel Prize, argues that one of the reasons that the "invisible hand" is invisible is that it's not there. We delineated why there are market failures and what the role and limitations of government were in trying to address these problems. It wasn't a Panglossian view that government solves every problem, but rather an attempt to say that markets fail, governments fail, and how do we get a balanced view of the role of government and the role of markets. In that literature, thirty years was ignored with disastrous consequences.

That leads to the next question: if it wasn't economic science, what was it? What drove the IMF particularly to push these policies that seem so counter to what economics says and so detrimental to the interests of the developing countries?

I argue is that there was a particular set of perspectives, ideology, and interests that underlie those perspectives and ideologies that are reflected in the governance of the international institutions. The international institutions are governed in ways that do not accord with the principles of democracy as we have come to understand them.

Just to give you one example, many of you are UN ambassadors and you know that there has been a lot of criticism that there are only five countries that have the veto. It has much to do with the history of World War II. I always feel nervous when I mention one of the countries which is relatively small. There are other countries in the world that have a larger population, a larger GDP, and yet this one still has the veto power. You say: what is the principle, other than history? History is important; I don't deny that. But if you were thinking about which countries ought to get a veto power, it would be very hard to understand that.

At the IMF there is only one country with veto power, what we call the G-1. It is not only that the voting powers do not represent the world today, but who exercised the voice for each country is not a broad spectrum of opinion. Who speaks for the United States? It's basically the U.S. Treasury.

Within the IMF in general, the governing body has a whole diversity of views that range from finance ministers to central bank governors. They do sometimes differ. One is more inflationary hawk than the other.

One of the major agenda items of "reform" is to create more independent central banks. So we have an international institution that will be accountable to the institutions in the countries that are unaccountable in democratic processes, or directly unaccountable.

The point is that the decisions being made affect everybody in these societies. If it were just check-clearing mechanisms, you could say, "Okay, let the central bankers decide that." None of us have emotional feelings about one computer program or another for clearing checks. But that's not the impact. The decisions of the IMF affect everybody around the world.

To give you one other manifestation of the difficulty of the problem, for the last twenty-five/thirty years, all the business of the IMF has been in the developing world. All the crises have been in the developing world. And yet, when it came to choose a new head of the IMF, they never said that one of the characteristics ought to be somebody who knew anything about the developing world, let alone somebody who had worked there or lived there. It was irrelevant. And yet, it's like choosing the head of an automobile company who had never seen an automobile. That would be inconceivable.

As a global institution in the era of globalization, you should say: how should we go about selecting the head of the IMF? We should look for the best qualified person in the world. At least our rhetoric should begin that way.

But what was the process in the case of the IMF? It has always been a European, and it was Germany's turn, so Germany got to choose the most-qualified German. Then the U.S. vetoed their first proposal because he knew something about developing countries, and that might be dangerous. It went to somebody else. I don't want to make any judgment about how well he is doing. If this is the way globalization is being governed, no wonder there is a problem.

The fundamental problem is what you might call the "smokestack" way in which international decisions are made at the U.S. Trade Representative. In the WTO, most trade ministers feel more accountable to their corporate interests and the large corporations than they do to consumers. I can tell you that for at least the case of the United States. They're not worried about consumers getting cheaper steel; they're worried about steel producers. So there is what we call a "smokestack" structure to international organizations that leads to this, in part, the heavy role of these special interests.

When you remark that the governance of international institutions reflects the interest of the more developed countries at the expense of the less-developed countries, I'd want to modify that and say that it's particular interests within the more developed countries, because it would be more in the United States' interest to have a broader, more equitable view, but particular interests, financial and corporate interests, are disproportionately represented in the decision-making in these areas of economic policy.

In the final chapter of the book I lay out a reform agenda. I begin with what might be called utopian, although even what is feasible can change over time. If you say the basic problem is governance, we ought to change the governance. In the long run this is what will have to be done. We have to begin to recognize the problems in the governance.

But this will not happen easily. The United States is not going to quickly say, "We have the veto power. It's morally wrong. We should not have so much power in the area of globalization." The United States has not been particularly shy about taking unilateralist positions, and I don't see this happening, at least in the next couple of years.

