In April 2000, as
Next week’s meeting of the International Monetary Fund will bring to Washington, DC many of the same demonstrators who trashed the
World Trade Organizationin Seattlelast fall. They’ll say the IMF is arrogant. They’ll say the IMFis secretive and insulated from democratic accountability. They’ll say the IMF’s economic ‘remedies’ often make things worse—turning slowdowns into recessions and recessions into depressions. And they’ll have a point. I was chief economist at the World Bank from 1996 until last November, during the gravest global economic crisis in a half-century. I saw how the IMF, in tandem with the US Treasury Department, responded. And I was appalled.footnote1
Stiglitz went on to detail his criticisms of the IMF’s
handling of the 1997–98 East Asian crisis. He pointed out that the countries
of the region had liberalized their financial and capital markets in the early
1990s not because they needed to attract more funds (savings rates were already
30 per cent or more) but under international pressure—particularly from the
US Treasury. In Thailand, the flood of short-term capital—‘the kind that
looks for the highest return in the next day, week or month, as opposed to
long-term investment in things like factories’—helped fuel an unsustainable
real-estate boom; in 1997, when the hot money flowed out again, the bubble
burst. The baht collapsed, the stock-market plunged. Japanese banks and other
investors pulled out, not just from Thailand but from other regional economies,
too. In doing so, they precipitated a far worse crisis. The IMF’s response
was to impose the same tight
As the World Bank’s chief
Stiglitz had no doubts as to where these policies were coming
from. Building free capital markets into the basic architecture of the world
economy had long been, in the words of the US Treasury’s (then) Deputy
Doctrine of enlargement
A central aim of US
the successor to a doctrine of containment must be a strategy of enlargement, enlargement of the world’s free community of market democracies. During the Cold War, even children understood America’s security mission: as they looked at those maps on their schoolroom walls, they knew we were trying to contain the creeping expansion of that big, red blob. Today . . . we might visualize our security mission as promoting the enlargement of the ‘blue areas’ of market democracies.footnote3
The multilateral economic organizations—above all, the IMF and World Bank—have been important vehicles for this strategy. But here the US faces a dilemma. On the one hand, it wants these organizations to be pushing hard for its free-market policy objectives, and so needs to ensure that appointment procedures yield people who will promote them. On the other hand, the Bretton Woods institutions need to appear to be acting in accordance with the wishes of the collectivity of member governments, rather than by Treasury dictate. Otherwise, they risk losing the legitimating force of multilateralism and may end up less effective in achieving US aims, in the long run.
The World Bank has been an especially useful instrument for projecting American influence in developing countries, and one over which the US maintains discreet but firm institutional control. The Bank’s president is effectively chosen by the United States (which has 17 per cent of votes cast, as compared to 6 per cent for Japan [at number two] and 4.7 per cent for Germany [number three]). It is also the only member state able to exercise a veto on various key constitutional issues. It makes the single biggest contribution to the International Development Agency—the Bank’s soft-loan affiliate, dedicated to lending to the poorest countries; and since the US Congress, alone among member legislatures, has to approve not only the tri-annual pledges to the Agency but also the annual release of pledged funds, there are unique opportunities for American legislators and their friends to impose conditions of their own.footnote4 In addition, it is American thinking about the roles of governments and markets that sets the conceptual centre of gravity for World Bank debates, rather than that of Europe, Japan or the developing countries.footnote5 The vast majority of Bank economists, whatever their nationalities, have a postgraduate qualification from a North American university (as is indeed true of large numbers of the world’s elite opinion leaders). And there are many subtle ways in which the Bank’s location—in the heart of Washington DC, just a few blocks from the White House, Treasury and Washington think-tanks—helps contribute to the way in which American premisses structure the very mindset of most Bank staff, who read American newspapers, watch American TV and use American English as their lingua franca.
