The Hospital That Makes You
the International Monetary Fund (IMF)
by Joseph Stiglitz
New Internationalist magazine,
[Joseph Stiglitz won the Nobel Prize for
Economics in 2001. He was Chief Economist of the World Bank between
1997 and 2000. So when he says that the IMF are 'free-market fundamentalists'
working in the interests of Wall Street, the world ought to sit
up and listen. The Nl interviewed him in London.]
NI: You say you have been forced to the
conclusion that the IMF works m the interests of Western capital.
This seems a remarkable view for a former chief economist of the
JS: I watched carefully what the IMF had
done, the mistakes that it had made in crisis countries in East
Asia, Latin America, Africa and the economies in transition. The
mistakes were sufficiently frequent that they clearly weren't
just an accident - as an academic you look for patterns.
There were a couple of obvious explanations.
One was that they were incompetent, stupid people. But that argument
is just not persuasive - they pay among the highest wages, they
get good people.
You could say it was bad economic models.
But there is an array of economic models out there and they chose
to use ones that led to wrong predictions, wrong policies and
really negative consequences.
So why did they choose them? One is left
with a possible answer that they had different objectives, that
their objective in going into a country was not, for example,
to keep employment as high as possible or to minimize poverty.
And then of course it all starts to make
sense. You ask: 'Who makes the decision, and on whose behalf do
they make those decisions?' You look at the decision-making structure
- at the IMF the United States is the only country with a veto,
other countries are represented by central bank governors and
finance ministers. They were looking at the world with a particular
perspective, a particular ideology that was in accord with their
interests. And their interests were to make sure the creditors
got paid. That took precedence over what would be good for the
Occasionally I almost got them to say
that explicitly. For instance, senior people would say: 'We can't
have bankruptcies or standstills, that would be an abrogation
of the sanctity of the debt contract'. And I'd say: 'Well, what
about the social contract?'
NI: You've gone as far as to talk about
the 'free-market fundamentalism' of the IMF...
JS: One of the reasons why I was so sensitive
to some of these controversies is that I had previously chaired
President Clinton's Council of Economic Advisers. In that administration
we had been trying to forge what we called a Third Way, a balance
between the role of the market and the role of government.
Free-market economists on the Right in
the United States were saying: 'We want to privatize social security.'
We looked at the numbers and saw that the transaction costs in
a public social security programme are much lower than in a private
one. And the private sector doesn't provide insurance against
inflation, it doesn't protect people against the volatility of
the stock market. There are strong arguments for having at least
a core public social-security programme. We weren't against a
complementary private one but we thought we needed a mixed system.
I go to the World Bank and find our sister
institution the IMF is pushing countries the world over to privatize
their social-security systems. Going from a public system to a
private one is very difficult and there are enormous budget constraints.
The IMF ignored those and that was one of the main problems in
Argentina and Bolivia.
Developing countries were being told:
'There is no debate; there is no other way.' It was intellectually
dishonest and many of the things that they pushed had no research
basis to them at all. For instance, capital-market liberalization
was the source of the instability in East Asia. I said before
the meeting in Hong Kong where they forced that through: 'Shouldn't
you have evidence to show that this is good for economic growth?
Okay, it's good for Wall Street but your mandate is not making
profits for Wall Street; it should be to increase global stability
and promote growth in developing countries. Where is the evidence?
NI: Weren't they at all troubled when
they heard these arguments coming from the World Bank? What was
JS: It was basically: 'This is what we
always do, this is the right thing.' No sense of self-questioning,
One of the things that got me quite angry
about this, or maybe sad is the right word, was that these are
supposed to be democratic institutions, or at least public institutions
in which the dominant members are democracies. The nature of a
democracy is not just that there's an election every four years
but that you deliberate, you discuss, you don't simply work behind
closed doors. They were very explicit about this: 'As long as
you talk about these issues anywhere in public we won't have any
discussions with you.'
NI: You portray a hermetically sealed
body, impervious to outside influence or self-questioning. Yet
this unaccountable body has a licence to impose policies that
do enormous damage. When you remove food subsidies and cut health
spending then the impact on the poor is disastrous. People die.