The next thing is how to improve it within the current institutional structure. I argue that there ought to be more openness, accountability and transparency. The reason why that's important is that making more public what decisions are being made allows for other voices to come in, not actually in the voting, but the voices to be heard. We have seen examples where those voices have had effect, like the Jubilee movement.

In the absence of that transparency, the problems within are not even well understood. Let me give you just one example. The U.S. Congress passed a law saying that at the IMF and World Bank the U.S. Government would not support what is euphemistically called cost recovery in education. You know what cost recovery is? It is charging the poorest children in the world tuition to go to primary school. The U.S. Government said, "We will oppose that."

The representative of the United States voted in contradiction to the U.S. law, but the U.S. Congress didn't know this, because the votes are secret, and Congress doesn't know what they vote. So they can vote in contradiction to what the U.S. Congress has said with impunity.

Now, the good news is that there are all kinds of leaks in international institutions. Some people were so outraged, it eventually leaked out, and Congress was outraged. But this is what happens when you have secrecy.

The accountability is also important in the following sense. When the IMF goes into a country, it focuses on the impact of its policies on inflation, but it never tells you what the impact will be on unemployment or poverty. Before it goes and announces a problem, it should say, "This is what we think our program is will do. It will lead to this in inflation, this is going to be unemployment, these are poverty." These are things that our societies care about.

Today in many countries when you have a project, you have to do an environmental impact statement because we know that there are side impacts on the environment of a dam. When you have an IMF program, it has first order impacts on poverty, unemployment, but no one is told what are those impacts will be. They don't even calculate them. But that ought to be part of the accountability: "This is going to be the impact," and that will be a framework in which to see the consequences of their programs. If they are different from what they say, then they could be held accountable.

And then, there is a third set of reforms, specific issues having to do with the mandates, how it operates, going from the big bailouts, to bankruptcy, which they have not yet begun to discuss. And then, there are similar issues in reforming the trade agenda to make it more balanced, more equitable.

So there are, even within the current governance structure, a number of very specific reforms that would make a very big step in addressing the imbalance in globalization.

The bottom line is that globalization has been a very powerful, positive force for some countries in the world, including some developing countries. Some of these reforms hold out the potential of being a positive force for more countries around the world, but it they are not undertaken, there will be a very strong backlash against globalization, and for good reason.

JOANNE MYERS: Thank you very much. I'd like to open the floor to questions.

Question & Answer

QUESTION: India is a country which has tried to manage gradually a transition towards a global economy in the context of a democracy with a federal government looking over its shoulder before it makes any decisions.

My question is on the aspect of globalization and democracy as international problems. Do you see any room for the United Nations and its institutions, where every member state has a voice in the new governance?

JOSEPH STIGLITZ: India does illustrate the advantages of governing globalization on your own terms. One subject in the book is my views on conditionality, the "let's get the money." The IMF used to list over 100 conditions the countries had to satisfy, many of which we would not accept in American democracy.

In Korea, for example, one condition that was imposed involved a more independent central bank focusing explicitly on inflation, when inflation had never been a problem.

The reason I felt so strongly about this issue was that when I was in the White House, Senator Connie Mack, proposed changing the Charter of the Fed which focuses on inflation, growth, and employment. In my view, it's a balanced set of objectives. Connie Mack said: "No, no, we want to focus just on inflation."

The President was enthusiastic and said, "Yes, this is a wonderful campaign issue. We will make the issue of what the Charter of the Fed should be a major campaign issue in 1996." As soon as he said that, Connie Mack said, "No, no, we didn't really mean that," and the bill was dropped.

Korea didn't have any choice. It was told, "If you want this money in the crisis, you have to change it." And I can give you many examples of that kind. There were over 100 conditions imposed.

In many of these cases, you get a next elected government that says, "That wasn't our choice; that was imposed from the outside," and then they reverse the policy. It's not gunboat diplomacy, but it's extortion under threat of not getting money, and it makes it very unstable.

