Joseph Stiglitz is a Nobel laureate who received the prize in 2001 for his work in economics. He held the post of senior vice president and chief economist at the World Bank from 1997 until 2000, when he resigned over professional disagreements regarding the bank’s policies. He served as the chair of former United States President Bill Clinton’s Council of Economic Advisors from 1995 to 1997, and was also on the Intergovernmental Panel on Climate Change at that time. Stiglitz is currently a professor at Columbia University and is the chair of Columbia University’s Committee on Global Thought. While attending a conference in Cairo last month put on by management consultancy firm Booz & Company, Stiglitz sat down with Executive for an exclusive one-on-one about the evolving role of global financial institutions such as the World Bank and the International Monetary Fund.
The IMF and the World Bank were accessories to the global recession. Should we remain confident in their ability to promote development?
Clearly some of the policies that they had recommended in terms of regulation and liberalization were exactly the kind that led to the crisis and to its rapid spread abroad. The question is: Have they learned the lesson? Have they changed the models?
I think that the crisis has been obviously traumatic, not only for economies but for economists and [it has led to] a reexamination of a lot of beliefs. I think there have been significant changes, for instance, at the IMF at the top. One example is if you look at some of the policies that they employed in response to the crisis; they’re very different than those in 1997 and 1998.
[The leadership is] much more tolerant of deficits and stimulus policies and much more accepting of capital controls. That’s a total change from before. Philosophically, when [IMF Managing Director] Strauss Kahn says that the measure of recovery is whether employment gets back to normal… before they never talked about employment. The IMF has changed dramatically. The question on many people’s minds is: how deep into the institution is it? If they got a head from the old school, would the institution revert to the old ways? No one really knows the answer.
What do you think of the view that these institutions are implements of American foreign policy?
I think there’s ambiguity as always in political life. I know the World Bank much better [than the IMF]. Most of the people in the World Bank, people that I knew, were very much committed to promoting development. Much of what is going on is concerned with education, health and poverty.
In fact, I think the World Bank has been among the strongest institutions raising the awareness of the issue of poverty around the world. At the same time, you can look at what the IMF did in the 1997-98 crisis and say that was very much a reflection of the United States’ financial orthodoxy.
And if you look at the bailouts in general, they’ve been as much a bailout of American and European banks as they were of the countries. In many of the cases the countries would have been better off [without the bailouts] because in many of the cases they were private borrowers and the IMF effectively encouraged them to take those loans onto those books. It was the citizens of the countries bailing out bad lending by American and European banks. That was not in the interest of the countries. It was in the interest of American financial institutions.
Does that discredit the institutions?
These are international institutions where the governance is complex and not always fully transparent. The IMF — where the US isn’t the only country with veto power, the G7 have the majority of votes, and the governance resides in the central banks and finance ministries which are closely linked to the financial sectors — you’re going to see the IMF be elective of the interests of the financial institutions in the richest countries. I think that’s inevitable.
I think though, at the same time, these institutions know they have to maintain global legitimacy to be effective. So they can’t just do what would only be in the interest of the financial institutions.
Is linking aid to human rights a good decision economically?
There is an economic aspect to it, to the extent that these institutions — like the World Bank — are funded by taxpayers, who are going to say: “We don’t want to give money if we think it is going to support values that we disagree with in a very strong way. We accept a wide range of behavior but there are certain things that we feel strongly about.” In a sense you have to see this as democratic accountability.
But the second point is that, broadly, more open societies are going to grow better. If you have a good education, people are going to start questioning — and you need a good education system to grow. A good education system is going to lead people to feel sensitive about the issues of human rights, almost inevitably. And then when you see that what is going on in your country is not consistent with that; you have the risk [that talented people will leave].
From the point of view of the World Bank there’s another issue though. Even if you think that the government is not democratic, I think there’s a moral obligation to figure out how you can deliver money to the poorest people in a way that doesn’t strengthen the government. You look at people in a country where they have a corrupt and a bad government in many ways, you say, “They’re already suffering. Should I punish them and make sure they don’t have a future by not providing support for the education of their children?”
My view was that we ought to figure out ways of delivering education [and] health services to the poor people in these countries in ways that don’t strengthen the government. In many countries, the World Bank has figured out how to do that.
What do you think of the top-down model of economic development practiced by authoritarian regimes, both in the region and China specifically?
First, in the case of China, there is actually wide participation in the formulation of the development agenda, so you cannot describe China as a top-down authoritarian regime. You cannot describe it as a democratic regime, but the fact is that there is very wide consultation in the formulation of their development strategy… Successful development strategies almost inevitably have to have a buy-in. Our societies are too complex to have anybody run the whole thing. Therefore you have to have a broad consensus about what are the right things to do.
In what ways does the democracy deficit in the region impact economic growth?
Let me get back to China for a moment. There are some people who argue that the reason that China has taken the strategy it has taken is in fact because the only legitimacy they have is growth. They don’t have legitimacy from a democratic electoral process. So they have to justify themselves by saying, “We have been successful in producing growth.” This is not a defense of not having elections. I think democratic openness is becoming increasingly important in dynamic societies where you have to be open to the world.
Does the developed world have a responsibility to take for protecting the environment? Should the developing world reign in industrialization to curb greenhouse emissions?
The 1992 Rio Convention gave the framework that I think is the right one, which is, the incremental cost associated with reducing greenhouse gasses should be borne by the advanced industrial countries as a matter of ethics. And you might say it’s not just that the advanced industrial countries have already [contributed] their fair share of the global [emissions]… it’s that to ask the poorest people to lower their standard of living so the US can maintain its profligate lifestyle seems unconscionable. I think that one of the reasons for the failure of Copenhagen was that there was less of an articulation of notions of fairness. It got down to mechanics and I think there ought to be more open discussion of “What are the ethical implications of this?”