[stop-imf] Stiglitz/FT: The disastrous consequences of instability

[Robert Weissman]

Financial Times [UK]
September 23, 2002

People in the News

The disastrous consequences of instability

By Joseph Stiglitz

Our world is as prone to financial crisis as ever. Officials from the
International Monetary Fund and the World Bank should remind themselves
of
that as they prepare for their annual meetings next week.

With the collapse of Argentina, and Brazil and Turkey appearing, at
various
times, to be near the brink, the past 12 months have once again
underlined
our failure to tackle basic problems. But it is not just the countries
in, or
near, crisis that are disillusioned. Throughout Latin America, where
liberalisation, privatisation and stabilisation - controlling inflation
-
have proceeded apace, countries are still waiting for the promised
rewards.
Growth in the 1990s was just over half of what it was in the pre-reform
decades, while increased labour market flexibility has brought lower
wages
but not lower unemployment.

It is true that progress has been made. For example, the IMF has
reconsidered
its stance on capital market liberalisation. It is also rethinking the
use of
bail-outs, which have proved largely unsuccessful, and is talking more
about
poverty and participation than before. But a number of fundamental
problems
remain.

First, there is a basic instability with the current system, which
focuses on
countries with trade deficits. By definition, the sum of the trade
deficits
must equal the surpluses; if some countries, such as Japan and China,
insist
on having a surplus, in the aggregate the rest must be in deficit. If
one
country reduces its deficit - as normally happens after a crisis - it
simply
appears somewhere else in the global system. The system has behaved
perhaps
better than might be expected because the US has acted as the
deficit-of-last-resort. But for how much longer can the richest country
continue to borrow from the rest? How long will the appetite of the rest
of
the world for American bonds and equities continue?

Second, it is much harder for poor countries to bear the risks of
exchange
rate and interest rate fluctuations than it is for rich ones, but they
are
forced to bear those risks. The consequences of this imbalance are often

disastrous. Debt burdens that look moderate become unbearable after big
devaluations. This year Moldova, already desperately poor, will spend
about
75 per cent of its government's income on debt repayments. Markets have
failed to develop appropriate mechanisms for risk distribution; the
international economic institutions should at least begin to discuss
undertaking this role.

Given the large number of countries with unsustainable debt, there is a
need
for giving better advice on risk management. And since every loan has
both a
borrower and a lender, and the lenders are supposedly more sophisticated
at
risk management than the poor borrowers, much of the fault must lie at
the
foot of the lenders.

Third, the experience in Argentina has shown that we have also failed to

learn how to manage crises when they occur. Sure, Argentina bears some
share
of the blame; but even if it had done everything the IMF recommended,
and
there had been no corruption, there is little reason to believe that it
would
have avoided the crisis, or that the crisis would have been less
profound.
Assume Argentina had been "good" and had received an IMF loan. Would
foreign
investors have started to pour into a country that was still in
depression?
It is hardly likely.

We need policies designed to reactivate the real economy, which means
creating markets for Argentina's goods and providing credit to its
companies.
A World Bank study shows that what drove the Mexican recovery was trade
with
the US, financed by American importers, more than the IMF bail-out. East

Asia's recovery was spurred by Japan's Miyazawa initiative, which
provided
billions in trade credit. We have had nothing like this to offer
Argentina.
Fourth, trade agreements need to be made fairer. Among the principal
successes of the United Nations summit on poverty last March was the
US's
commitment to increase aid. But that also showed how paltry aid has been
so
far. There was another achievement of that meeting: it made clear that
finance issues could not be separated from other aspects of the economy.

Exports provide revenue and jobs but trade negotiations have been
asymmetric:
the north has not done enough to open its markets to the south. Larger
US
agriculture subsidies have made things even worse. Finance ministers
should
lean on their trade colleagues to make the Doha round of trade
negotiations
truly a development round.

Fifth, trade should be used as an instrument of economic stability. In
the
past, countries facing an economic downturn or an onslaught of imports
have
raised tariffs to protect themselves. These beggar-thy-neighbour
policies
exacerbated the Great Depression. Would a positive trade policy of
temporarily opening up markets to countries in crisis not be better?
Additional sales of Argentine wine, beef and wheat would help to
resuscitate
the country's economy more than the billions of dollars of high finance.

Sixth, September 11 and the war on terrorism have again raised the
question
of transparency in the financial sector. The enervating effects of
secret
bank accounts on the developing world have yet to be tackled head on.
They
are central in facilitating the corruption, tax evasion and drug money
laundering that weaken so many developing countries. The question of
transparency also applies to the international economic institutions,
where
there are growing concerns over governance structures. Changing the
arrangements will prove slow and tortuous, but greater transparency
meanwhile
would help.

Finally, there will be some discussion at the World Bank/IMF meetings of

government bankruptcy and the IMF's proposal for a sovereign debt
restructuring mechanism. But there is a concern about the central role
that
the IMF would like to assume. Can a single creditor play a central role
in
the bankruptcy process - other than as one among several creditors?
Clearly,
it cannot be the bankruptcy judge. But that makes clear that a
discussion of
bankruptcy reform, in an institution in which the creditors dominate,
would
be like delegating bankruptcy reform in the US to the financial
institutions.
No democracy would find this acceptable.

Globalisation, including global financial flows, is of concern to
ordinary
people, not just to finance ministers and central bank governors. Yet
their
voices are not being heard. Rethinking the global economic architecture
to
ensure that they are is the most important challenge facing the global
community today. I hope that this too will be on the agenda at the
IMF/World
Bank meetings.

The writer is professor of economics at Columbia university, and was
formerly
chief economist of the World Bank