Breaking Stiglitz’s Brain: International Political Economy of Financial Institutions

By: Nofia Fitri

A. Stiglitz, the Promise of Global Institutions

In The Promise of Global Institutions, Stiglitz tried to give an answer, what’s new is the wave of protest in the developed countries.

I. Critics of Globalization

Stiglitz stated that opening up to international trade has helped many countries grow far more quickly than they would otherwise have done. International trade helps economic development when a country’s exports drive its economic growth. Because of globalization many people in the world now live longer than before and their standard of living is far better. Globalization also has reduced the sense of isolation felt in much of the developing world and has given many people in the developing countries access to knowledge well beyond the reach of even the wealthiest in any country a century ago.

Talked about the proponents of globalization, he stated that, they have been, if anything, even more unbalanced. To them, globalization is progress, developing countries must accept it, if they are grow and to fight poverty effectively, but to many in the developing world, globalization has not brought the promised economic benefits.

 

In the other hand, the critics of globalization accuse Western countries of hypocrisy, and the critics are right. The Western countries have pushed poor, countries to eliminate trade barriers, but keep up their own barriers, preventing developing countries from exporting their agricultural products and so depriving them desperately needed export income. They see globalization in a very different light than the treasury secretary of the US, or the finance and trade ministers of most of the advanced industrial countries.

II. Globalization and International Institutions Mistakes

Globalization has been accompanied by the creation of new institutions that have joined with existing ones to work across borders, that why it’s powerfully driven by international corporations, which move not only capital and goods across borders but also technology. acıtırsa Globalization has also led to renewed attention to long-established international intergovernmental institutions: UN to attempts to maintain peace, the ILO with ‘decent work’ slogan, and the WHO, concerned with improving health conditions in the developing world.

According to Stiglitz, to understand what went wrong with globalization, it’s important to look at the three main institutions that govern it: the IMF, the World Bank, and the WTO, as the institution which had play a role in the international economic system. But as his emphasized, Stiglitz was concerned only with IMF and World Bank, as the center of the major economic issues of the last two decades, including financial crisis and economic transition, he written. He explained the Keynes general theory (lack of sufficient aggregate demand explained economic downturn, government policies could help stimulate aggregate demand) as the solution for the Great Depression.

The IMF is a public institution which established with money provided by taxpayers around the world, was founded on the belief that there was a need for collective action at the global level for economic stability, but then changed markedly, became founded on the believe that markets often worked badly, it now champions market supremacy with ideological fervor, that there is a need for international pressure on countries to have more expansionary economic policies- such as increasing expenditures, reducing taxes, or lowering interest rates to stimulate the economy, and today it typically provides funds only if countries engage in policies like cutting deficits, raising taxes, or raising interest rates that lead to a contraction of the economy.

As Reagan and Thatcher started their neo-liberalism in US and UK, the IMF and the World Bank became the new missionary institutions, through which ideas were pushed on the reluctant poor countries that often badly needed their loans and grants. Then, the Keynesian role for the government in job creation was replaced by the Washington Consensus, between the IMF, the World Bank, and the U.S. Treasury about the right policies to developing countries. Stiglitz saw that the Washington Consensus policies were ill-suited for countries in the early stages of development or transition. Most of the advanced countries, had built up their economies by wisely and selectively protecting some of their industries until they were strong enough to compete with foreign companies.

Those two institutions could have provided countries with alternative perspectives on some of the challenges of development and transition, and in doing so they might have strengthened democratic processes, but they were both driven by the collective will of the G-7 (the governments of the seven most important advanced industrial countries).

Stiglitz concluded that it was clear that the IMF has failed in its mission, because had not done what it was supposed to do, like provide funds for countries facing an economic downturn to enable the country to restore itself to close to full employment. Many of the IMF policies premature capital market liberalization have contributed to global instability.

In once a country was in crisis, IMF funds and programs not only failed to stabilize the situation but in many cases actually made matters worse, especially for the poor. Thus, IMF failed in its original mission of promoting global stability, it has also been no more successful in the new missions that it has undertaken, such as guiding the transition of countries from communism to a market economy, like what had been happened with Russia case.

The IMF has made mistakes in all the areas it has been involved in: development, crisis management, and in countries making the transition from communism to capitalism. Structural adjustment programs didn’t bring sustained growth even to those. Underlying the problems of the IMF and the other international economic institution is the problem of governance: who decides what they do. The institutions are dominated not just by the wealthiest industrial countries but by commercial and financial interest in those countries, and the policies of the institutions naturally reflect this. The choice of heads for the institutions symbolizes the institutions’ problem, and too often has contributed to their dysfunction. Almost all of the activities of IMF and World Bank in developing world led by representatives from the industrialized nations. Thus the institutions are not representative of the nation they serve. Also the problems arise from the finance ministers and the central bank governors. Each of the ministers is closely aligned with particular constituencies within their countries.

