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Last Updated on October 26, 2018, by eNotes Editorial. Word Count: 1661

Popular discontent with the economic process known as globalization is on the rise not only in developing countries, for which globalization has had adverse consequences, but also in the West, as shown by the large street demonstrations that take place whenever the World Trade Organization (WTO), the World Bank, or...

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Popular discontent with the economic process known as globalization is on the rise not only in developing countries, for which globalization has had adverse consequences, but also in the West, as shown by the large street demonstrations that take place whenever the World Trade Organization (WTO), the World Bank, or the International Monetary Fund (IMF) hold a major meeting. These demonstrations can no longer be shrugged off as the work of a small, discontented minority. In Globalization and Its Discontents, the critics of globalization and the role of Western financial and trade institutions in promoting it receive some heavyweight support from an insider who knows what he is talking about. This book is a sustained and often devastating critique of the role of the IMF in globalization and is only slightly less critical of the economic policies and assumptions of the U.S. government. Stiglitz relentlessly offers example after example of situations in which the IMF’s rigid insistence that its policies were the only correct ones to be pursued, in spite of evidence to the contrary, led to disastrous results across the globe, from East Asia to Latin America and Russia.

Globalization is the process which has led to a closer integration of all the nations of the world by the reduction in costs of transportation and communication and the breaking down of artificial barriers to the movement of goods, services, capital, and people across borders. There is no doubt, as Stiglitz points out, that globalization has brought many benefits. The opening up of international trade has helped many developing countries grow far more quickly than they otherwise would have done. Standards of living have been raised and life expectancy extended. However, in many parts of the world, globalization also has failed to bring the predicted economic improvements. More people live in poverty in 2003 than at the beginning of the 1990’s, even though total world income has increased during the same period. Nor has globalization brought economic stability, as crises in Latin America and Asia have shown.

The IMF was created in 1944 with the task of ensuring global economic stability. Stiglitz believes that it has failed in its mission. Not only have economic crises become more frequent over the last twenty-five years, but in many cases, the policies promoted by the IMF have actually made the situation worse, especially for the poor. Nor has the IMF been successful in the task it adopted in the 1990’s, to supervise the transition to a market economy in former communist countries.

The basic criticism that Stiglitz makes is that the IMF is attached to a rigid ideological agenda that is not always appropriate for the situation. He calls this the “Washington Consensus.” This consensus, which emerged in the Reagan era of the 1980’s, values the free market above everything else. It emphasizes fiscal austerity, privatization, and market liberalization. According to Stiglitz, when the consensus first emerged it made considerable sense, but as the years went by it came to be applied as an end in itself rather than as a means to ensure equitable and sustainable growth in the nations concerned. The Washington Consensus was then pushed too far and too fast. Stiglitz calls this “market fundamentalism.”

Too often, the approach of the IMF to developing countries is that of a “colonial ruler.” Agreements between the IMF and leaders of developing nations are not made between equal partners. The nation in effect hands over its economic sovereignty to the IMF in order to receive IMF-based aid. Stiglitz cites an arrogance at the heart of the IMF culture, the notion (not borne out by the facts) that it always knows best. Little real discussion is permitted, nor are dissenting views. The IMF might claim that it always negotiates the terms of its loans and does not use coercive tactics, but Stiglitz argues that such negotiations are completely one-sided since all the power lies with the IMF. Given the fact that IMF-based economic measures fail as often as they succeed, it is not surprising that the IMF is vilified in most developing countries. In those countries that have had some success in avoiding or recovering from economic crises, such as Uganda, Ethiopia, Botswana, and China, and in a country such as Poland, which has had relative success in making a transition to a market economy, the strategies followed have largely differed from those of the Washington Consensus.

Much of Stiglitz’s book focuses on the economic crises in East Asia (in a chapter subtitled “How IMF Policies Brought the World to the Verge of a Global Meltdown”) and Russia. The East Asian crisis began in July, 1997, when the Thai currency collapsed. Within months, the crisis had spread to Malaysia, Korea, the Philippines, and Indonesia. Attempting to ride to the rescue, the IMF, in Stiglitz’s analysis, merely made things worse. Huge IMF loans came with certain conditions, including higher interest rates, cutbacks in spending, and raising of taxes, as well as the insistence on structural economic and political reforms such as increased openness and improved financial market regulation. These contractionary policies were the opposite of what was needed. High interest rates “strangled” the economy, and the policies also created a “beggar-thy-neighbor” effect: Economic downturns were passed on to neighboring countries as each country reduced its imports.