The strength of India was that they had four or five changes of government, and the governments did have different positions on the reforms, but they were all within a relatively narrow span. So there was enormous policy stability, even though there was a lot of change in governments. This is a result of policy reforms that came from a conviction within the country that they were the right thing.

Even at the level of the states in India, there is a recognition of competition among those states to create a better environment, and that is helping push reform. So, rather than being imposed, they are seeing that some states are being more successful. Self-persuasion, self-learning, is clearly the most effective way of doing it.

The role of the UN is an interesting question. In my mind, that was one of the things that made the Monterrey Meeting so important, because they said, "The issue of financing for development is not a matter for finance ministers and central bank governors, that these issues of financing for development have effect on all of society; and, since it has those effects, there ought to be broader participation in the formulation decision-making; and if we're going to have broader participation, we have to elevate it, and the UN is currently the only institution in which that is done."

The UNDP is playing, and in the future ought to be playing, a larger role in that. I have been trying to encourage the UNDP to, for instance, try to create a research program of comparable credibility to that of the Bretton Woods institutions, to present an alternative set of views.

Even the World Bank was doing research saying that capital market liberalization doesn't work, but it couldn't yell it very loudly, because you would get your hands slapped. So it could write the research papers on the grounds that nobody would read them, but if it said it very loudly, people got upset.

The UNDP has the opportunity to speak a little bit more loudly. One of the problems that I had when I was at the World Bank, was that there is a view that we are all sister institutions and we don't disagree. In democracies, people will disagree.

And from the point of view of economic theory, we all know that there is not a single best policy; there are choices and tradeoffs. That is, again, one of the things we talk about in the first chapter in any economics book. And yet, the Bretton Woods institutions try to give the impression that there is only one right policy.

The UN could make a very important contribution in trying to raise the notion that there are choices and we need to look at the consequences of alternative choices.

QUESTION: Would you comment on the budgetary consequences of economic policies? And secondly, how do you assess improvements at the World Bank and IMF in dealing with development issues?

JOSEPH STIGLITZ: First, on the budgetary consequences of expansionary policies, one has to go back to the origins of the IMF and the intellectual godfather, Keynes. There is a real irony. The person who thought about the importance of expansionary fiscal policy was the intellectual godfather of the IMF. It was founded because, after World War II, there was a fear that the world would go back to the Great Depression.

Keynes also recognized that a downturn in one country, has spillover effects on its neighbors. If one country has "beggar thy neighbor" policies, where they are having a recession, they put up tariffs to buy more goods of their own, which has adverse effects on their neighbors. So it was a problem which needed to be addressed internationally.

What was his solution? An international institution that would provide the finance to allow countries to get over their recession, so it was particularly in periods of recession that finance ought to go there.

Now, interestingly, in the first loans from the IMF and World Bank, the condition that was imposed was that the country have more expansionary policies, because the vision of Keynes was still there.

Somewhere between 1945 and today, the IMF forgot why it was created. I have a line in the book, "Keynes would be rolling over in his grave if he saw what had happened to his institution."

One of the stories I tell in the book is that Ethiopia was my first trip after joining the World Bank. I looked at the data before I went there. The government had overthrown one of the worst Marxist regimes in the world, which had the term "red terror," believed in it, would kill people and leave them on the streets to keep people in line, so they could see what the consequences of disagreeing with him were. Since the overthrow in the beginning of the 1990s, the country was growing at 5-6 percent per year. They had no inflation; in fact, prices had declined. Budget balanced. And yet, the IMF had suspended their program because it said its micro-policy was bad.

I asked them why. They said, "The reason is its budget isn't in balance."

And you say, "Well, how can two green-eyeshade people disagree so much?"

They said, "We don't include foreign aid."

"What you do want them to do with the foreign aid, put it in reserves? Is that why the Netherlands is giving money to Ethiopia or to these other countries, to be put in reserves?"

And then, what the IMF said was, "It's too volatile, you can't count on it."

The Ethiopian Government had the right answer. They knew more economics. They said, "We have flexible expenditure programs. These are not like Star Wars programs that take twenty years to develop and if you spend it for ten years and then you discontinue, you've wasted money. These are schools that take six months to build. If we get money from the Netherlands, we'll build the school. If we don't, we don't build the school. If we get money from England to build a hospital, we'll build it. So we have completely flexible expenditure programs that move in accord with the foreign aid."