‘Any signal of displeasure by the US executive director has an almost palpable impact on the Bank leadership and staff, whether the signal is an explicit complaint or simply the executive director’s request for information on a problem,’ one observer has noted.footnote6 Nevertheless, the US rarely resorts to proactive interventions, preferring to use negative power—to ensure, above all, that senior Bank people who do or say things contrary to Treasury wishes can be silenced or fired.
More than just a source of funds to be offered or withheld, the World Bank is a fount of Anglo-American ideas on how an economy—and, increasingly, a polity—should be run. The role of the World Bank’s chief economist is a critical one from this point of view. The Bank’s legitimacy rests on the claim that its development advice reflects the best possible technical research, a justification readily cited by borrowing governments when imposing Bank policies on their unwilling populations. The chief economist has much influence over what research is done and by whom: what evidence is accepted, what conclusions are drawn and how these are advertised; hence, much influence over what constitutes ‘the best technical research’. So when Joseph Stiglitz began criticizing the IMF/World Bank free-market policies in East Asia, and particularly their promulgation of unrestricted short-term capital flow—even advising the Ethiopian government on how to resist IMF demands that it open up its financial system—Treasury reacted strongly. Summers—now Treasury Secretary—asked World Bank President James Wolfensohn to rein him in.
Wolfensohn badly wanted a second term, not least to consolidate his claim to the all-important Nobel Prize. Summers, by far the most powerful figure in the Clinton Cabinet, had the main voice in the decision. In essence, Summers made his support conditional on Stiglitz’s non-renewal. Wolfensohn agreed. He announced Stiglitz’s resignation as the Bank’s chief economist in November 1999—just before Seattle; but, he added, Stiglitz would stay on as his own ‘special advisor’. As Stiglitz would explain: ‘it became very clear to me that working from the inside was not leading to responses at the speed at which responses were needed. And when dealing with policies as misguided as I believe these policies were, you have to either speak out or resign . . . Rather than muzzle myself, or be muzzled, I decided to leave.’footnote8
Stiglitz had many opponents inside the Bank, and not only among those who—riding high before his arrival—shared the ideological disposition of the IMF and the Treasury and had not taken kindly to Stiglitz’s criticism. Even those—including some of his own managers and research staff—who agreed with Stiglitz’s views on the limitations of free markets could be heard to say that he was treating the Bank like a travel agency and neglecting his internal roles of mentoring staff, debating economic strategy and directing the research complex. He often forgot to thank those he left carrying the can. The staff reciprocated, awarding him bottom marks in the Staff Attitude Survey of 1999. Wolfensohn’s own tribute at Stiglitz’s farewell was somewhat barbed: he declared himself a great admirer of ‘someone I understand I have met in the past few years—when he wasn’t travelling’.footnote9
It was scarcely two months after this, in January 2000, that one
of Stiglitz’s own appointees,
Ravi Kanbur, a distinguished professor of development economics,
had been brought in by Stiglitz to direct the team writing the WDR
2000, Attacking Poverty. This was always going to be a sensitive
subject: poverty reduction is the very core of the Bank’s mission and is the
focus of the most passionate debates in the whole of development studies.
Kanbur was chosen for several reasons. He had been a Bank insider (chief
economist of the Africa region), but was now at Cornell—this, plus his
identity as a British-educated developing-country national, helped secure the
WDR’s reputation as independent. He was also known to be broadly
sympathetic to the views about development sketched by Wolfensohn in the
Comprehensive Development Framework and elaborated by Stiglitz and his
advisors—a minority position among development economists in the
Anglo-American tradition. Jagdish
The ‘business’ of empowerment
The January 2000 ‘red-cover’ draft Report contained
much that was anathema to
Highly controversial, in IMF/World Bank circles, was the section on empowering the impoverished: how to create or scale up organizations of the poor—networks, cooperatives, trade unions and the like—so as to articulate their interests in the political and market realms; and how to make state organizations more responsive to their citizens.footnote11 The Report drew extensively on the ‘Consultations with the Poor’ exercise that the Bank had been running since 1998, a combination of new and existing participatory studies involving some 60,000 people in sixty countries. Drafts were reviewed via an intensive, independently moderated electronic consultation involving 1,523 subscribers in eighty countries, a project on a far bigger scale than had been attempted for any other WDR. The Bank had, in fact, been widely praised for this, and some non-governmental organizations saw Kanbur’s approach as promising evidence of a growing openness to alternative perspectives on development issues. The Report’s attitude to security was also controversial, arguing that effective safety nets should be created before free-market reforms are pushed through. Without safety nets, the reforms will create losers with nothing to fall back on.
