Global Speculators

A billionaire and a Nobel laureate want to fix international trade agencies. Why bother?

Charles Oliver from the March 2003 issue

(Page 2 of 3)

Lenders have come to believe that the IMF will bail them out when developing nations run into trouble repaying loans. Such lenders become less averse to risk, pumping money into nations with poor fiscal and monetary policies when they otherwise would not. Thus the IMF aggravates global financial crises. The IMF itself has admitted in reports on the Asian economic crises of the late 1990s that its policies may create a moral hazard.

Strident as it is, Soros' indictment of international institutions such as the IMF and World Bank pales beside that offered by Nobel Prize-winning economist Joseph E. Stiglitz in Globalization and Its Discontents. Stiglitz served as the World Bank's chief economist from 1997 to 2000, and his tenure left him with little good to say about that agency or any other major international economic institution. The policies of such organizations, as he sees them, are based on a perverse blend of bad economics and naked special interest politics. Such policies not only fail to reduce Third World poverty, but often increase the suffering of the peoples of developing nations. Stiglitz casts a jaundiced eye on all the major institutions, but none comes in for more criticism than the IMF.

"IMF structural adjustment policies -- the policies designed to help a country adjust to crises as well as to more persistent imbalances -- led to hunger and riots in many countries; and even when results were not so dire, even when they managed to eke out some growth for a while, often the benefits went disproportionately to the better-off, with those at the bottom facing even greater poverty," he writes.

The IMF, argues Stiglitz, lacks detailed, hands-on knowledge of the countries it deals with. That, along with a strong "market fundamentalist" ideology, leads it to prescribe one-size-fits-all solutions for every crisis it deals with. Sometimes its prescription works, but more often it makes things worse. The East Asian crises of the late 1990s are perfect examples of that problem.

"The Fund recognized that the underlying problems in East Asia were weak financial institutions and overleveraged firms; yet it pushed high interest rate policies that actually exacerbated those problems," Stiglitz writes. "The consequences were precisely as predicted: The high interest rates increased the number of firms in distress; and thereby increased the number of banks facing nonperforming loans."

Stiglitz also condemns developed nations, especially the United States, for blatant hypocrisy. Such nations demand that developing nations open up their markets to manufactured goods and protect the patents of the software and drugs made by multinational corporations. Yet they are unwilling to end the agricultural subsidies or import barriers that hammer Third World farmers.

Like Soros, Stiglitz paints himself as an economic Cassandra whose constant (and constantly correct) predictions of the harm brought on by IMF policies are always ignored. Yet like Soros, he ends up calling for more and more powerful international institutions to deal with the distress globalization can cause.

Stiglitz admits that markets do a great job of creating wealth, but they can also disrupt people's lives, and the benefits of capitalism, he claims, don't flow evenly to everyone. At the national level, we did not allow markets "to develop willy-nilly on their own." Governments passed minimum wage laws and antitrust laws. Governments provided public goods and promoted infant industries.

"Unfortunately, we have no world government, accountable to the people of every country, to oversee the globalization process in a fashion comparable to the way national governments guided the nationalization process," Stiglitz complains. He would like to take us closer to that world government.

Given their powerful condemnations of existing institutions, how can Soros and Stiglitz call for new and even more powerful international organizations? They clearly believe that existing institutions are simply run by the wrong people or have been badly designed. If the right people were to redesign and run those institutions -- people such as George Soros and Joseph Stiglitz -- they wouldn't do as much damage and would do a great deal of good.

Critics of globalization aren't the only ones who say that a reformed and more powerful ILO, World Bank, and IMF can and should play a vital role in overseeing the process of globalization. Columbia University economist Jagdish Bhagwati is best known as an advocate of free trade; his new book Free Trade Today is a brief but excellent defense of trade against protectionist attacks. But even he gives lip service to the idea that international agencies such as the ILO and World Bank are needed. Are they?

Soros and Stiglitz condemn the way that special interest politics influences IMF and WTO decision making, but apart from calling for more "openness" in these institutions, they offer few specifics on how to remove the self-interest or the politics from the policy making. But is openness -- giving the public greater access to the decision-making processes -- really a cure for what ails the IMF and WTO and other international agencies?

Economist Anthony Downs has shown that most voters are ignorant, and rationally so, when it comes to political issues. One individual is unlikely to have any real impact on an election or on the course of government policy. So it makes little sense for most people to be well informed about what their government is doing. If one person can't affect his government, how much less influence will he have over large international institutions? No matter how "open" we make the IMF or the World Bank, the vast majority of the world's people will still have little reason to follow their policies very closely.

But those who can gain the most from the actions of these agencies -- multinational corporations, Third World leaders, and others -- will have a strong incentive to remain informed about them and to try to influence their decisions. These persons and firms will likely still wield a disproportionate influence over international economic institutions. We may change the rules and the structure of these institutions, but we can't change human nature.

Markets, imperfect as they are, tend to direct our often self-serving behavior toward ends that benefit others. In a purely free market, corporations must earn money by providing goods and services that consumers demand. But when subsidies or special protection are available from either governments or international agencies, corporations will tend to compete for them. The only winners in that game are the victorious companies and the bureaucrats who aid them.