I went back to Washington and I did fiscal analysis, and we showed that tax revenue was more unstable than foreign aid. So if you use the IMF reasoning, they should not have included tax revenue in the budget. Now, if you don't include tax revenue and you don't include foreign aid, every country is in trouble.

And then Meles, very emotionally, said, "I fought for seventeen years to overthrow this terrible regime"—to be told by some international bureaucrat that he couldn't build schools for his people if he could persuade somebody to give him the money to do it. This is a bad accounting framework.

It's not only in Ethiopia. The principle of accounting used in Latin America is different from those in Europe. In the United States, when we look at our deficit, we include Social Security. In Argentina, because of the way they did privatization, they do not include it. If you included Social Security into their accounting framework, Argentina has a surplus; but, if you don't include it, it has a deficit.

Accounting is done consistently in ways that lead to excessive austerity. They do have an important message: "you have to live within your means." But the question is: do they say that at the right time and in the right circumstances?

To the second part of your question, yes, they have adopted a more development-oriented language. They have political institutions and political sensitivities, but there is still a gap between language and reality. They didn't use to talk about poverty, and indeed argued, not that long ago, that poverty wasn't their concern. Now they do recognize it as their concern.

Just to give you another example, I contrast the experience in Russia and China. When you're making the transition from communism to a market economy, you have to create new enterprises; you can't just restructure old ones. You can't create new enterprises when you have interest rates at 100 percent.

China focused on job creation. You might say it was a political necessity, because if they didn't do that, they had no legitimacy at all. But they were able to do this globalization in a paced way that made sure that job creation kept tandem with job destruction. It was not just restructuring existing enterprises, but creating new enterprises. So that is what I would call a development-oriented strategy and a poverty-oriented strategy.

The IMF strategies in transition, development, and in crises all led to more poverty. It's welcome that they are beginning to talk about it, but it hasn't gone far enough.

QUESTION: Having covered Russia in the 1980s, I think the 2 percent figure on poverty is low. But I take your point that certainly many people feel a lot worse off now.

In retrospect, who do you blame for that? Is it the international institutions or was it the Russian Government? In using the method of hindsight, what would have been the policy that you would have advocated?

JOSEPH STIGLITZ: First, on the statistics, one can't look at any single statistic, but there is an enormous amount of evidence of demographic statistics, life expectancy, that corroborates a very large deterioration in the standard of living for large numbers of people. The number is not just based on their communist propaganda, but on what they call studies of households. So they're not macro, they're micro, data, the surveys, the living standard surveys.

One cannot put the blame on any single party. The Russian Government agreed to these policies. But what one can say is that the international institutions, the IMF, played into domestic politics in ways that reinforced certain policy stances which had disastrous consequences. Let me give you some examples.

It was in the interest of some people in Russia to have what you might call illegitimate privatization that was associated with the loans for share agreements, where you gave an enormous amount of the state's most valuable national resources to a relatively few people at bargain-basement prices. They were giving away billions of dollars to a few people. In return, they gave money back to the government. They helped support the reelection.

It was clearly in the interest of the oligarchs. But getting the blessing and saying "rapid privatization, no matter how you do it, is the right policy," gave a legitimacy to what otherwise would have been viewed as "this is really strange."

Think about the policy of capital market liberalization in conjunction with these. The Russian experience shows that economists are right, incentives matter. But people who don't really understand economics sometimes think that it's automatically the case that incentives will lead to wealth creation. But if you don't have the right incentives, rather than getting wealth creation, you have asset stripping. That's what happened in the set of incentives that were set up in Russia.

Put yourself in the place of one of these guys who has gotten an illegitimate privatization; it's like opening up a bird cage, and you say all the birds are going to fly in. It's more likely that the bird in there will fly out.

They opened up the bird cage and these guys said, "I can invest anywhere. Do I want to invest in Russia, which is having a depression, no real rule of law, no corporate governance; or invest in the U.S. stock market that is having a boom; or put my money in a Cyprus bank account where nobody can trace what I have?" The answer is, very clearly, if you are bright enough to get Yeltsin to give you billions of dollars, you are bright enough to take the money out of the country.

