First, thanks for the article - very informative!
The policy is simply a stupid one being implemented by incompetents who can't even use the search and replace facility of their word processors correctly... He makes an interesting contrast between IMF and Bank policy, also.
I agree that the policies are stupid - their underlying theories don't match up with reality. I don't believe that it's merely incompetence that's to blame, though. (And I think that the apparent disparity between the World Bank and the IMF policies is a red herring - in the zmag.org interview, which I believe is more recent, he attacks both the IMF and the World Bank.) Let's take a closer look at Stiglitz's article that you linked to in your post. First, he said that he couldn't work out what was preventing the IMF from listening to change:
So I began lobbying to change the policy. I talked to Stanley Fischer, a distinguished former Massachusetts Institute of Technology economics professor and former chief economist of the World Bank, who had become the IMF's first deputy managing director. I met with fellow economists at the World Bank who might have contacts or influence within the IMF, encouraging them to do everything they could to move the IMF bureaucracy.
Later in the article another significant player is revealed - the US Treasury Department (which happens to be a 51% shareholder in the World Bank):
Convincing people at the World Bank of my analysis proved easy; changing minds at the IMF was virtually impossible. When I talked to senior officials at the IMF--explaining, for instance, how high interest rates might increase bankruptcies, thus making it even harder to restore confidence in East Asian economies--they would at first resist. Then, after failing to come up with an effective counterargument, they would retreat to another response: if only I understood the pressure coming from the IMF board of executive directors--the body, appointed by finance ministers from the advanced industrial countries, that approves all the IMF's loans. Their meaning was clear. The board's inclination was to be even more severe; these people were actually a moderating influence. My friends who were executive directors said they were the ones getting pressured. It was maddening, not just because the IMF's inertia was so hard to stop but because, with everything going on behind closed doors, it was impossible to know who was the real obstacle to change. Was the staff pushing the executive directors, or were the executive directors pushing the staff? I still do not know for certain.
The calamity in Russia shared key characteristics with the calamity in East Asia--not least among them the role that IMF and U.S. Treasury policies played in abetting it. But, in Russia, the abetting began much earlier. Following the fall of the Berlin Wall, two schools of thought had emerged concerning Russia's transition to a market economy. One of these, to which I belonged, consisted of a melange of experts on the region, Nobel Prize winners like Kenneth Arrow and others. This group emphasized the importance of the institutional infrastructure of a market economy--from legal structures that enforce contracts to regulatory structures that make a financial system work. Arrow and I had both been part of a National Academy of Sciences group that had, a decade earlier, discussed with the Chinese their transition strategy. We emphasized the importance of fostering competition--rather than just privatizing state-owned industries--and favored a more gradual transition to a market economy (although we agreed that occasional strong measures might be needed to combat hyperinflation).
So one implication one might naively draw from this is that the US Treasury Department believed in a policy of privatization, liberalizing financial and capital markets, fiscal austerity, etc. without regard to the specific problems of individual nations. In other words, very close to economic libertarianism. Libertarianism holds that (given basic infrastructure such as courts and police) removing subsidies and privatizing virtually everything except the police, judiciary and military is always the right thing to do, irrespective of prevailing economic conditions in a particular country. Let's call a spade a spade here.
The second group consisted largely of macroeconomists, whose faith in the market was unmatched by an appreciation of the subtleties of its underpinnings--that is, of the conditions required for it to work effectively. These economists typically had little knowledge of the history or details of the Russian economy and didn't believe they needed any. The great strength, and the ultimate weakness, of the economic doctrines upon which they relied is that the doctrines are--or are supposed to be--universal. Institutions, history, or even the distribution of income simply do not matter. Good economists know the universal truths and can look beyond the array of facts and details that obscure these truths. And the universal truth is that shock therapy works for countries in transition to a market economy: the stronger the medicine (and the more painful the reaction), the quicker the recovery. Or so the argument goes.
Unfortunately for Russia, the latter school won the debate in the Treasury Department and in the IMF. Or, to be more accurate, the Treasury Department and the IMF made sure there was no open debate and then proceeded blindly along the second route. Those who opposed this course were either not consulted or not consulted for long. On the Council of Economic Advisers, for example, there was a brilliant economist, Peter Orszag, who had served as a close adviser to the Russian government and had worked with many of the young economists who eventually assumed positions of influence there. He was just the sort of person whose expertise Treasury and the IMF needed. Yet, perhaps because he knew too much, they almost never consulted him.