As the closing statement, Stiglitz stated that it’s time to change some of the rules governing the international economic order, to think once again about how decisions get made at the international level, and in whose interest, and to place less emphasis on ideology and to look more at what works.

B. Broken Promises

Talked about poor country, and Ethiopia as his subject especially, while he went there, Stiglitz argued that the obvious problem with the IMF’s logic is that it implies no poor country can ever spend money on anything it gets aid for. There were other sticking points in IMF-Ethiopia relations, concerning Ethiopian financial market liberalization. Good capital markets are the hallmark of capitalism, but nowhere is the disparity between developed and less developed countries greater than in their capital markets. The IMF wanted Ethiopia not only to open up its financial markets to Western competition but also to divide its largest bank into several pieces. In the other way, faced with Ethiopian reluctance to accede to its demand, the IMF suggested the government was not serious about reform and, Stiglitz said that, suspended its program.

At least, Stiglitz concludes that the tussle over lending to Ethiopia taught him a lot about how the IMF works. There was clear evidence the IMF was wrong about financial market liberalization and Ethiopia’s macroeconomic position, but the IMF had to have its way, seemingly wouldn’t listen to others, no matter how well informed, no matter how disinterested.

The IMF is like so many bureaucracies, it has repeatedly sought to extend what it does, beyond the bounds of the objectives originally assigned to it. As IMF’s mission creep gradually brought it outside its core area of competency in macroeconomics, into structural issues, such as privatization, labor market, pension reform, and so forth, and in into broader areas of developing strategies, the intellectual balance of power became more tilted. The imbalance of power between the IMF and its client countries inevitably creates tension between the two, but the IMF’s own behavior in the negotiations exacerbates an already difficult situation. In dictating the terms of the agreements, the IMF effectively stifles any discussions within a client-government about alternative economic policies.

According to Stiglitz, facing the IMF problem, there are two reasons why the IMF should consult widely within a country as it makes its assessments and designs its programs. Those within the country are likely to know more about the economic than the IMF staffers and for the program to be implemented in an effective and sustainable manner, there must be a commitment of the country behind the program, based on a broad consensus.

C. Better Roads to the Market

“There were alternatives: other countries made different choices, and there is a clear link between the different choices and the different outcomes. “

According to the success of Poland, former deputy premier and finance minister, George W. Kolodko, has argued that it was due to its explicit rejection of the doctrines of the Washington Consensus. This country didn’t do what the IMF recommended, it didn’t engage in rapid privatization, and it didn’t out reducing inflation to lower and lower levels over all other macroeconomic concerns. But Poland did emphasize some things to which the IMF had paid insufficient attention, such as the importance of democratic support for the reforms, and creating the institutional infrastructure required to make a market economy function.

In the other way, China’s reforms began in agriculture, with the movement of the commune system of production in agriculture to the “individual responsibility” system (effectively, partial privatization). In meanwhile, China unleashed a process of creative destruction: of eliminating the old economy by the township and villages, which had been freed from the responsibility of managing agriculture and would turn their attention elsewhere, and at the same time, the Chinese government invited foreign firms into the country, to participate in joint ventures.

As we can see, Stiglitz clearly gave an abstract that different with what has happened in Russia, - the reforms strategy was failed- contrast with China, there some alternatives strategies for other country instead of follow the IMF policies.

D. Stiglitz, the Way A Head

Stiglitz argued in this article as his conclusion about the discontent of globalization that the problem is not with the globalization, but with how it has been managed, but as he stated that he believed globalization can be reshaped to realize its potential good and he believe that the international economy institutions can reshaped in ways that will help ensure that this is accomplished.

According to the fact that international economy institutions had became one of the problem, Stiglitz gave emphasized as the other way, that the balance view of the role of government need to be advocate, as what he did as the president’s economic advisor of World Bank. He stated it would sees the two as working together, in partnership, with the precise nature of that partnership differing among countries, depending on their stages of both political and economic development.

Stiglitz, finally stated that the discontent with globalization arises not just from economics doing to be pushed over everything else, but because a particular of economic (market fundamentalism) is pushed over all of views. In the other hand, he stated that the global public instititutions should focus on issues where global collective action is desirable. As he mentioned the most fundamental change that is required to make globalization work in the way it should is a change in governance within the international economic institution, especially and the transparency of international economy institutions.

While he gives some options very clearly, how to reform the international economy institutions, Stiglitz remained that globalization can be force for good with the idea of democracy an civil society, global economic which beneficial for poor, but as the contrary, for some of the people, globalization has not work. Many have actually been made worse off, as they have seen their jobs destroyed, insecure, and democracies had eroded their cultures.

Finally his closing statement sounds that yes, not easy to change how thing are done, but the international institutions must undertake the perhaps painful changes that will enable them to play the role they should be playing to make globalization work, and work not just for the well off and the industrial countries, but for the poor and developing nations and the developed world needs to do its part to reform the international institutions that govern globalization

To be continued....