Documents and Speeches on the Politics of International Economics

This collection is intended to be a useful archive of important primary materials. The text of the documents has not been amended, but usually some copy-editing of the lay-out has been done.
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An Open Letter to Joseph Stiglitz

Downloaded and copy-edited by Peter Willetts from www.imf.org/external/np/vc/2002/070202.htm

An Open Letter, by Kenneth Rogoff, Economic Counsellor and Director of Research, International Monetary Fund, 2 July 2002. [1]

To Joseph Stiglitz, Author of Globalization and Its Discontents (New York: W.W. Norton & Company, June 2002)

At the outset, I would like to stress that it has been a pleasure working closely with my World Bank colleagues—particularly my counterpart, Chief Economist Nick Stern—during my first year at the IMF. We regularly cross 19th Street to exchange ideas on research, policy, and life. The relations between our two institutions are excellent—this is not at issue. Of course, to that effect, I think it is also important, before I begin, for me to quash rumors about the demolition of the former PEPCO building that stood right next to the IMF until a few days ago. No, it's absolutely not true that this was caused by a loose cannon planted within the World Bank.

Dear Joe,

    Like you, I came to my position in Washington from the cloisters of a tenured position at a top-ranking American University. Like you, I came because I care. Unlike you, I am humbled by the World Bank and IMF staff I meet each day. I meet people who are deeply committed to bringing growth to the developing world and to alleviating poverty. I meet superb professionals who regularly work 80-hour weeks, who endure long separations from their families. Fund staff have been shot at in Bosnia, slaved for weeks without heat in the brutal Tajikistan winter, and have contracted deadly tropical diseases in Africa. These people are bright, energetic, and imaginative. Their dedication humbles me, but in your speeches, in your book, you feel free to carelessly slander them. [2]

    Joe, you may not remember this, but in the late 1980s, I once enjoyed the privilege of being in the office next to yours for a semester. We young economists all looked up to you in awe. One of my favorite stories from that era is a lunch with you and our former colleague, Carl Shapiro, at which the two of you started discussing whether Paul Volcker merited your vote for a tenured appointment at Princeton. At one point, you turned to me and said, "Ken, you used to work for Volcker at the Fed. Tell me, is he really smart?" I responded something to the effect of "Well, he was arguably the greatest Federal Reserve Chairman of the twentieth century" To which you replied, "But is he smart like us?" I wasn't sure how to take it, since you were looking across at Carl, not me, when you said it.

    My reason for telling this story is two-fold. First, perhaps the Fund staff who you once blanket-labeled as "third rate"—and I guess you meant to include World Bank staff in this judgment also—will feel better if they know they are in the same company as the great Paul Volcker. Second, it is emblematic of the supreme self-confidence you brought with you to Washington, where you were confronted with policy problems just a little bit more difficult than anything in our mathematical models. This confidence brims over in your new 282 page book. Indeed, I failed to detect a single instance where you, Joe Stiglitz, admit to having been even slightly wrong about a major real world problem. When the U.S. economy booms in the 1990s, you take some credit. But when anything goes wrong, it is because lesser mortals like Federal Reserve Chairman Greenspan or then Treasury Secretary Rubin did not listen to your advice.

    Let me make three substantive points. First, there are many ideas and lessons in your book with which we at the Fund would generally agree, though most of it is old hat. For example, we completely agree that there is a need for a dramatic change in how we handle situations where countries go bankrupt. IMF First Deputy Managing Director Anne Krueger—who you paint as a villainess for her 1980s efforts to promote trade liberalization in World Bank policy—has forcefully advocated a far reaching IMF proposal. At our Davos [World Economic Forum] panel in February you sharply criticized the whole idea. Here, however, you now want to take credit as having been the one to strongly advance it first. Your book is long on innuendo and short on footnotes. Can you document this particular claim?

    Second, you put forth a blueprint for how you believe the IMF can radically improve its advice on macroeconomic policy. Your ideas are at best highly controversial, at worst, snake oil. This leads to my third and most important point. In your role as chief economist at the World Bank, you decided to become what you see as a heroic whistleblower, speaking out against macroeconomic policies adopted during the 1990s Asian crisis that you believed to be misguided. You were 100% sure of yourself, 100% sure that your policies were absolutely the right ones. In the middle of a global wave of speculative attacks, that you yourself labeled a crisis of confidence, you fueled the panic by undermining confidence in the very institutions you were working for. Did it ever occur to you for a moment that your actions might have hurt the poor and indigent people in Asia that you care about so deeply? Do you ever lose a night's sleep thinking that just maybe, Alan Greenspan, Larry Summers, Bob Rubin, and Stan Fischer had it right—and that your impulsive actions might have deepened the downturn or delayed—even for a day—the recovery we now see in Asia?