JS: And it's not only in the short run.
The consequences of malnutrition are lifelong, intergenerational
even. It will have long-run consequences if, as in Thailand, you
cut out money for anti-AIDS programmes - they had been doing a
tremendous job getting rid of AIDS and then suddenly it started
going back up again. That's why, in countries like Thailand and
Indonesia, the moment they have had the resources they have repaid
the loan and said: 'Get out of here, we don't want an IMF programme.'
But one of the issues we need to engage
with is that the IMF says repeatedly: 'We get the sick people.'
My father used to joke all the time that he didn't want to go
into hospital because people die in hospital. The IMF has a similar
argument. It says: 'Don't blame us for all the problems because
they come to us when they can't balance their budget, when they
have hyperinflation, when they have a crisis. These are really
But their hospital is one where people
get sicker. We saw in East Asia, Latin America, Russia and Africa
how they made things worse. Unequivocally. In East Asia, the country
that did not take IMF advice, Malaysia, had the shortest and shallowest
downturn and the least legacy of debt. The country that was best
in managing the IMF in some way, Korea, recovered the fastest.
The countries that took the medicine - Thailand and Indonesia
- had the worst performance.
NI: Most people in the rich world have
no idea that the IMF has such power...
JS: Most people in the North do not spend
much time in the South and therefore don't get to feel and see
what people in the South do. It was only when I became chief economist
of the World Bank and had to spend a very large fraction of my
time in developing countries that I really began to see what was
going on. That was a real wake-up call for me. I'd read about
it but it didn't have the emotional impact until I saw at first
hand in Ethiopia how bad things were.
The IMF always defines the problem in
terms of corrupt government, high inflation and so on - they shift
the blame to the country. Yet in Ethiopia here was a country that
had no inflation, high growth, a government committed to helping
the 85 per cent of the population in the rural sector and to cutting
back on military expenditure - really quite striking. And the
IMF cut off their programme for no reason. The budgetary stance
of the IMF was completely unreasonable.
So here I had an A-plus student, getting
an F from the IMF. At that point you say something is wrong with
NI: You paint the Bank as being much more
complex and multifaceted than the IMF. But the Bank still insists
that countries follow IMF prescriptions before it will offer loans.
JS: There is what I call a demarche, an
agreement, whereby the IMF is in charge of macroeconomic policy
and this is often the source of the difficulty. So they defer
to the IMF and the part of the Bank working in that area often
winds up thinking much like the IMF.
NI: Aren't they a bit like a 'good cop
bad cop' act? The Bank, aware of its image, makes gestures that
the IMF needn't bother with. But as a unit, isn't their impact
on developing countries very similar?
JS: In some countries that is true. But
in the case of Ethiopia we tripled lending even while the IMF
cut off funding. That was an unusual case, though.
I think the stranglehold that the IMF
has on finance is wrong, and it's not only Bank lending it affects.
European lending is also conditional on IMF approval - that's
what gives it so much power.
But other things make the Bank different
from the Fund. Half the Bank's employees live in the developing
world. That gives them a feeling for the developing world that's
quite different from people that fly in overnight. The Bank's
governance is also different - it's not just the central banks
and the finance ministers, it's also the aid ministries which
always tend to be among the more Left agencies in government.
And finally because the Bank is involved in environment, health
and education it interacts with the whole local administration,
not just the finance minister. It gives you a completely different
perspective on society than someone who goes in and only looks
at the national GDP data and money supply numbers.
So the cultures of the two institutions
are markedly different. A lot of people do see them as reinforcing
each other, but I think that doesn't give full weight to the ways
in which they differ and in which the World Bank has tried to
moderate, not always successfully, the extremism of the IMF.
Joseph Stiglitz's case against the IMF
is detailed in Globalization and its Discontents (www. Norton/Penguin
2002). His latest book on the US economy - is The Roaring Nineties:
Seeds of Destruction (www.Norton/Penguin 2003). Read a fuller
version of this interview on www.newint.org
International Monetary Fund (IMF) & World Bank