One of the most widely discussed books these days, in both extreme left and right circles, is that of the World Bank’s ex-chief economist Joseph Stiglitz (Globalization and its Discontents). Stiglitz is being lionised since he’s the quintessential Washington Consensus man (prior to his Bank job, he was part of Clinton’s Council of Economic Advisers), and here he is now ratting on his former colleagues. It’s not just us, the left and the RSS-types are arguing, it’s an insider who is saying International Monetary Fund-World Bank (Fund-Bank) policies resulted in massively aggravating the 1997 Southeast Asian crisis, it’s IMF policies that hastened the collapse of Russia and the rise of the oligarchs who raped it, and it’s IMF policies that ensured the crises of Brazil and Argentina keep coming up repeatedly. And while providing a bailout to Korea in 1997, Stiglitz says, the IMF insisted on opening Korea’s markets to goods from Japan — clear proof the IMF’s agenda is not as pure as driven snow. And it is the same insider who’s hinting, while denying it formally, that Fund-Bank policies were tailored to benefit financial conglomerates in the West — the IMF, the argument goes, aggravated the Asian crisis, then urged countries to sell their assets at bargain-basement prices, and these were brokered by western banks. In the case of Southeast Asia, for instance, Stiglitz points out, when the crisis occurred and the exchange rates began crashing, the IMF forced countries to raise interest rates dramatically — to over 25 per cent in the case of Korea. High local interest rates, textbook economic theory tells you, attracts capital into the country. So, the IMF argued, capital that was flowing out would now start flowing back, and the problem would get solved. Yet, Stiglitz argues, the exact opposite happened. Since most firms in Southeast Asia had huge amounts of debt, the interest hike made them insolvent immediately and this, in turn, bankrupted the banks as well. So, despite the higher interest, capital began flowing out of the region. Going by this, clearly, the IMF botched up things badly. And, yet, while Stiglitz clearly has an important point here, his condemnation of the Fund-Bank is also too sweeping. For what he doesn’t do is to argue the counter-factual — what would have happened if the IMF had not raised interest rates, what would have happened if they’d gone by Stiglitz’s solutions? Most Korean firms, for instance, had way too much debt (some top chaebols had debt-equity ratios as absurdly high as 14:1), and would have collapsed anyway. Besides, forcing banks to clean up their act and, in turn, forcing industry to restructure, has actually helped Korea whose economy bounced bank. That the picture is not as cut and dried as Stiglitz makes it out to be, of course, is evident from the fact that both the IMF and Stiglitz cite Korea as an example to prove their case — IMF deputy managing director Anne Krueger was in town last week, and spoke of Korea being a good example of IMF policies working exactly as intended! Whether a country gets crippled by, or benefits from a Fund-Bank programme, of course, depends entirely on the country itself. Morocco or the Ivory Coast may have suffered grievously from the IMF suggesting they privatise rapidly, but India has clearly been a country that can be cited as an example of IMF success. The forex crisis of 1991 is far behind us, and the economy has been growing steadily since after the immediate crisis years. If there’s any cloud on the horizon, it’s the still-high fiscal deficit levels that are currently running at around ten per cent of GDP. If India was still under an IMF programme, and the Fund-Bank insisted on government expenditure being cut - this would free up funds for the private sector - most would argue this would be a good thing. Similarly, even without a Fund-Bank programme, the government has come out with an ordinance that seeks to choke off private firms that have consistently defaulted on loans to banks and financial institutions. Again, most would argue that this is essential if India’s financial system is to remain healthy — one wonders how Stiglitz would describe such an ordinance if India was still under an IMF programme? Besides, why blame just the Fund-Bank? Stiglitz cites the case of the Ivory Coast being persuaded to privatise a telephone firm even though there was no attempt to create competition first — this resulted in phone rates shooting up so much that students couldn’t even afford internet connections. That’s awful, but the Delhi government’s privatisation of the Delhi Vidyut Board has also resulted in just replacing a government monopoly with a private one. And while Stiglitz blames the Bank for promoting costly power sector deals in countries like Pakistan, let’s not forget it was the same World Bank that asked India not to sign the Dabhol deal with Enron as it was too expensive! Stiglitz’s picture is a compelling one, but it’s over-painted.