    Let's look at Stiglitzian prescriptions for helping a distressed emerging market debtor, the ideas you put forth as superior to existing practice. Governments typically come to the IMF for financial assistance when they are having trouble finding buyers for their debt and when the value of their money is falling. The Stiglitzian prescription is to raise the profile of fiscal deficits, that is, to issue more debt and to print more money. You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government's debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF—no, make that we on the Planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace but, especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.

    Joe, throughout your book, you condemn the IMF because everywhere it seems to be, countries are in trouble. Isn't this a little like observing that where there are epidemics, one tends to find more doctors?

    You cloak yourself in the mantle of John Maynard Keynes, saying that the aim of your policies is to maintain full employment. We at the IMF care a lot about employment. But if a government has come to us, it is often precisely because it is in an unsustainable position, and we have to look not just at the next two weeks, but at the next two years and beyond. We certainly believe in the lessons of Keynes, but in a modern, nuanced way. For example, the post-1975 macroeconomics literature—which you say we are tone deaf to—emphasizes the importance of budget constraints across time. It does no good to pile on IMF debt as a very short-run fix if it makes the not-so-distant future drastically worse. By the way, in blatant contradiction to your assertion, IMF programs frequently allow for deficits, indeed they did so in the Asia crisis. If its initial battlefield medicine was wrong, the IMF reacted, learning from its mistakes, quickly reversing course.

    No, instead of Keynes, I would cloak your theories in the mantle of Arthur Laffer and other extreme expositors of 1980s Reagan-style supply-side economics. Laffer believed that if the government would only cut tax rates, people would work harder, and total government revenues would rise. The Stiglitz-Laffer theory of crisis management holds that countries need not worry about expanding deficits, as in so doing, they will increase their debt service capacity more than proportionately. George Bush, Sr. once labeled these ideas "voodoo economics." He was right. I will concede, Joe, that real-world policy economics is complicated, and just maybe further research will prove you have a point. But what really puzzles me is how you could be so sure that you are 100 percent right, so sure that you were willing to "blow the whistle" in the middle of the crisis, sniping at the paramedics as they tended the wounded. Joe, the academic papers now coming out in top journals are increasingly supporting the interest defense policies of former First Deputy Managing Director Stan Fischer and the IMF that you, from your position at the World Bank, ignominiously sabotaged. Do you ever think that just maybe, Joe Stiglitz might have screwed up? That, just maybe, you were part of the problem and not part of the solution?

    You say that the IMF is tone deaf and never listens to its critics. I know that is not true, because in my academic years, I was one of dozens of critics that the IMF bent over backwards to listen to. For example, during the 1980s, I was writing then-heretical papers on the moral hazard problem in IMF/World Bank lending, an issue that was echoed a decade later in the Meltzer report. Did the IMF shut out my views as potentially subversive to its interests? No, the IMF insisted on publishing my work in its flagship research publication Staff Papers. Later, in the 1990s, Stan Fischer twice invited me to discuss my views on fixed exchange rates and open capital markets (I warned of severe risks). In the end, Stan and I didn't agree on everything, but I will say that having entered his office 99 percent sure that I was right, I left somewhat humbled by the complexities of price stabilization in high-inflation countries. If only you had crossed over 19th Street from the Bank to the Fund a little more often, Joe, maybe things would have turned out differently.

    I don't have time here to do justice to some of your other offbeat policy prescriptions, but let me say this about the transition countries. You accuse the IMF of having "lost Russia." Your analysis of the transition in Russia reads like a paper in which a theorist abstracts from all the major problems, and focuses only on the couple he can handle. You neglect entirely the fact that when the IMF entered Russia, the country was not only in the middle of an economic crisis, it was in the middle of a social and political crisis as well.

    Throughout your book, you betray an unrelenting belief in the pervasiveness of market failures, and a staunch conviction that governments can and will make things better. You call us "market fundamentalists." We do not believe that markets are always perfect, as you accuse. But we do believe there are many instances of government failure as well and that, on the whole, government failure is a far bigger problem than market failure in the developing world. Both World Bank President Jim Wolfensohn and IMF Managing Director Horst Köhler have frequently pointed to the fundamental importance of governance and institutions in development. Again, your alternative medicines, involving ever-more government intervention, are highly dubious in many real-world settings.