The incentives were put in place. Who was the privatization, and the way it was done in Russia versus Poland? You have older people doing it in Russia, younger people in Poland. What did that mean? Older people say, "I won't be around when these enterprises become profitable. There's no capital market. I need to get my money." Younger people say, "I'll be around for twenty years. I better make this system work." So even details about the age structure turn out to be important.

Many of the things that I talked about in the book that should have been done are not said from hindsight. There was an active debate, ex ante, about what the strategies were, what ought to be. For instance, I and a number of other people argued that you needed to put more emphasis on rule of law, corporate governance, that a market economy needs rules in order to work.

The IMF/World Bank strategies were influenced by people who said, "Don't worry about rule of law. You set up property and that will lead to the rule of law. You give away money, and those people will have to have a rule of law."

So giving away property to a few people creates an oligarchy that does not lead to a rule of law. They had a theory of political economy that was misguided.

And then, all of this is interrelated. With high interest rates as part of your macro-economic framework, you can't get job creation. When you have an enterprise, you can do two things: you can either try to build it up or you can strip out the assets. If you have such high interest rates that you can't get capital, the only thing to do then is to strip out assets. So even the macro policy interrelated with the privatization and the openness to create an environment that worked all together to lead to the failures that we have seen.

QUESTION: How much weight do you give to the political side in IMF decisions. I can give you two examples. The reason why the IMF rushed to help South Korea instead of helping Thailand was because South Korea was important and Thailand was not.

Second example, a much more delicate one: I am told that the IMF agenda in Indonesia may not have been purely economic, but also political, that the regime change was considered desirable. Do you see these political factors coming into the IMF decisions?

JOSEPH STIGLITZ: Yes, very strongly. The most dramatic case was the Russian bailout in July 1998. We had gone through the calculations at the World Bank. It was very clear that the overvalued exchange rate was keeping the economy down. As soon as they devalued, they started to grow.

We knew that, given the level of debt, giving it more money was not sustainable. There are studies called debt sustainability studies. Furthermore, we knew that there was a high level of corruption.

Under our standard procedure, we would not have given any money, but it was a political decision to do so. We thought that the money would allow them to maintain their overvalued exchange rate, hurting their economy for about two or three months. It lasted three weeks.

We thought that the corruption would be settled. Money went out the next day to the Cyprus and Swiss bank accounts.

The World Bank voted in the committee to lend an enormous amount less than $5 billion. We announced $5 billion, but we only lent $300 million. What we said was that the rest we would tranche—"Here is your first amount, in two or three months you'll get another amount." We were fairly confident that we weren't going to give the rest. Now, IMF actually gave the $5 billion.

After they gave it and the money was going out, the central bank in Russia increased the exchange rate, so that the oligarchs when they went to the bank to get dollars would not need as many rubles to get the number of dollars.

I had occasion to ask Gershenkyo [phonetic], who may be the world's worst central banker, why was that. He and I both knew the answer. He got a broad grin on his face and he said, "Market forces."

That was probably the most dramatic example of an explicit political pressure for an explicit reason. They knew Yeltsin and they were betting on a particular horse. From the U.S. political point of view, an election was coming up and they did not want to see a failure.

If they could postpone the failure until after the election, that would have been an achievement worth $5 billion of Russia's money, because, after all, Russia is going to repay it. So if you were the U.S. Treasury, would you bet Russia's money to have a better environment for your election? The answer is yes. So again, it goes back to the point of looking at the incentive which was very clear.

There are other examples where clearly you see inklings of political interest. In some of these cases in East Asia, there was strong disagreement within the U.S. Government. The State Department was concerned about instability in Indonesia, the political and social turmoil that would result from their excessive austerity. But the responsibility for the IMF lies in Treasury, and so, though the State Department raised its concerns, it did not have any very strong influence on the outcome.

JOANNE MYERS: The problem with such courageous thinking is that it generates so many questions and not enough time. I thank you very much for a wonderful discussion.