The International Monetary Fund has been a major player in our lives for well over a decade. We are all familiar with structural adjustment programmes, enhanced structural adjustment programmes, conditionalities and tests for compliance. We have become aware of the fund's prescriptions for removal of subsidies, low inflation, privatisation, removal of capital market controls and so on. Some seemed sensible, others seemed questionable, particularly when it was understood that the fund was applying similar remedies in a number of quite different situations globally.
A book has been published that clarifies, magisterially, things we have felt for some time but in a somewhat general and imprecise way, namely `Globalisation and its discontents' by Joseph Stiglitz, Nobel Laureate in Economics, 2001, and former chief Economist at The World Bank. Before that he had left an academic career to serve on the Council of Economic Advisers under President Bill Clinton. He has now resumed teaching.
The book is written with great clarity and its thesis is that the International Monetary Fund (IMF) has essentially reflected the interests and ideology of the Western financial community. Moving away from its original Keynesian orientation which emphasised market failures and the role of government in job-creation, it effectively adopted the free market policies of the Washington Consensus, a consensus between the IMF, the World Bank and the US Treasury about what they believed were the right policies for developing countries and which led to a radically different approach to economic development and stabilisation. He argues that many of their policies were developed in response to problems in Latin America where governments had let budgets get out of control and loose monetary policies had led to rampant inflation. The ideas there developed were applied dogmatically all over the world, whatever the actual problems or the stage of development of the country, often with catastrophic results.
Painting a picture of a Washington based bureaucracy often completely out of touch with the real world, Stiglitz catalogues its most egregious failures in East Asia in a chapter subtitled "How IMF policies brought the world to the verge of a global breakdown" and in Russia where he estimates that the "shock therapy" strategy advocated by the fund for the transition from a state-controlled to a free market economy set Russian development back by at least a decade. Countries like China which also encouraged private investment but maintained some controls enjoyed much higher rates of growth.
He highlights the grotesque privatisation exercise in Russia that created overnight a corrupt new oligarchy and the insistence on capital market liberalisation which led to the widespread theft by the political and bureaucratic elite and its colleagues of funds received from the financial institutions. He does accept that some of this was politically motivated in an effort to keep Boris Yeltsin in power.
The lesson for a poor developing country like ours is clear. IMF policies because of their dogmatic, textbook, one cure fits-all approach have often exacerbated poverty and created unnecessary pain. On occasion, they have been almost the exact opposite of what was needed, deflationary rather than stimulating growth. The IMF, has in its time, committed economic atrocities and has, because of the fact that it has usually operated behind closed doors, escaped public censure, though in both East Asia and Russia there was such resentment that there were those who argued that its policies had been deliberately designed to harm their economies because of the potential economic threat they posed, so badly misconceived were the policies. Fortunately, there have been changes, mistakes have been recognised and reform has been accepted. But how is it, Stiglitz asks, that such talented and highly paid government bureaucrats made so many mistakes. He suggests that part of the problem was the dissonance between the objective for which it was created, promoting global economic stability, and the newer objectives it adopted such as capital market liberalisation which have served the interest of the financial community. This led to intellectual incoherence and inconsistencies; economic science was replaced by ideology.
The book should be required reading for all ministers of finance and governors of central banks so that they can gain a better awareness of this institution and an understanding of its strengths and weaknesses.