    I haven't had time, Joe, to check all the facts in your book, but I do have some doubts. On page 112, you have Larry Summers (then Deputy U.S. Treasury Secretary) giving a "verbal" tongue lashing to former World Bank Vice-President Jean-Michel Severino. But, Joe, these two have never met. How many conversations do you report that never happened? You give an example where an IMF Staff report was issued prior to the country visit. Joe, this isn't done; I'd like to see your documentation. On page 208, you slander former IMF number two, Stan Fischer, implying that Citibank may have dangled a job offer in front of him in return for his cooperation in debt renegotiations. Joe, Stan Fischer is well known to be a person of unimpeachable integrity. Of all the false inferences and innuendos in this book, this is the most outrageous. I'd suggest you should pull this book off the shelves until this slander is corrected.

    Joe, as an academic, you are a towering genius. Like your fellow Nobel Prize winner, John Nash, you have a "beautiful mind." As a policymaker, however, you were just a bit less impressive.

    Other than that, I thought it was a pretty good book.

    Sincerely yours,

    Ken

Notes

1. Used as opening remarks at a June 28 discussion of Mr. Stiglitz's book at the World Bank, organized by the World Bank's Infoshop.
    
2. For example: "It was not just that IMF policy might be regarded by softheaded liberals as inhumane. Even if one cared little for those who faced starvation, or the children whose growth had been stunted by malnutrition, it was simply bad economics." Joseph Stiglitz,Globalization and Its Discontents, p 119.
    

Stiglitz, the IMF and Globalization

Downloaded and copy-edited by Peter Willetts from www.imf.org/external/np/speeches/2002/061302.htm

A Speech to the MIT Club of Washington, 2 July 2002
By Thomas C. Dawson Director, External Relations Department International Monetary Fund

1. Thank you for the invitation to talk to you this evening. I'm told that your fellow MIT alum Joseph Stiglitz addressed this group a couple of years ago and used his time to say some nice things about the IMF. The organizers of this evening's entertainment thought it would be fun if I repay his kindness.

2. The title of my talk is "Stiglitz, the IMF and Globalization". My preference would have been to talk about these three topics in the reverse order from which they appear in the title and to have run out of time by the time I got to the third. Instead, because Stiglitz has been so prominent in the press in recent years, and so critical of the IMF, I have to devote the bulk of my talk to responding to his attacks on us. My defense for getting into the fight is the classic one: "He started it!". I hope there will be time at the end to discuss the far more important issue of how to make globalization work for all, an issue on which Stiglitz and the IMF share common ground.

3. In the very unlikely event that you haven't heard of us, let me just say that the IMF is a multilateral agency with two main jobs: first, to help preserve global economic and financial stability and, second, to assist in the global war on poverty.

4. And for the few among you who may not heard of Joe Stiglitz, he is a noted academic economist. Since he addressed your group, he's won the Nobel Prize, an honor his fellow economists, who rarely agree on anything, agree he completely and richly deserves. Joe has also gone from being the Chief Economist of the World Bank to Chief Critic of the IMF.

5. One of the many things that he criticizes us for is dispensing policy advice without taking on board the lessons of the academic work that won him the Nobel. Stiglitz evidently feels that being a top-notch academic economist is ample qualification for being a good policymaker. The fact is that Joe got a late start in policymaking and shows it. Policymaking requires a different skill set from academic theorizing. Joe's skills as a policymaker are vastly improved by hindsight, something his former boss Jim Wolfensohn alluded to when he said about Joe: "To stand back later and say, "If you'd done it my way everything would have been different," is a little generous to yourself."

6. Stiglitz has recently written a book called "Globalization and its Discontents". Despite its general title, the book is mostly about the IMF, not a major critique of globalization. The Economist, said in its review that a more accurate title for the book would have been "The IMF and My Discontent."

7. My bean-counting assistant noted that the index to the book has some 64 references to globalization, whereas references to the IMF – almost all critical – total 340. That works out to over one alleged mistake committed by the IMF per page. You'd think by sheer accident we'd have gotten a couple of things right.

8. That's my bottom-line message: You can't judge a book by its cover. There are two books in here. The first is a haphazard list of allegations against the IMF. Buried amidst the half-truths and some nasty (and false) allegations are a few valid criticisms of the IMF. Stiglitz tries to provide a grand theme for all this by claiming that all these mistakes are due to the IMF's slavish devotion to what he calls "market fundamentalism". He is simply wrong in this view. I won't have time to delve too much into specific allegations here but I will tell you why the overall criticism is wrong. The second book, matching the advertised title of "Globalization and its Discontents", is a discussion of the benefits and risks of globalization. Stiglitz's views here are quite mainstream and the IMF and many other observers would be in substantial agreement with him.

9. Let me begin with Stiglitz's overarching critique of the IMF, that it is driven by "market fundamentalism". Stiglitz accuses the IMF of being driven by a belief in the perfection of markets and the imperfection of governments. The accusation is simply wrong. IMF staff are well aware that they owe their jobs to the imperfections of markets.

