Stiglitz presents the composition and structure of International Monetary Fund (IMF) , the way in which IMF handled the financial crises in East Asia in 1997-98, the policies IMF adopted and enforced during liberalization of Russia. Finally he discusses the possible reasons why IMF failed, its consequences on different countries and what can be done to avoid future crises.
IMF was established to avoid financial crises caused by government irresponsible spending (bad fiscal policy), fast capital erosion of stock markets, and to tackle hyper-inflation. They have handled financial crises (hyper-inflation and fiscal irresponsiblity) in latin american countries by forcing these governments to adopt contractionary policies i.e., by cutting government spending, raising interest rates and more liberalization of their capital markets.
Stiglitz finds that same policies were doggedly enforced by IMF on the East Asian countries, the African countries and during liberalization of Russian economy. The East Asian crises happened because the hot money (foreign investors) pumped into these markets and banks were issued for real estate development and these loans turned bad. As a result, money quickly moved out from these markets causing these governments to insolvency. IMF came to the rescue and proposed Interest rate hiking to 20-25% as conditions for government bailout. The firms dependent on bank loans quickly ran out of business, the economy suffered serious setbacks and went in to deep recession.
Stiglitz presents how IMF forced African countries to cut back government spending on education, which hits these countries hard in generation of human capital. The book has a special chapter on how IMF handled the Russian transformation economy from a state owned economy to a market economy. IMF adviced Russia to quickly sell off the state enterprises to private players without any regulatory institution to monitor the sell offs. As a result they were sold at dirt prices to Yeltsin family friends and other oligarchs of the russian politics. These people had few incentives in the development of these firms and more in stripping assets. As a result they stripped assets of the newly bought firms and moved their money quickly out of Russia. IMF advice was to go for even faster liberalization rather than to concentrate on the sequencing of liberalization. IMF provided more and more money to Russia for its solvency and the oligarchs kept moving out the money.
Stiglitz argues that capital markets function well only with a good regulatory agency. Therefore sequencing of liberalization is important. Secondly, he argues that while contractionary policies were right for fiscal irresponsible latin american countries they proved deadly for east asian countries. It is surprising to find that Clinton and other american governments continue with their expansionary policies (tax cuts, lower interest rates, high government spending) and do not take advice of IMF or treasury.
The results of IMF policies destroyed economy of all these countries. The countries suffered serious setback in growth and employment and many firms were shut down or stripped of their assets.
Till now I believe I was faithful in expressing Stiglitz opinions. Off course he brings up lot of interesting questions for analysis:
1. Is letting governments continue expansionary policies during the time of crises a good macro-economic policies? Isn't reigning inflation important and how do we even know that Stiglitz policies would have succeeded?
Stiglitz argues that South Korea and China which did not adopt sharp contractionary policies prescribed by IMF and had smaller recession than countries like Thailand and Indonesia. Secondly, he argues that even if evaluation of macro economic policies is hard the IMF has dictated its policies to these countries without any responsibility, without any arguments and with no willingness to listen to these countries. It is interesting to note that IMF is not a democratic institution and only US has veto power in it.
2. Shouldn't IMF have rights to dictate its policies in loaning to a "default" government?
Stiglitz argues that IMF has got back all its loaned money and no government has ever deafulted on IMF loans. So IMF loans are not risky and always paid back by taxpayers. Actually he argues IMF money has been used for bail out of foreign investors. They have ensured this by arguing that banks should maintain solvency and by pumping in money and letting investors take out money.
3. If IMF is composed of best PhD economists, they know better of macro-economic policies. Why shouldn't IMF be allowed to enforce its policies?
Stiglitz argues that many economic theories do not incorporate crises and insolvency the exact things that IMF handles. The policies have to be well sequenced by analyzing the ground conditions and by more arguments across the board. Even IMF people are recruited and move into Wall Street firms without any regulations. This creates lot of incentives for these folks to obilige Wall Street firms.
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