The Atlantic Monthly | October 2001
Addis Ababa

Thanks for Nothing

A former chief economist at the World Bank offers a case study in how
heavy-handed interference can break what doesn't need fixing
by Joseph Stiglitz
.....
During the recent demonstrations in Seattle, Quebec
City, and elsewhere denouncing the International Monetary Fund and the World Bank, the press
tended to dismiss the protesters as fringe reactionaries ignorant of the
benefits of globalization. But although no one condones the violence in Genoa, for example, it would
be wrong simply to reject many of the protesters' concerns. As the chief economist at the World Bank from 1997 to 2000, I have
seen firsthand the dark side of globalization—how the liberalization of capital
markets, by allowing speculative money to pour in and out of a country at a
moment's whim, devastated East Asia; how so-called structural-adjustment loans
to some of the poorest countries in the world "restructured" those
countries' economies so as to eliminate jobs but did not provide the means of
creating new ones, leading to widespread unemployment and cuts in basic
services. The media and the public have since become concerned about this dark
side as well—globalization without a human face, it is sometimes called.
However, the issue that is commonly debated—namely, whether we should be
"for" or "against" globalization—is not the salient one. As
a practical matter there is no retreating from globalization. The real issue is
the conduct of the international economic organizations that steer it. If we
continue with globalization as it has been managed in the past, its agenda
driven by the North for the North, reflecting the North's ideologies and
values, the future will not be bright. There will be a backlash in the
developing world and increasing conflict with the developed world. There will
be greater global instability and rising doubts about the value of a market
economy. Those doubts are already reflected in a pervasive hostility toward the
IMF in the Third World: in Thailand
and Korea,
for example, ordinary citizens refer to their countries' debilitating
recessions as "the IMF." Yet well-managed globalization has enormous
potential for improving the lives of people in poor countries.
Events in Ethiopia
offer a case study of the ways in which globalization can go awry, and they
highlight the need for reform. In March of 1997, barely a month into my job at
the World Bank, I went to Ethiopia
to meet with Prime Minister Meles Zenawi. Meles came to power in 1991,
after a seventeen-year guerrilla war against a bloody Marxist regime. His
victory left him facing seemingly intractable problems. Ethiopia, at
the time a nation of 58 million people, had a per capita income of around $100
a year. Droughts had killed millions. Though he trained in medicine, Meles had
studied economics at the Open University, in England, and knew that only major
changes in economic policy could bring his country out of poverty. During our
discussions he showed a deeper and more subtle understanding of economic
principles (not to mention a greater knowledge of the circumstances in his
country) than many if not most of the international economic bureaucrats I
would deal with in the succeeding three years.
These intellectual attributes were matched by integrity: Meles was quick to
investigate any accusations of corruption in his government. He was committed
to decentralization—to ensuring that the center did not lose touch with the
various regions.
At the time of my arrival Meles was engaged in a bitter dispute with the
International Monetary Fund, which had suspended its program in his country. At
stake was not just some $125 million of IMF money but potentially hundreds of
millions of dollars in World Bank loans as well. Traditionally the World Bank
is reluctant to lend money unless the IMF certifies that the country in
question has a solid macro-economic framework. The provision is well
intentioned: history has shown that governments that cannot manage their
overall economy do not do a good job managing foreign aid.
The IMF is supposed to judge performance by results. Ethiopia's results could not have
been better. It had no inflation; in fact, prices were falling. Output was
growing steadily. Meles was demonstrating that with the right policies even a
poor country recovering from civil war and famine can experience sustained
economic growth. After years of struggle and rebuilding, Ethiopia was
beginning once again to receive assistance from Western governments.
Judging by results, then, the IMF should have given Ethiopia an A+. And there were
other positive indicators, such as direct evidence of the competence and commitment
of the government. For instance, it had cut back dramatically on military
spending—a remarkable feat for a government that had come to power by military
means—in favor of spending to fight poverty. This was precisely the kind of
government to which the international community should have been directing
assistance. Yet the IMF had suspended its aid. Why?
The Fund was worried, first, about the role of foreign aid in the government's
budget. A poor country like Ethiopia
has two sources of revenue—taxes and foreign assistance. The government's
budget is balanced as long as those revenues equal expenditures. This may seem
like elementary economics—but it is not IMF economics. Although Ethiopia's
budget was balanced, the Fund argued that the country's budgetary position was
untenable: what would happen if foreign assistance suddenly dried up? Ethiopia should
act immediately, the Fund argued, to prevent the possibility of disaster. That
meant cutting spending or raising taxes—a difficult action in any country, but
especially in a desperately poor one.