10. What is probably true is that the staff of the IMF (and the World Bank) have over time become more confident about the ability to use markets to serve the public interest. What caused this shift? Quite simply, the evidence. Through the 1980s, central planning represented an important alternative to markets as a way of organizing economies. The collapse of the Soviet Union and the fall of the Berlin Wall suggested to many that markets, whatever their faults, were a more durable way of organizing a country's economy. This feeling was reinforced by the good economic performance of the United States and the United Kingdom, both of which had moved to more market-oriented systems during the 1980s.

11. While these monumental changes were going on in the world economy, Stiglitz was hard at work in academia illuminating in a remarkable series of papers the flaws of market economies. As the award of the Nobel Prize attests, those papers are surely important contributions. But it cannot come as a surprise that, given the sweeping historical developments that I have described, the practical lessons being applied in the policymaking realm involved making more, rather than less, use of markets to solve economic problems.

12. The great British economist John Maynard Keynes, who Stiglitz greatly admires, once said in replying to a critic: "When I get new information, I change my opinions. What, sir, do you do with new information?" One is tempted to ask Joe Stiglitz why, despite the new information about the fall of central planning, there has not been a transition in his views about the relative prevalence of market and government failure.

13. Other eminent economists have made the transition. Larry Summers, former U.S. Treasury Secretary and currently President of an university in Cambridge whose name escapes me, is one example. He said, in an interview, that when he was growing up Milton Friedman was the devil incarnate in his household. But now, Summers said, he has ungrudging respect for Friedman's views about the market.

14. The IMF's critics on the right find the allegation that the IMF is driven by market fundamentalism completely ludicrous. For instance, listen to what Brink Lindsey of the Cato Institute, the true home of market fundamentalism, says in his review of the book in the Wall Street Journal. Lindsey writes that for Stiglitz to accuse the IMF of market fundamentalism "is misleading to the point of absurdity ...There's nothing in his book that suggests even a whisper of the many profound disagreements between the "disciples of Milton Friedman," as he calls them, and the IMF's economists. Such disagreements do not fit well with Mr. Stiglitz's ax-grinding, and so, apparently, he decided to leave them out."

15. Not only is the overarching criticism incorrect, notes Lindsey, but the examples that Stiglitz provides of how market fundamentalism led the IMF astray are vastly over-blown. According to Stiglitz, Russia's difficult transition from communism, worsening poverty in Africa, the collapse of Argentina's economy--these all are manifestations of what happens when the IMF's market fundamentalists get their way. The fact is that there are all very complex situations on which there was, and remains to this day, plenty of disagreement about the right way to do things and who is to blame for things that have gone wrong. The IMF deserves its share of the blame, but so do many others.

16. In fact, many of Stiglitz's criticisms should apply with equal force to our sister institution, the World Bank. Issues related to privatization, the quality of a country's institutions, consideration of alternate strategies to alleviate poverty – these are all areas where our sister institution tends to be what's called the "lead agency". But, as the New York Times noted in its review, the Bank "is spared the searing indictment that Professor Stiglitz reserves for the IMF ... Not surprisingly, part of the book's purpose seems to be an attempt to ensure that events during his World Bank tenure do not besmirch his own reputation. In the process, one suspects that some score-settling may well be in play."

17. As part of this score-settling, Stiglitz has made some very mean-spirited observations about Fund staff and officials, past and present. One charge in particular should not go unanswered, particularly before this audience. Stiglitz notes that Stanley Fischer, the former deputy head of the IMF and former MIT professor of economics, went straight from the IMF to Citigroup. Stiglitz adds: "A chairman of Citigroup was Robert Rubin who, as secretary of Treasury, had a central role in IMF policies. One could only ask, Was Fischer being richly rewarded for having faithfully executed what he was told to do?" To anyone who knows Fischer's utter devotion to institutions he works for, whether it was the IMF or MIT, the suggestion that he used twisted IMF policies to ensure a job at Citicorp is repugnant. Stiglitz surely knows that Fischer is regarded as a man of unimpeachable integrity and yet he cannot resist the jibe at him.

18. I also take strong exception to the portrayal of IMF staff as uncaring bureaucrats serving the narrow interests of the Western financial community. Stiglitz implies that IMF staff see the unemployed "as just a statistic ... the unintended casualties in the fight against inflation or to ensure that Western banks get repaid." He suggests that IMF staff, like the pilots of "modern high-tech warfare" who drop "bombs from 50000 feet", have no feelings for the people whose lives are affected by their policies. The IMF's staff are drawn from nearly a 150 countries; many are acutely aware of the pain and suffering of the people of developing countries and want the situation in these countries to get better. Stiglitz has not cornered the market on morality and caring. Another Stiglitz refrain is that IMF staff "make themselves comfortable in five-star hotels" in the countries they visit for missions. If, as Stiglitz recommends in his book, the IMF and the World Bank become subject to some sort of a Freedom of Information Act, many IMF staff will rush to ask for the release of Stiglitz's own travel and hotel records during his years as a World Bank staffer: Given the shrillness of his complaints about others staying in five-star hotels, we fully expect to find that Stiglitz has been leading by example and staying in places several notches lower.

