Lessons from J. Stiglitz book

I seem to remember that this book had a bomb effect in 2001, however I only got to it now.

What strikes about it is that while titled “Globalization and its Discontents” it is focused almost exclusively on the poor handling by international public institutions of crises and transitions of developing countries, especially on the criticism of the IMF. While the IMF indeed appears to be guilty of a lot if not all things Stiglitz talks about, his message is often repetitive throughout the book.

While the book may not be well-written the substance of it is great stuff that teaches the follofing lessons:

• IMF, as envisaged by Keynes is the institution that is supposed to fill the gap of the effective demand in the cases of the global economic downturns. A recession in any tends to spread to others as spending on imports declines and causes the output of its trading partners to go down as well. In such cases IMF was supposed to step in and help finance the necessary fiscal stimulus. In its practice, however, the IMF failed to do so and in many cases imposed austere policies on the countries
• IMF was a proponent of the capital market liberalization. This is indeed a very dangerous practice, as the financial system of small countries become subject to huge shocks when hot money enters or exits. Thailand’s crisis is the prime example of this
• IMF is unduly ideological in promoting laissez-faire, which is not a surprise in the current state of economics, when alternative schools of thought are not even considered by the mainstream academia. As a result of beliefs in the neoclassical ideas, IMF doesnt take into account insttutional context when providing prescriptions. E.g. in Russia, IMF advised to conduct rapid privatization when the institutions were not in place that would ensure fairness adn efficiency. This led to the emergence of Russian oligarchs
• At the same time IMF isn’t consistent – e.g. austerity policies during financial crises were aimed at “restoring investor confidence”, very much to the contrary of the pragmatic maret-based approach – letting investors deal with their fears
• Stiglitz comes to the conclusion that IMF seems to acting in the interests of the Wall St, although he softens the accusation by saying that IMF does that inadvertently. I would go a step further here and emphasize that IMF is managed by the former bankers and often go to work there after the IMF. Of course they act in the interest of the Wall Street! Let’s face it, these are the people who went to the same colleges, worked in the same investment banks, in the same governments and sat along the same tables in various international organizations!
• Stiglitz devotes some time in his book to the issues of trade. The main message that the proponents of free trade, mainly the US and other western powers as well as WTO often act to the contrary of the preached principles – namely adopt protectionistic measures to the greater extent than justified and are subject to the influence of the special interests. This is of course isn’t big news. I am wondering what implications his analysis would have for the people who pushed the Ukrainian bid for WTO. Was the thorough analysis conducted?

The book has changed my perception of Russian economic reforms in the 1990s. Before I felt that the pains were necessary and the oligarchs as well, as there was an urgent need in someone to pick up the idle assets and put them to work.

However, now I know better. The problem was this inherent in capitalism accelerative dynamics – when oligarchs grabbed an asset for a fraction of its value and shared some of the gains with the corrupt official, on the next day both went for even bigger pieces. And since the uncertainty was huge, instead of investing in and developing the assets they stripped them and placed proceeds abroad.

There was certainly a better way to manage transition. This however doesn’t endorse in any way the methods of the current administration in Russia – if oligarchs are bad, then everyone should be in prison not just Mr Khodorkovskiy.

This book is definitely enlightening in the sense that the author shares the inside information about one secretive organizaton that seems to be doing the wrong thing.