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Session 8Joseph Stiglitz, Globalization and Its Discontents, 2002Chapters 7-9

Chapter 7 Better Roads to the Market

Two examples of countries that pursued successful alternative strategies (not following theWashington Consensus): Poland and China. Both chose a more gradualist approach, asopposed to shock therapy.Key elements of Polands strategy:

Gradual privatization while building up banking and legal system

Emphasized importance of democratic support for reforms, benefits for unemployed,adjusting pensions for inflation etc.

Key elements of Chinas transition: Partialprivatization, beginning w/agriculture individual responsibility system

Township and village public enterprises

Two-tier pricing (old prices under quota system AND market-set prices)

Creation of institutional infrastructure

Opening to foreign investment

Prioritized creating competition & new jobs over privatization and restructuring (tomaintain social stability)

The Road to the Future : RussiaNeeds to go beyond focus on macrostabilization and encourage economic growth. To do this,Russia must:

Create an investment-friendly environment

Establish a federalist structure that provides incentives at all levels

Establish political and social stability

Collect taxesWhile Russian leaders should be held accountable for failure of economic reforms, so should IMFand Western leaders.

Chapter 8: The IMFs Other Agenda

Market fundamentalists dominate the IMF. However, IMF needs to identify instances in whichmarkets fail and analyze how particular policies might avert or minimize damage done by thesefailures.Examples of inconsistencies in IMF policies:

Intervention to sustain exchange rates (why is this intervention desirable whenintervention is so undesirable in other markets?)

IMFs attempts to quarantine contagion (economic crisis in one country spreading toothers) but in Asian financial crisis, IMF spread the disease rather than containing it!

Overly simplistic understanding of balance of payments deficits need to consider whatmoney is actually being used for.

By providing funds for governments to bail out Western creditors when loans arentrepaid, IMF has caused creditors to weaken incentives to ensure that debts will be paid.Borrowers are encouraged to incur excess risk dont buy insurance b/c they count onan IMF bailout.

IMF began to condition approval of loans to a country on participation by the privatesector i.e. if a country cant raise a minimum amt of money from private banks, it mightnot be able to receive funds from the IMF.

In 1999, IMF decided to expand its role to be the Lender of Last Resort, a rolepreviously played by central banks. But countries pay IMF back first, and if more $$ is

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going to IMF, less can go to private lenders. This results for need of risk premiums andhigher private sector interest rates.

What explains this lack of coherence?IMF is pursuing interests of the financial community (esp foreign creditors), which are often inconflict w/objective of enhancing global stability. IMF pursued the sanctity of the credit contract(bail-outs to prevent bankruptcy) over the sanctity of the social contract governmentsobligation to provide basic social and economic protections to its people.Stiglitz suggests that IMF should take strategies more sympathetic to the debtors, work to geteconomies back on track before building up foreign reserves, explore other ways of providingshort-term stability.IMF blamed Asian crisis on bad policies and lack of transparency of Asian govts they werereally just trying to shift the blame for the failure of the IMFs policies (capital market liberalizationled to speculation, financial market liberalization to bad lending).

Chapter 9: The Way Ahead

Problem is not with globalization, but the way it has been managed. Part of problem lies w/intleconomic institutions. These institutions need to be reshaped so they can help reshapeglobalization.

Government has an important role in mitigating market failures and ensuring social justice. Socialcohesion is key for economies to function.Economists continue to disagree on role of markets vs. states. The IMF presents as doctrinerecommendations for which there is not widespread agreement. This is attributable to the IMFsmarket fundamentalist IDEOLOGY, which is so strong that IMF has failed to consider empiricalevidence that their policies led to instability.Globalization has increased the need for global collective action and the importance of globalpublic goods. Recommendations:

Change institutional mind-set by giving voting rights to developing countries.

Fundamental reforms in governance of IMF and World Bank will be difficult to obtain inthe short term: increase number of African seats even if it is impossible to increasetheir voting rights

Help fund a think tank to outline policy recommendations on behalf of developing

countries. Increase openness and transparency of the international economic institutions. Absence

of discourse means policies arent subject to timely criticism. IMFs should be limited to core area of crisis management and stop being involved in

economies of transition and development.

Key reforms for international financial system:

Accept dangers of capital market liberalization; with large externalities, interventions areoften desirable.

Bankruptcy reform: IMF should not finance bailouts when private borrowers cannot repaycreditors; bankruptcy reform should recognize the special nature of bankruptcies thatarise out of macroeconomic disturbances.

Less reliance on bailouts Improved banking regulation need less ideological approach to regulation, adapted to

the capacities of each country. Improved risk management one possibility is to have creditors absorb the risks of large

real interest fluctuations. Improved safety nets, i.e. unemployment insurance programs.

Improved response to crises interests of workers and small businesses need to bebalanced with those of creditors.

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Return to basic economic principles: IMF needs to return to original mandate of providingfunds to restore aggregate demand in countries facing economic recession.

Reforming the World Bank and Development AssistanceSuccessful countries have pursued comprehensive approach to development. Development=not

just resources and capital also transformation of society.

Assistance should be provided based on selectivity (giving aid to countries with proven trackrecords) rather than conditionality (imposition of conditions, often political, on assistance)Developing countries also need debt forgiveness in order to grow. 24 countries have now

passed the threshold for debt forgiveness, but this needs to be expanded further.Reforming the WTO and Balancing the Trade AgendaNovember 2001: Doha (Qatar) development round of trade negotiations finally put on agendathe redressing of past imbalances of WTO.WTO needs to be more balanced in addressing developing countries interests AND concernsthat go beyond trade (i.e. environmental concerns).International economic justice requires developed countries to take steps to open up fair tradew/developing countries outside of WTO framework. Example: Europes Everything but Armsinitiative allows free importing of all goods except arms from poor countries.Toward a Globalization with a More Human FaceThere needs to be a multipronged reform strategy: reform of intl economic arrangements ANDreforms that each country can take on itself i.e. developed countries must eliminate trade barriers;developing countries need to manage their budgets better, establish effective regulations, and setup effective governments w/accountability, openness and transparency. Developing countriesneed freedom to make their own choices. Need policies for sustainable, equitable, democraticgrowth. Development is about transforming societies.