19. Stiglitz has also attacked the competence of IMF staff, once characterizing them as "third-rank students from first-rate universities." This provoked Rudi Dornbusch, a famous MIT professor of international economics, into responding that "at Harvard and MIT, and everywhere else, fresh Ph.Ds who can't get jobs at the top 5 universities in the world will pick the World Bank or the IMF. And that is all for the better. Anyone likely to be picked as top draft choice by the top schools may be a trifle too theoretical for the cruder world of policymaking. Stiglitz himself with his predilection for the intriguing exceptions rather than the general rule is a great case in point."

20. OK, enough of the food-fight. Let me shift to a more positive tone and acknowledge the validity of some of the criticisms Stiglitz makes of the IMF. As I noted earlier, the IMF's has two main tasks: first, to help preserve global financial stability and, second, to assist the World Bank and others in the global war on poverty. The critiques by Stiglitz (and others) on some of our failures on both of these fronts, while not accurate down to every last detail, are well-taken.

21. One criticism is that the U.S. Treasury and the IMF showed excessive zeal in encouraging countries to open up to short-term foreign capital in the mid-1990s. The critics say that the entry, and often the subsequent hasty exodus, of foreign capital into economies which are too small or whose financial sectors are ill-equipped to regulate and absorb the capital can be devastating. Is this a valid characterization? It's useful to recall a bit of history first. When the IMF was created in 1944, its founders envisioned a world with free trade but with restrictions on movement of capital across countries. In the jargon, current accounts were to be open, but capital accounts closed. There is no denying that the vision of the world being promoted by the IMF in the mid-1990s was different: at the 1997 IMF-World Bank meetings the proposal on the table was to make eventual deregulation of international capital flows obligatory for IMF members. In the case of Korea, the U.S. Treasury did press (albeit with lack of success) for broad capital account liberalization in the context of the country's OECD accession.

22. But while Stiglitz's characterization of a greater push toward capital account liberalization is broadly correct, it is inaccurate in many important details. The IMF and the U.S. Treasury did not encourage countries to liberalize short-term flows through the banking sector, which is what turned out to be the Achilles Heel during the Asian crisis. And many countries liberalize for their own reasons rather than as a consequence of external prodding – Thailand for instance was keen to have Bangkok emerge as international financial sector like Singapore. Nevertheless, as a result of the criticism by Stiglitz and others, the IMF is more vocal in pointing out the risks of rapid capital account liberalization. While such cautionary notes have always been present in IMF advice on capital account liberalization, today they are much more likely to be given greater prominence. For instance, three weeks ago, although unnoticed by anyone in the international media but the Dow Jones newswires, we advised Sri Lanka against opening up its capital account until its financial sector was further strengthened.

23. Other aspects of our handling of the financial crisis in Asia have also come for criticism from Stiglitz and others. We've acknowledged that we made mistakes in our initial response to the crisis. As anyone who has been centrally involved in crisis situations will tell you, battlefield medicine is never perfect. We were surprised by the speed and virulence with which the crisis spread to many countries in the region. The experience revealed the IMF had not kept up with the rapid developments in international capital markets, a deficiency it has tried to rectify through a number of steps taken over the last couple of years.

24. Our most glaring error, according to many observers, was to recommend excessive belt-tightening to Thailand at the start of the crisis. It is worth recalling that in July 1997, Thailand was still growing rapidly, had a huge and growing current account deficit (more than 8 percent of GDP), and faced large, though as yet unrecognized, fiscal liabilities to recapitalize the financial system. It was against this background that the Imf recommended a roughly-unchanged fiscal position. However, once the scope of the crisis became evident, we quickly changed course. Indeed, IMF-supported programs in Thailand and other crisis countries were soon marked by large budget deficits, in part because of increases in spending on social safety net programs. This is exactly the kind of easing of fiscal policy Stiglitz advocates.