The ‘empowerment’ section attracted immediate criticism, ranging from ‘why is this stuff being given priority over growth?’ to ‘these chapters pander to noisy and nosy NGOs’—and, best of all, ‘the Bank should not be in the business of empowerment’. On the question of security, many critics argued that, while social safety nets were needed they had to be built simultaneously with market reforms, not made a precondition for them. From Yale, T. N. Srinivasan launched an attack on the report’s conceptual foundations. ‘Security, opportunity and empowerment could at best be termed as diagnostics and at worst as three symptoms of the disease or syndrome of poverty, but they certainly do not provide an analytical engine.’ He also argued that the report lacked causal analysis, taking cross-country regressions too literally as the basis for policy judgements. Angus Deaton sent in scathing remarks from Princeton. Some of the Bank’s own leading macroeconomists joined in the barrage, charging that the draft short-changed economic growth, despite its opening declaration.footnote12
It was at this stage, with criticism building on Kanbur’s Report and protesters massing for the Spring Meetings of the IMF and World Bank, that Stiglitz’s New Republic article on the handling of the East Asian crisis appeared. Summers was reported as being close to apoplexy. He rang Wolfensohn and spoke to him in a way that Wolfensohn was spoken to by few others. He told him that all connexions between Stiglitz and the Bank had to be severed. Wolfensohn called Stiglitz to his office for a tense and testy meeting, told him he was no longer a special advisor and no longer welcome in the Bank. Stiglitz pointed out that the ‘optics’ would not be good if he were fired so soon after the New Republic piece. Wolfensohn threatened that if the story leaked he would call a press conference and denounce him. Stiglitz took this as blackmail. Meanwhile, Stanley Fischer, deputy managing director of the IMF and Summers’s ally, called a special staff meeting to discuss how the Fund was going to respond to Stiglitz’s article. He informed the gathering that Wolfensohn had agreed to fire Stiglitz, to the delight of all.
The US Treasury’s comments on Kanbur’s draft Report
came in at about this time and read quite differently to those of other
member governments—their tone stiffened, no doubt, by the anti-globalization
demonstrations.footnote13 They especially stressed the need for
emphasis on higher economic growth—and on freer markets, as the route to
growth. The Treasury had seen Seattle, in particular, as a worryingly unequal
alliance between well-organized, traditional forces of Western protectionism
and naïve, pro-development NGOs. The apparent success of the alliance in
obstructing the conference—and the fact that, with an election in prospect,
Kanbur concluded that the WDR was on a slippery slope. They were coming under insistent pressure from the Treasury and from powerful Bank economists. Stiglitz’s successor, Nicholas Stern, had only just been appointed; new and untested, he might not be in a strong position to protect them. They apparently had less support from Wolfensohn than they had counted on. The choice was to revise the WDR even further in the direction of the Washington Consensus, or to fight to protect their central argument and have the Bank dissociate itself from the Report and sweep it under the carpet. If Kanbur resigned, on the other hand, there might be a chance that the publicity would force the Bank to acknowledge Attacking Poverty as the work of an independent team of social scientists: ‘we don’t know why he resigned, we gave him complete independence and, to show our commitment to the process and our independence from the Treasury, we will keep the main themes the same, though we will of course improve the quality.’
