BUSINESSWEEK ONLINE : APRIL 24, 2000 ISSUE
COVER STORY Acid Words for the IMF Why economist Stiglitz gives it low marks Former World Bank chief economist Joseph E. Stiglitz has provided much of the intellectual fodder for the current drive to reform the International Monetary Fund (IMF). Considered one of the foremost U.S. economists and now a senior fellow at the Brookings Institution in Washington, Stiglitz had a bird's-eye view of how the IMF managed the global economic crisis of 1997-99 from his perch at the fund's sister institution. He spoke with Senior Writer Rich Miller on Apr. 11 about his ideas for reforming the IMF and World Bank. Q: You have been highly critical of the IMF for its handling of the Asian financial crisis. Where did it go wrong? A: They invoked bad economic analysis. Anybody who has taken Economics 101 would have anticipated there was going to be a recession or a depression [in the countries hit by the crisis]. In that case, you need to expand government spending; the IMF called for fiscal contraction. It also backed raising interest rates to very high levels. They focused on inflation in the midst of a depression. Q: But IMF officials say the high interest rates were needed to stop a free-fall in Asian currencies, such as the Thai baht and South Korean won. A: Raising interest rates didn't work. It wasn't until Korea had a debt standstill with foreign banks [which agreed not to yank their credit lines] that the exchange rate stabilized. The IMF's argument is a very simple one. They say raising interest rates makes it more attractive for money to return to a country. But if you're a lender, you don't just care about the interest rate you're being paid. You care about whether you're going to get the money back. The IMF's policies actually contributed to the weakening of the currencies [by hurting the economies of the countries and increasing the risk of default]. Q: What about the IMF's decade-long effort to help Russia transform from communism to capitalism? A: They bungled the transition in Russia. More than 50% of the people are impoverished, vs. 2% just 10 years ago. Gross domestic product is 50% of where it was. It's startling. We told these countries that, if you go to a market system, you're going to see things like you've never seen before. It was like nothing they had seen before, but it was the opposite of what we had told them to expect. Q: So how should the IMF be reformed? A: They should be limited to handling crises. They were founded to handle crises, and they should go back to their original mission. But that's not sufficient. The kind of conditionality they impose [on their loans] is counterproductive. They have the wrong economic philosophy. That's harder to change. Q: So you think the IMF's loans to crisis-hit countries shouldn't carry any conditions? A: The only conditionality [I would recommend] is ensuring that the country can repay. It's a very weak conditionality. It's not concerned with monetary policy or palm-oil subsidies. You decide if there is a temporary crisis or a country is just going down the tubes. Q: What about reforming the World Bank? A: The World Bank has been in the process of opening up for a number of years. Because it operates in education, the environment, health, and other areas, Bank officials have to interact with the country at an intimate level. You can't check into a five-star hotel, go down to the Ministry of Finance, and solve the country's problems. [The Bank has] made a lot of progress, but a lot more needs to be done. Q: Many critics charge that the World Bank's structural-adjustment loans are as damaging to the countries that get them as IMF credit. A: The Bank cannot go in [with structural adjustment loans] unless the Fund gives the O.K. The Bank gets tarnished with the Fund's program. I have been pushing for a new category of loans not tied to IMF approval that I call development loans. Structural-adjustment loans have the overtone that a country needs money because it needs its nose straightened out. Some countries are just poor. The fundamental thing they need is growth and development. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Backlash: Behind the Anxiety over Globalization COVER IMAGE: Backlash: Behind the Anxiety over Globalization TABLE: The Pros and Cons of Globalization TABLE: BW/Harris Poll: Globalization: What Americans Are Worried About Does Anybody Love the IMF or World Bank? TABLE: What Protesters Want Acid Words for the IMF ONLINE ORIGINAL: Globalization Threatens Workers, Thrills Investors ONLINE ORIGINAL: Are Protesters Going About It All Wrong? (Video) INTERACT E-Mail to Business Week Online

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