The Globalization Wars: An Economist Reports From the Front Lines

Joseph Stiglitz's memoirs of his years in Washington, D.C. -- first as chair of President Bill Clinton's Council of Economic Advisers and then as chief economist at the World Bank -- have the flavor of a morality play. Our goodhearted but slightly naive hero, on leave from Stanford University, sets out for the nation's capital to serve his country and improve the lot of the developing world. Once there he finds a morass of political opportunism, ideologically motivated decision-making, and bureaucratic inertia. Undeterred, he battles valiantly on behalf of impoverished nations against the unrelenting globalizers of the International Monetary Fund (IMF). As the tale unfolds, the reader waits with bated breath to learn whether the hero can save the world's poor from the consequences of bad economic advice.

Its melodramatic aspect notwithstanding, this book has a serious point. At its core is a withering critique of globalization, and of the role played by multilateral institutions and their principal shareholders in pressing developing countries to liberalize their economies. Too often, Stiglitz contends, those concerned with economic development have seen economic openness and liberalization as panaceas. He criticizes the Clinton Treasury Department for embracing this approach less because of its analytical merits than because it allowed the department to promote policies helpful to U.S. commercial and financial interests. Instead of progress, he argues, the result has all too often been devastation. Developing countries that have opened themselves to trade, deregulated their financial markets, and abruptly privatized national enterprise have experienced more economic and social disruption than growth. Foreign direct investment has destroyed potentially viable domestic companies. And liberalized international finance has made emerging-market economies more vulnerable to erratic shifts in investor sentiment without conferring any visible benefits.

Stiglitz's account also raises questions about the moral and professional obligations of economists in government and international organizations. Academics on leave, he argues, seduced by plush offices and first-class travel, may lose sight of their original motivation for public service -- namely, to enlist science in the pursuit of human betterment. And international civil servants often have to choose between dissent and professional advancement. This is where tenure is valuable: if taking on the bureaucratic status quo gets a professor into political hot water, he or she can always retreat to the ivory tower.

But an official who publicly criticizes the policies of his or her agency without resigning in protest risks damaging its effectiveness. Doubts will arise about whether the members of its management team are on the same wavelength. Stiglitz's oft-reported criticisms of the Bretton Woods institutions were newsworthy precisely because he went public without resigning as the World Bank's chief economist and because they therefore raised questions about the competence of these agencies. To be sure, the author was less critical of his own employer than he was of the IMF, its sibling organization across 19th Street in Washington. But the multilateral institutions must work as a team to help financially distressed countries regain the confidence of the markets, which requires confidence in their own actions. Thus there is no finessing the point.

MR.STIGLITZ GOES TO WASHINGTON

These are the key issues posed by Stiglitz's entertaining, insightful, and well-written book. It is hard to think of anyone better placed to raise them, not just because of the author's practical experience but also because of his scholarly stature. Now at Columbia University, Stiglitz was prominent for his contributions to the economics of "asymmetric information" even before sharing the Nobel Prize in economics last year.

As the phrase implies, asymmetric information exists when one party to a transaction knows more about its characteristics than does the other. Among the theory's applications are some that yield important insights into the operation of financial markets. These show, among other things, that interest rates cannot always be counted on to balance the supply and demand for money and credit, that financial stress can undermine the stability of the economy as a whole, and that financial liberalization does not necessarily result in a more efficient and rational allocation of resources.

One suspects that Stiglitz's years of research not only shaped his analytical outlook but also gave him a stake in seeing his ideas taken up by policymakers. Thus when officials proposed at the 1997 IMF-World Bank meetings that the deregulation of international capital flows be made obligatory for IMF members, he vigorously dissented. It is similarly understandable that he reacted negatively when the IMF recommended interest-rate hikes to restore balance to the countries caught in the Asian financial crisis.

With the benefit of hindsight, most economists now agree that Stiglitz's warnings about the dangers of precipitous financial deregulation were on the mark. Indeed, the meeting in Hong Kong at which officials pushed for making the eventual deregulation of capital flows an obligation of IMF members actually took place after the outbreak of the Asian crisis, seemingly in disregard of that event. Stiglitz regards this poor timing as evidence that the IMF saw a liberalized financial system not as a means to development or stability but rather as an end in itself. (The alternative interpretation, it should be noted -- that the proposal was driven by bureaucratic inertia -- is scarcely more flattering.)