Kanbur left the Bank immediately after the meeting with the two managing directors, returned the next day to collect a few belongings, and disappeared. After sending a brief email note to the team informing them of his intention, he resigned on May 25th. People—Wolfensohn included—tried to persuade him to withdraw his resignation, to no avail. His deputy took over as Report director. The story broke a fortnight later. Kanbur refused all press interviews. He did not want to dissociate himself from the Bank or the WDR, fearing this might legitimize even broader revisions to the draft.
In the end, the Report was published with three substantive changes. First, a chapter was added on growth and poverty, even though, in the eyes of some, its Washington Consensus message was inconsistent with the rest of the argument. Second, the chapter on free-market reforms and unemployment, ‘Making markets work for the poor’, no longer emphasized the need for the prior establishment of social safety nets but called for them to be put in place ‘simultaneously’ with labour-shedding reforms—which might provide more excuse to delay them altogether. The original emphasis on other hazards of free-market reforms was also softened, and that on their benefits strengthened. Finally, the long section on the need for capital controls was cut to a fraction of the earlier draft’s, and mention of Malaysia’s experience was dropped altogether. The need for a ‘cautious approach’ to liberalizing financial markets was substantially watered down, with capital controls now appearing only as transitional measures en route to free capital markets. This last change was particularly dear to Treasury’s heart.
An alternative development Bank?
There is some substance to Treasury’s criticisms. There is a dangerous tendency in development thinking—seen in the thrust of the red-cover draft Report and in the Comprehensive Development Framework—to shift attention from growth towards non-income aspects of poverty and from hard-nosed technical subjects such as industrial technology policy and irrigation investment towards ‘soft-nosed’ issues—education, health, participation, legal reform and cultural projects. Developing countries have been experiencing a severe growth slowdown. Ever since 1960, average incomes in developing countries have grown more slowly than OECD incomes in most years, causing world income inequality to widen. The past two decades have seen the situation worsen: the median rate of growth in developing countries’ average incomes between 1980 and 1998 was 0 per cent.footnote14 The growth crisis is itself an important proximate cause of the rising numbers in poverty and should be right at the forefront of the development debate—as should be the steps that OECD countries take to moderate it, including lifting US union-sponsored protectionism. But the swelling phalanx of American-led—and mostly Western-based—NGOs which have succeeded in advancing the ‘governance, participation and environment’ agenda are not likely to place it there; these bodies have shown little serious interest in economics and economic growth.
These qualifications notwithstanding, the Bank would be a better development agency if the US—both the Federal government and American-based NGOs—had less control over it, and if people from other states, with knowledge of other forms of capitalism, had more influence over what the Bank says and does, in terms of sanctioning a wider range of institutional configurations. We know from Japan and from the countries of continental Europe that efficiency, catch-up, innovation and well-being can be promoted not only by competition but also by organizational loyalties. Free markets in labour can be constrained by the need to protect such loyalties; corporations can be managed in the interests of employees and other stakeholders, as well as shareholders; they need not be bought and sold on the stock-market; and the public sector can express the principle of mutual responsibility through the supervision of health care, education and collective social insurance.footnote15 Certainly, such alternatives are on the defensive at the start of the present century. They are under question from segments of their own national elites (part of the US’s return on generous scholarship funding for foreign students in American graduate schools), and under pressure from capital flows out of Europe. The US Treasury has declared that capital will continue to drain and the euro to fall ‘unless and until Europe shows more commitment to overhauling its restrictive labour market and generous welfare systems, which are seen as a barrier to growth’—in effect, setting free-market conditionalities on US cooperation in intervention on behalf of the euro.footnote16 But political economies with social-democratic characteristics clearly can be effective vehicles of late development. And the world economy would be less fragile if it contained a broader and more stable range of capitalist forms.footnote17
One acid test of the World Bank’s independence from US
Treasury views would be the appointment of a chief economist and associated
staff who openly championed these arguments. In the end, perhaps, the only
long-term way to moderate