25. There is another, more technical, debate about which there is still no meeting of the minds between Stiglitz and others. This debate has to do with the appropriateness of the IMF's advice on monetary policy during the Asian crisis. The IMF and many others continue to disagree with Stiglitz's assertion that it is obvious that monetary policy must also be eased at the onset of a financial crisis. As Larry Summers noted recently, "when a country's exchange rate is declining rapidly because capital is trying to leave the country, and the country's financial institutions are in real trouble, there is a fundamental conflict between restoring external confidence by raising interest rates and providing for financial repair through increased liquidity. It's a classic problem of a single instrument and multiple targets. Confidence is widely recognized as essential in combating financial crises." Others have taken similar positions. Dornbusch for instance says that "investors will take confidence and bring money back when they see fiscal conservatism and high interest rates. Do that for a few months and you are on the right track." Our former chief economist Michael Mussa said in his typically colorful language that those who advocate easing monetary policy at the onset of a financial crisis are smoking something "not entirely legal". So the point is that there isn't a professional consensus on this topic. What's needed is honest debate and a closer look at the evidence, not polemics.

26. The experience of more recent financial crises, such as the one in Argentina, suggest that our existing mechanisms to resolve crises in a rapid and orderly fashion do not work smoothly. One problem is that governments do not deal with their sovereign debt problems promptly; the situation is often allowed to fester until a crisis is precipitated. Our current deputy head Anne Krueger has suggested creating a statutory mechanism to secure a more orderly and timely restructuring of unsustainable sovereign debts. For those of you who may have been following this issue, the mechanism being proposed is to empower a super-majority of creditors to take key decisions in the restructuring process in negotiation with the debtor. Stiglitz has been quite supportive of the general idea of having a sovereign debt restructuring mechanism.

27. With respect to our other main task, poverty alleviation, Stiglitz notes that the IMF and the World Bank have recently launched a new approach. This is a more "participatory" approach, one which involves the country's government and its civil society at an early stage in measuring the size of the poverty problem and in devising development strategies to reduce poverty. We get a rare compliment here when Stiglitz says that even though participatory assessments are not yet being perfectly implemented "they are a step in the right direction". He also notes correctly that if the gap between the rhetoric and reality of the new poverty strategy "persists for too long or remains too great, there will be a sense of disillusionment."

28. As promised, let me finish with a brief discussion of globalization, the supposed subject of the book. Stiglitz provides a mainstream, but nonetheless eloquent and clear, description of the benefits of globalization. He notes that "opening up to international trade has helped many countries grow far more quickly than they would otherwise have done. ... Because of globalization many people in the world live longer than before and their standard of living is far better." ... "People in the West may regard low-paying jobs at Nike as exploitation" but, says Stiglitz, "working in a factory is a far better option for many than growing rice" on the farm. It is also the case, says Stiglitz, that globalization "has reduced the sense of isolation felt in much of the developing world and has given many people in the developing world access to knowledge well beyond the reach of even the wealthiest in any country a century ago." With all of this, we couldn't agree more.

29. However, the benefits of globalization are spread very unevenly. In Africa the high expectations that people had for the continent following colonial independence remain unfulfilled. Growth in many countries in Latin America has yet to be placed on a secure footing. India is only just emerging from decades of economic slumber. As a consequence, many millions of people throughout the developing world remain mired in poverty. People disagree on the solutions to this problem. Even Larry Summers, not easily stumped, admits that "he doesn't have it all figured out"; however, he thinks "that in the developing world, far more people are poor because of too little globalization rather than too much, and far more people are poor because of a lack of economic reform rather than because of excessively rapid economic reform." Others such as Stiglitz feel that there has been too much of a "one-size-fits all" approach taken to development, and that market reforms have been pushed with excessive zeal and haste; he says that countries must be free to experiment with alternatives and follow paths that best suit their situations and needs.

30. While there are no easy answers, one concrete step could be taken to help the situation considerably, and that is for developed countries to lower the trade barriers they have against precisely those products in which the developing countries have a comparative advantage. On this particular issue, the relevant portions of Stiglitz's book read like passages from speeches by the IMF's Managing Director.

31. Let me end on that note of harmony.
 

The Role of the IMF in the Global Economy

Downloaded and copy-edited by Peter Willetts from www.imf.org/external/np/speeches/2002/070102.htm

Remarks by Horst Köhler, Managing Director of the International Monetary Fund, at the High-Level Meeting of the United Nations Economic and Social Council, New York, 1 July 2002

Ambassador Šimonovic, Mr. Secretary-General, Ladies and Gentlemen:

Today's high-level meeting provides a welcome opportunity to take stock of where we stand in meeting the challenges facing the global economy. And there can be no question that the foremost challenge is poverty. The Financing for Development Conference in Monterrey produced an unprecedented common understanding about what it will take to overcome world poverty. First, the basis for everything is self-responsibility. Economic development requires good governance, respect for the rule of law, and policies and institutions which create a good investment climate and unlock the creative energies of the people. Second, on this basis, developing countries can rightly expect faster and more comprehensive support from the international community. What is crucial now is to transform the Monterrey Consensus into concrete action and measurable results. To establish proper accountability, we should identify more clearly the respective responsibilities of poor countries and their development partners – donor countries, international institutions, the private sector, and civil society. I am confident that it will be possible to achieve the Millennium Development Goals, if all cooperate to do their parts under this two pillar approach.