As exchange rates continued to fall, the IMF then blamed the countries themselves, claiming that they had not taken the necessary reforms seriously enough. This had the further effect of eroding investor confidence, and the result was the flight of capital from the countries concerned. The IMF had become part of the problem, not the solution. The IMF’s mishandling of national economies led to social unrest, especially in Indonesia. Although the IMF had provided $23 billion in loans, it had provided nothing directly to help the poor. Even worse, food and fuel subsidies were cut back, and riots broke out the very next day.

Stiglitz argues that the IMF has not learned from its mistakes, and in the next crisis may make exactly the same errors. He believes that an alternative strategy would have worked better. This would have been to maintain the economy as close to full employment as possible, which requires an expansionary rather than contractionary fiscal and monetary policy. The IMF also miscalculated in its dealings with Russia and other former communist countries in Eastern Europe as they struggled to make the transition to a market economy. The Russian economy during the 1990’s turned out to be a disaster. In every year after 1989, gross domestic product (GDP) fell. Over the period 1990-1999, GDP fell by 54 percent. Industrial production fell by 60 percent, a greater drop than during World War II. There is no underestimating the task faced by the Russian government during this decade. Nearly seventy years of struggling along under an unrealistic, centrally planned economy had to be wiped out and the economy reshaped so that it responded to market forces.

The mistakes made, according to Stiglitz, were in the IMF’s encouragement of a “shock therapy” approach, in which the transition was made too quickly, over a gradualist strategy. For example, too-rapid price liberalizations led to huge inflation. Rapid privatization, carried out on the instructions of the IMF, did not lead to increased efficiency or growth, but to asset stripping and decline. It also led to a loss of confidence in government, democracy, and reform. IMF policies also ignored the social context in which their measures were to be carried out. During the 1990’s there was an increase in inequality in Russia. The rich got richer and the poor got very much poorer and more numerous. In 1989, only 2 percent of Russians lived in poverty. By 1998, that figure had soared to 23.8 percent.

Stiglitz also faults U.S. government policy toward Russia and developing countries. On too many occasions, pandering to special economic interests made the United States look hypocritical. For example, although the United States supports free trade, when a poor country tried to export a commodity to the United States, more often than not domestic protectionist interests interfered. Trade laws were exploited to construct barriers to imports. One case Stiglitz cites is when the United States accused Russia of “dumping” (that is, selling below cost) aluminum. Not only was the charge false, but the U.S. response relied on the opposite of the market forces it was supposedly promoting: It created an international cartel that regulated the production and export of aluminum. Prices rose, and consumers lost out. The Russians learned from this, as well as from their attempt to export uranium, that on occasion, the United States preaches one thing but does another.

For Stiglitz, the challenge is not to go back on globalization, but to make it work for everyone, not just the industrialized world. He argues that to accomplish this will require reforms of the international financial system. He proposes several major areas of reform: acceptance of the dangers of capital market liberalization; bankruptcy reforms (a better way of addressing debt than IMF-financed bailouts); improved banking regulations; improved risk management; improved safety nets (unemployment insurance programs, for example); and improved responses to crises. He also notes that the advocates of globalization must become more sensitive to the impact the process has on a culture’s traditional values. Urbanization, for example, can have an adverse effect on rural societies; the ascendancy of large national retailers has adverse effects on small town businesses and communities. Globalization and Its Discontents is a sobering reminder that despite noble rhetoric, Western-dominated financial interests, as manifested in institutions such as the IMF, often suffer from an intellectual myopia that leads them (and those forced to rely on their prescriptions) astray, and also leads to an unsettling tendency to arrange international economic affairs largely for their own benefit.

Sources for Further Study

Booklist 98 (May 15, 2002): 1560.

Business Week, June 17, 2002, p. 17.

Foreign Affairs 81 (July/August, 2002): 157.

Library Journal 127 (May 15, 2002): 106.

The New York Times Book Review 107 (June 23, 2002): 12.

The New Yorker 78 (July 15, 2002): 82.

Publishers Weekly 249 (May 13, 2002): 64.

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