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IMF, World Bank need reform: Globalisation is not working

by Joseph E. Stiglitz, Nobel Laureate for Economics

International bureaucrats - the faceless symbols of the world economic order - are under attack everywhere. Formerly uneventful meetings of obscure technocrats discussing mundane subjects such as confessional loans and trade quotas have now become the scene of raging street battles and huge demonstrations. The protests at the Seattle meeting of the World Trade Organisation in 1999 were a shock.

The death of a protester in Genoa in 2001 was just the beginning of what may be many more casualties in the war against globalisation.

Almost overnight, globalisation has become the most pressing issue of our time, something debated from boardrooms to op-ed pages and in schools all over the world. A growing divide between the haves and the have-nots has left increasing numbers in the Third world in dire poverty, living on less than a dollar a day.

Despite repeated promises of poverty reduction made over the last decade of the twentieth century, the actual number of people living in poverty has actually increased by almost 100 million. This occurred at the same time that total world income actually increased by an average of 2.5 annually. In Africa, the high aspirations following colonial independence have been largely unfulfilled. Instead, the continent plunges deeper into misery. Crises in Asia and in Latin America have threatened the economies and the stability of all developing countries. Globalisation and the introduction of a market economy has not produced the promised results in Russia and most of the other economies making the transition from communism to the market.

Instead, it brought unprecedented poverty. To understand what went wrong, it's important to look at the three main institutions that govern globalisation; the IMF, the World Bank, and the WTO.

The IMF and the World Bank both originated in World War II as a result of the UN Monetary and Financial Conference at Bretton Woods, New Hampshire, in July 1944, part of a concerted effort to finance the rebuilding of Europe after the devastation of World War II and to have the world from future economic depressions. The IMF is a public institution, established with money provided by taxpayers around the world.

This is important to remember because it does not report directly to either the citizens who finance it or those whose lives it affects. Rather, it reports to the ministries of finance and the central banks of the governments of the world. They assert their control through a complicated voting arrangement based largely on the economic power of the countries at the end of World War II. There have been some minor adjustments since, but the major developed countries run the show, with only one country, the United States, having effective to.

Underlying the problems of the IMF and other international economic institutions 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 interests in those countries, and the policies of the institutions naturally reflect this. The choice of heads for these institutions symbolises the institutions' problem. While almost all of the activities of the IMF and the World Bank today are in the developing world, they are led by representatives from the industrialised nations. They are chosen behind closed doors, and it has never even been viewed as a prerequisite that the head should have experience in the developing world.

Globalisation today is not working for many of the world's poor. It is not working for much of the environment. It is not working for the stability of the global economy. The transition from communism to a market economy has been so badly managed that, with the exception of China, Vietnam, and a few Eastern European countries, poverty has soared as incomes have plummeted.

To some, there is an easy answer: Abandon globalisation. That is neither feasible nor desirable. Globalisation has brought better health, as well as an active global civil society fighting for more democracy and greater social justice. The problem is not with globalisation, but with how it has been managed. The demand for reform is palpable - from congressionally appointed commissions and foundation-supported groups of eminent economists writing reports on changes in the global financial architecture to the protests that mark almost every international meeting. The IMF and the World Bank have changed their rhetoric - there is much more talk about poverty, and at least at the World Bank, there is a sincere attempt to live up to its commitments to "put the country in the driver's seat" in its programs in many countries.

* Improved banking regulation: Financial sector deregulation and the excessive reliance on capital adequacy standards has been misguided and destabilising. Thailand was right to have restricted speculative real estate lending in the 1980s. It was wrong to encourage the Thais to eliminate these restrictions.

* Improved risk management: Today, countries around the world face enormous risk from the volatility of exchange rates. Surely the developed countries are much better able to handle these risks than the less developed countries, and they should help develop these insurance markets.

* Improved safety nets: The developing countries require not only that aid be given in a way that helps their development but also that there be more aid. Relatively small amounts of money could make enormous differences in promoting health and literacy. There needs to be a basis for funding this assistance on a more sustained level, free from the vagaries of domestic politics in the United States or elsewhere. A proposal entails using the revenues from global economic resources, the minerals in the seabed and fishing rights in the oceans to help finance development assistance.

* Debt forgiveness: without the forgiveness of debt, many of the developing countries simply cannot grow. Huge proportions of their current exports go to repaying loans to the developed countries. The jubilee 2000 movement mobilised enormous international support for debt forgiveness. By the end of 2000, as a result of international pressure, twenty-four countries had passed the threshold. But debt relief needs to go further: as it stands now, the agreements touch only the poorest of the countries.

But the International institutions must undertake the perhaps painful changes that will enable them to play the role they should be playing to make globalisation work, and work not just for the well-off and the industrial countries, but for the poor and the developing nations. The developed world needs to do its part to reform the international institutions that govern globalisation. We set up these institutions and we need to work to fix them. If we are to address the legitimate concerns of those who have expressed a discontent with globalisation, if we are to make globalisation work for the billions of people for whom it has not, if we are to make globalisation with a human face succeed, then our voices must be raised. We cannot, we should not stand idly by.

Prof. Joseph E. Stiglitz was Chief Economist at the World Bank and Economic Advisor to Bill Clinton. Today he teaches at Columbia University in New York. Last year he was awarded the Nobel Prize for Economics.

- (Courtesy: Deutschland Magazine)

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