    We can all be happy that the doomsday scenarios some predicted after the terrorist attacks of September 11 did not materialize. Thanks in particular to the decisive interest rate cuts and tax reductions in the United States and the supportive policy response in Europe, a recovery of the world economy now appears to be under way. And I think it was also important for confidence that the membership of the IMF came together last November in Ottawa to define a collaborative approach to strengthen the global economy.

    To be sure, there are still questions about the strength and durability of the recovery. These relate especially to corporate earnings and investment in the United States, fragilities in financial markets, and regional political tensions. But on the whole, I am confident that the world economy will gain strength in the second half of this year. What is required now is vigilance and a shift from short-term considerations to tackling decisively the underlying economic and financial imbalances in the global economy. This calls for strong leadership of the advanced industrial countries, by taking action to strengthen the prospects for sustained growth in their own economies and through leading by example in the effort to make globalization work for the benefit of all.

    Strong US growth in the second half of the 1990s served the global economy well. But this has been accompanied by a widening current account deficit which raises concerns over the sustainability of capital inflows to the United States and the valuation of dollar assets. In this situation, it will be crucial for the US to ensure that the budget remains balanced over the medium term, as part of a strategy for increasing national savings. But the US current account deficit is not just an issue for the United States: what is also needed to strengthen the global economy is more robust, domestic demand-driven growth in other advanced economies. It is clear that it would be possible to raise potential growth rates in Europe to 3 percent a year or even more, if there would be more ambition for structural reform. Similarly, in Japan the return to a growth performance that corresponds to the country's size and potential demands accelerated action to dispose of nonperforming loans, deregulate key industries, and restructure Japan's banking and corporate sectors. The recent improvement in business activity should not reduce incentives for action on these reforms.

    Emerging markets and other developing countries should stay the course of sound fiscal and monetary policies and structural reform, which is indispensable to weather the ongoing storm. In this context, there also must be confidence that the international environment will hold opportunities for countries committed to reform.

    Trade is crucial for growth. There is no example of a developing country experiencing rapid growth without becoming strongly integrated into the world trading system. Trade liberalization is also an important element in crisis avoidance—the experience of Latin America, where trade links have lagged behind capital market links, illustrates that vividly. To me, withstanding pressures for protectionism is key to strengthening confidence about the future prospects for strong global growth and shared prosperity in the world. There would be very significant benefits to all if the Doha Round could duplicate the growth in trade that followed the Uruguay Round.

    But we should be even more ambitious. During our lifetimes, integration into the global economy through trade, financial flows, and the spread of ideas and technology has produced unprecedented gains in economic growth and human welfare for most of the world—and it still holds huge potential for the future. Realizing this potential will require a concerted and collaborative effort of the entire international community to make globalization more inclusive, and to seek a better balancing of the risks and benefits.

    The IMF is committed to being a part of that effort. And to do the best possible job, the IMF itself is in a process of change and reform. We have become more open and transparent. We are building on the lessons learned from the financial crises of the past decade to improve the IMF's capacities for crisis prevention and management. As part of our work on crisis resolution, IMF Management has proposed a new Sovereign Debt Restructuring Mechanism. Our work on internationally recognized standards and codes is helping to establish new rules of the game for the global economy. We have embarked—together with the World Bank—on a comprehensive program to assess financial sector strengths and weaknesses in our member countries. And we are further intensifying our cooperation with the World Bank and other international institutions to ensure a good division of labor.

    I am convinced that the international financial system is more resilient today than before the Asian crisis. But recent experience should also make us even more humble: the fact that it was not possible to avoid the meltdown of the Argentine financial system, or to do a better job of limiting overshooting in equity and capital markets, suggests that we still have a lot to learn.

    In particular, we must draw firmer conclusions about the indispensable role of sound institutions and good governance for sustained growth and financial stability. It is up to each country to ensure that such conditions exist. To resolve homegrown problems, no external advice, however sound, and no amount of outside money can substitute for self-responsibility and political cohesion in a society.

    The Enron collapse and, even more, the WorldCom scandal have made it clearer than ever that there is a need to give as much attention to risks and vulnerabilities arising in the advanced countries, as we do to problems in emerging markets and developing countries. I therefore welcome the broad discussion and legislative activities that are underway in the United States, in the aftermath of these revelations. But I also think that the international community as a whole should review issues related to accounting, disclosure, and corporate governance.