But wait - just one second! How could that possibly be true? The US government (whether headed by Republicans or Democrats) has no intention of applying anything as extreme as economic libertarianism to the US itself. The disparity between the policies the IMF wrote into its loan/aid contracts and the policies pursued by the US is striking, as others in this discussion have already pointed out: farm subsidies, tariffs, financial market regulations, protection for national industries, bailouts of failing megacorps especially in cases of investment bubbles, export guarantees for defence contractors, truly massive procurement and R&D subsidies to industry under the "Defense" and "Science" headings in the federal budget - the list of what count as "market interventions" according to libertarian dogma and yet are carried out massively by the US government just goes on and on! - even environmental laws and labor laws have been classified as "trade barriers" in WTO disputes and negotiations. As Noam Chomsky often puts it, in the US it's a case of "free markets for the poor, socialism [i.e. socialised risk] for the rich". In other words, the poor have to deal with the cold, hard realities of capitalism with hardly any governmental safety nets - whilst the rich, who need a safety net least, are subsidised by the rest of us to the tune of $billions per year.
So clearly there is a double standard here. One policy for the US, one policy for IMF debtors. The question is why?
Whose interests does the US Treasury Department serve? Well, as free marketeers are fond of pointing out, if you want to know why people do things or don't do things, look at the incentives. Let's rephrase the question. Whose interests does the US Treasury Department have greatest incentive to serve?
Clearly the Treasury Department is answerable to the administration. Whilst elected politicians are unlikely to approve policies which will anger 90% of the population to the extent that they will be voted out, there is of course a more important constituency here - those who provide the vast majority of the campaign funding for both the Republicans and the Democrats. Large corporations. Corporations have the vast resources which ordinary voters don't have, to track and lobby for legislation, fund think-tanks and advertisements to skew the media debate and influence voters - and yes, most importantly, bribe politicians. Without significant corporate campaign funding, the reality is you are extremely unlikely to be able to compete with those who have and get elected to Congress, Senate or President. Corporations really do hold an axe over political life - you can see this by counting the number of reps that consistently go against their campaign backer's interests. (It wasn't always this way. In the early days of the US, as Kalle Lasn points out, corporations were prohibited from interfering in the political process.)
It's important to remember that this probably isn't as crude as officials saying to each other "Don't do that or Rep. X's backers won't like it!" - at least not most of the time. It works to a large extent by ideological selection (and doublethink). Those who are "idelogically unsuitable" are never hired in the first place. Officials and experts who start to disagree publically, like Stiglitz, are excommunicated.
Now, the self-interested motivations for corporations in this IMF fiasco are mixed (and often differ from corporation to corporation, of course). Indonesian-style riots or massive inflation is not necessarily good for corporations which have set up shop in a country - hence the capital flight experienced whenever an IMF "five-year plan" (Soviet reference intentional) goes sour. However, neither are corporations particularly interested in spreading peace, hapiness and economic development to the whole world. The Treasury Department and the World Bank / IMF inherits this distinct lack of interest in humanitarianism.
For example - you might think that all businesses favour peace over war, because it's hard to do business while a war is going on, right? Not at all. "Defense" (i.e. war) contractors love it! (And, as one would expect from a self-interested business, they will quite readily fuel both sides of a civil war, thus lengthening it, and go to great lengths to pursue lucrative contracts even with embargoed countries/rebels and prohibited weapons such as landmines - often exploiting quite legal loopholes - by tactics such as shipping through third party countries, or even - get this - renaming weapons to get around laws! For example, even though the UK has made selling landmines illegal, they were quite openly on sale as "antipersonnel devices" at a recent government-sponsored UK arms fair - attended by such paragons of human rights as Saudia Arabia.)
The World Bank / IMF is very much involved in the arms trade. Loan/aid deals are often tied to arms contracts - so that much of the money goes straight back to the lending nations, instead of being spent on education, health-care, or infrastructure. Libertarians often cite the "corruption" of Third-World governments - while remaining curiously silent about the Western defense firms that surely lobbied for this show of IMF "generosity" in the first place. (Indeed, when I pointed out the fact that this military spending is often not due to "corrupt" third-world governments so much as the governments being forced to buy weapons as a condition of the desperately-needed loans, one libertarian called me a lunatic.)
Stiglitz himself said, in my linked article 'The US Treasury view was: "This was great, as we wanted Yeltsin re-elected. We DON'T CARE if it's a corrupt election.." '
Once again, the IMF is not interested in spreading development and democracy around the world. It is only interested in those insofar as they meet its real aims, which are to benefit Western corporations and Western economies. I've given one example - defence contracts - if you want more, I'll be happy to provide them, but there's plenty of cogent IMF critiques on the net already.
Repeatedly, the US government says "We are pursuing this policy because it is in the national interest", or "We are not pursuing this policy because it is not in the national interest". In this they are being absolutely truthful - if you remember that in politican and mainstream media doublethink, "national interest" does not mean "interests of the general population", it means "interests of my constituents", i.e. big business.
"Capitalism is the absurd belief that the worst of men, for the worst of reasons, will somehow work for the benefit of us all." -- John Maynard Keynes
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