An argument against long-term reliance on foreign aid may be superficially
appealing, but in reality it dictated that Ethiopia's expenditures could be
paid for only by tax revenues. That is a fundamentally unsound policy: it means
that foreign aid does not lead to more schools or health clinics. Instead the
money is, in effect, simply added to reserves. Surely this was not the
intention of the international donor community. Surely donors wanted to see
those new schools and health clinics built in Ethiopia. Meles put the matter to
me passionately: he said that he had not fought so hard for seventeen years to
be told by some bureaucrat that he could not actually provide improved services
for his people once he had persuaded donors to pay for them.
I cannot adequately describe the emotional force of his words or the impact
they had on me. I had taken the World Bank job with one mission in mind—to work
to reduce poverty in the poorest countries of the world. I had known that the
economics would be difficult, but I had not fathomed the depth of the
bureaucratic and political problems imposed by the IMF.
Meles provided an economically sound response to the IMF's concerns about the
stability of foreign aid: flexible spending. Building schools and clinics does
not require long-term commitments. If donors provided money to build schools, Ethiopia would build schools; if they stopped
providing funds (as they had for a while), Ethiopia would stop building
schools. But the IMF would not be swayed.
The IMF had other bones to pick with Meles. In 1996 Ethiopia repaid a U.S. bank loan
early, using some of its reserves. The transaction made perfect sense. In spite
of the solid nature of its collateral (an airplane), Ethiopia was paying a far higher
interest rate on its loan than it was receiving on reserves. But the United States
and the IMF objected. They were bothered not by the logic of the strategy but
by the fact that Ethiopia
had undertaken this course without consulting the IMF. The IMF used this
failure to consult as one of the grounds for suspending its program. But why
should a sovereign country—one whose policies had convincingly demonstrated its
capability—have to ask permission of the IMF for every action it undertakes?
Another point of contention related to financial markets. Even after the United States
experienced the ruinous consequences of financial deregulation, in the form of
the savings-and-loan debacle, the IMF preached the gospel of rapid deregulation
around the world, to countries far less able to withstand its negative
consequences. Earlier deregulation in Kenya had led to soaring interest
rates there. Meles sensibly resisted such a move in Ethiopia. But the IMF continued to
insist on deregulation, and not even a panel of scholars I assembled, most of
whom supported Meles's position, could budge the organization.
These episodes highlight two troubling aspects of the IMF's characteristic
behavior. The first concerns secrecy. Because so many of its decisions are
reached behind closed doors, the IMF leaves itself open to suspicions that
power politics, special interests, or other agendas unrelated to its stated
purposes are at play. For example, some critics questioned whether it was just
a coincidence that Ethiopia's
early repayment deprived a U.S. bank of a high-interest, secure-collateral loan
on which it was making large profits and that the United States was the country most
vociferously protesting. A second, closely linked aspect concerns the
subordination of matters of substance to matters of process. The processes
themselves, with the numerous conditions that are often attached, not only
infringe on national sovereignty but also tend to undermine democracy.
I returned to Washington from Ethiopia gravely
upset by what I had seen. During the following weeks I convinced the World Bank
that the IMF's position made no sense, and the Bank tripled its lending to Ethiopia. In
the ensuing years the country has been beset by political problems and war. It
is impossible to know whether some of its travails could have been avoided or
mitigated if aid had been more forthcoming.
The debate over globalization has already had an impact: the IMF's rhetoric,
and in some instances its actions, have changed. The IMF talks more about
poverty and participation than it used to. Last year it finally offered a
number of poor countries meaningful debt relief. Still, these are only
beginnings.
The biggest problems afflicting the IMF and other instruments of globalization
concern governance. At the United Nations five countries can exercise veto
power. In the IMF only one—the United
States—can do so. At both the IMF and the
World Bank voting rights are allocated not according to population but
according to economic power, and the various countries' representatives are
typically finance ministers or members of central banks, not officials with
broader outlooks and concerns. Most of the debate about reforming the
international economic architecture has occurred within these same small, elite
circles. The voices of those most affected by globalization are barely audible
in discussions about how the table should be reshaped and who should have a
seat at it.