    In Monterrey, I made it clear that the IMF will play an active part in the effort to achieve the Millennium Development Goals. In my talks with leaders, business persons, and civil society in low-income countries, I have been struck by the willingness to take responsibility for tackling the home-grown causes of poverty. It is particularly encouraging that African leaders have made good governance, sound policies, and increased trade and investment the cornerstones of the New Partnership for Africa's Development (NEPAD). Our global outreach and review has shown that the Poverty Reduction Strategy Paper (PRSP) process is broadly accepted as a practical way to put this approach into action. Most importantly, the PRSP process is country led, and designed to take on board the views of all parts of society. PRSPs recognize both social realities and the need for hard economic choices. And perhaps equally important, they provide a natural basis for coordination of activities by external donors and other development partners. I therefore trust that donors and civil society will continue to support this process and help to realize its full potential.

    Leaders in low-income countries have underscored the severe demands that donor coordination and the design of poverty reduction strategies are placing on their limited administrative capacities. We have to recognize that slow progress in the reforms needed to fight poverty often reflects a lack of institutional capacity, rather than a lack of political will. As part of our support for NEPAD, we plan to establish five African Regional Technical Assistance Centers (AFRITACs), and I already signed agreements to establish the first such centers in Tanzania and Cote d'Ivoire later this year.

    I am encouraged by the efforts of many countries to create the conditions for the mobilization of private domestic and foreign capital and for job creating growth. NEPAD rightly relies on the private sector as a major engine of growth, recognizing that development requires both a well-functioning state and a dynamic private sector. In that context, Jim Wolfensohn and I have been helping African countries—beginning with Ghana—to establish Investment Advisory Councils, to identify practical ways to improve the investment climate and create new economic opportunities.

    Debt relief is an essential element in a comprehensive strategy for fighting world poverty. The IMF and World Bank are working hard to make the enhanced Heavily Indebted Poor Countries Initiative (HIPC) a success. Today 26 countries are receiving debt relief under this initiative, with a total value of over $40 billion, and we are working hard to help other eligible countries qualify for HIPC assistance. The resulting reduction in debt service payments is already permitting recipient countries to raise poverty related expenditure, on average, from about 6 percent to 9 percent of GDP. The bulk of this spending will go to much needed health care (particularly HIV-AIDS treatment and prevention), education, and basic infrastructure such as rural roads.

    Full participation in the HIPC initiative by all external creditors and strong policy implementation are crucial for reaping the full benefits, including debt sustainability. In addition, however, it is clear that the IFI's need be very careful to ensure that the assumptions underlying debt sustainability analyses are realistic. Some countries' prospects for debt sustainability have been adversely affected by declining commodity prices and global growth trends, following their decision points. We will continue to take advantage of the possibility of topping up HIPC relief in cases—like Burkina Faso—where exogenous factors have caused fundamental changes in a country's underlying economic circumstances.

    To support countries that are trying to help themselves, I also believe that official development assistance must be increased. It is good that the United States and Europe have undertaken to do more on this score, and I welcome the indications from the G8 Summit about the plans for putting those commitments into action. But the target of 0.7 percent of GDP for official development assistance remains an important benchmark in the fight against world poverty. Discussions about so-called innovative sources of financing for development should not obscure the importance of official development assistance as a clear, transparent, and accountable measurement of solidarity between the rich and poor of this world. The IMF is working with the World Bank and other institutions to help countries use increased aid effectively. And I am convinced that citizens in the advanced countries will be willing to back increased aid, if they are aware of what is at stake and are shown evidence that recipient countries are putting external assistance to good use.

    While it is crucial not to neglect any element of comprehensive support for poverty reduction, trade is clearly the best form of help for self-help—not only because it paves the way for greater self-sufficiency, but also because it is a win-win proposition for developed and developing countries alike. The measures taken recently under the European Union's "Everything But Arms" initiative and the African Growth and Opportunity Act (AGOA) in the United States are welcome, but much more is needed—notably, the phasing out of the billions of dollars spent on agricultural subsidies in advanced economies. Real progress in cutting these subsidies and reducing tariffs for processed goods should be a benchmark for a successful conclusion of the Doha Round. But I would also stress that the evident case for market opening in the industrial countries would become even more credible if developing nations demonstrate their ambition to reduce the barriers to trade among themselves, which are often even higher than those with industrial countries.

    Mr. President, with a concerted effort, I am optimistic that we can achieve the goals we have set. The global economy is recovering, and the international financial system has demonstrated its resiliency. Now we need ensure that the defined concepts to facilitate sustained growth and reduce world poverty are implemented. The IMF is committed to playing an active role in making globalization work for the benefit of all. And you can count on us to provide the strongest possible support, within our mandate and means, for the implementation of the Monterrey Consensus.