From: "Patrick Bond" <bondp at zeus.mgmt.wits.ac.za> Subject: Talking with Joe Stiglitz
Ok, here's part of my report-back from some travels to the US and Canada; I think Cansa may host a session on this sometime next week; I'll also send an article I dashed off for one of our weekly papers (tentatively accepted)... but what follows isn't for publication or cross-posting...
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Visiting Ottawa for an NGO strategy session on the crisis in international financial markets in late September, I then flew to Washington for similar parallel NGO sessions at the IMF and World Bank. With no first or business class seats on that Air Canada flight, I found myself sitting next to Joseph Stiglitz, the World Bank's chief economist. He had just come from a 29 September keynote speech to Ottawa's North-South Roundtable forum where he shared a platform with Trevor Manuel, the South African finance minister. That morning's Ottawa Citizen newspaper carried Stiglitz's photo and a story covering his speech, including the view that the vast bailouts of financial institutions that followed the East Asia, Russia and Latin America crises were terribly biased against the interests of the poor, who would need to find a way to get a `place at the table' in any future bailouts. (Not an unreasonable position, if you believe that somehow getting to a table automatically gives you the discursive power of those around you from the state and international financial institutions, who have the guns and the money -- a point I return to in the next post.)
Stiglitz chatted with me non-stop during that flight and I was obviously grateful for an opportunity to pick his brain about controversies in practical economic management and the economics discipline. By way of background, Stiglitz has had an enormous influence on the discipline this year. (I'll quote at length because it's on-record background info that very much reflected his tone in the discussion with me.) In his speech to a Helsinki United Nations meeting in January, Stiglitz argued, `the policies advanced by the Washington Consensus are hardly complete and sometimes misguided... [and] are neither necessary nor sufficient either for macro- stability or long-term development.' He continued, `I will argue that the focus on inflation -- the central macroeconomic malady of the Latin American countries which provided the backdrop for the Washington Consensus -- has led to macroeconomic policies which may not be the most conducive for long-term economic growth, and has detracted attention from other major sources of macroeconomic instability, namely weak financial sectors. The focus on freeing up markets, in the case of financial market liberalization, may actually have had a perverse effect, contributing to macro-instability through weakening of the financial sector.' He argued that `the advocates of privatization overestimated the benefits and underestimated the costs' and with respect to inflation, insisted that below a 40% rate, `there is no evidence that inflation is costly.'
This paper is still widely cited by the Left in South Africa as part of our attempt to undermine public confidence in the orthodox economic policy inherited from (and amplified after) the apartheid era. Mentioning this to Stiglitz at the outset, he acknowledged that the Helsinki `Beyond the Washington Consensus' speech was controversial, but contended that two or three other recent speeches have been even more hard-hitting.
How serious was the financial crisis now unfolding?, I asked. Stiglitz was coy, implying strongly that he was no Keynesian (i.e., interested in finding ways to restore artificial growth to international and domestic economies via state spending binges). The secret would instead be reversion to capital controls, particularly dual exchange rates (which allow investors to exit only by paying a higher price for a currency that can be converted to dollars or other hard currencies). I told him of South African experiences (the 1985-95 `finrand'), confessing the institutional problem of widespread corruption within our own Reserve Bank (virtually all late 1980s and early 1990s large forex deals involved some hanky-panky, according to the Johannesburg attorney general, nearly entirely associated with unpatriotic Afrikaans financial networks).
To an economist, the friction associated with a dual exchange rate is usually intolerable, but in this case it's friction Stiglitz wants, to prevent the maniac financial speculators from gobbling up currencies, chewing them up and spitting them out. I pointed out that the 1965 Rhodesian capital controls were formidable, and have been cited by even mainstream economists for so effectively bottling up money in Rhodesia (now Zimbabwe) at the time of the impositions of sanctions against the racist government, as to be mainly responsible for kickstarting the 9,5% GDP annual average growth that over the subsequent 9 years made Rhodesia the world's fastest-growing economy.
Notwithstanding the revulsion felt in elite circles over Mahathir's recent imposition of exchange controls in Malaysia, capital controls of some sort (even mild-mannered `speed bumps' which Chile had in place until recently, that the IMF now concede are acceptable) are the flavour of the month amongst vaguely reformist economists (like Paul Krugman of MIT). Hence US Treasury Secretary Robert Rubin has had, the last few days, to campaign all the harder against them. But they are more than a short-term palliative to Stiglitz, it would seem, for from his perspective they cut to the deeper irrationalities of contemporary global capitalism.
Stiglitz argued that the contemporary financial crises are the function largely of market information asymmetries, and that instead of Keynesian remedies, the key was to ensure to avoid the pre-Keynesian `Treasury View' (the phraseology that Keynes used to deride his predecessors for very similar hard-line monetarist perspectives that today prevail at the IMF and US Treasury Department). In fact, he said that had one of his students provided the answer (austerity policies) to a hypothetical East Asia crisis question that the IMF did in reality late last year and this year, s/he would receive a `D' or `F.'
The day before, I had encountered this same Treasury View during a debate with Jack Boorman, head of policy at the IMF, and necessarily a hard-line, no- apologies neo-liberal. Boorman conceded nothing to the lessons of East Asia or to the professional incompetence in his own institution -- I cited a November 1996 `IMF Survey' headline that had East Asia's rapid growth continuing indefinitely, which Boorman ignored. The IMF is still very much holding a position that would lead to global financial meltdown and economic depression, and no persuasion would loosen Boorman up on that.
Not one to easily divide the Bank and Fund into wholly different entities (though maybe `good cop, bad cop' under certain circumstances), I had not been entirely convinced that significant space was indeed opening up within the profession. But Stiglitz confirmed incidents in which quite substantial differences emerged between his line and that of the US Treasury Department and IMF, including over which US constituencies were favoured by which types of economic policies (Goldman Sachs over workers and small firms), and how far to publicly debate these matters.
Did Stiglitz at least have the support of his own staff at the Bank? Yes, he replied, some 75-80% of the top economists were on board the critique of orthodoxy. And when even former Federal Reserve chair Paul Volcker -- who through raising interest rates and beginning financial deregulation, applied early 1980s austerity at a scale unprecedented in US history -- now favours capital controls, Stiglitz confided, the issue was not even whether the new Treasury View would be transcended. Looking a bit further ahead, he suggested, the problem was whether the emerging backlash against neoliberalism -- Mahathir's currency controls, the resistance now to Russian `reforms,' the Hong Kong stock market intervention -- would degenerate into full-fledged protectionism of the 1930s variety.
There were then a number of points that should probably remain confidential regarding Stiglitz's perspective on South Africa's economic policy- makers. Trevor Manuel's speech the previous day raised the spectre of Keynes quite vividly, but was limited to a redistributive tenor without questioning the internal character of the system (no surprise).
The issues I probed next were associated with the various international financial reforms being debated in the NGO circuits. One is the Tobin Tax, named after Yale professor (and Nobel laureate) James Tobin, which moots the taxation of international financial transactions to the tune of as much as 0.5% each, which would raise several hundred billions a year (if it didn't dramatically decrease such transactions) for the benefit of the United Nations or the like. Stiglitz's opposition was technical in character, because of difficulties in pricing the underlying value of the transactions in an age of `derivatives,' namely the various bets on financial instruments' price changes, not necessarily their underlying values. Some such derivatives are, however, marked to a market value (by conventions such as the Basle convention which the Bank for International Settlements regulates) while others are completely outside the scope of regulation. Reading about this subsequently, I see that some economists have already tried to grapple with the feasibility issue (particularly Peter Kenen in a 1996 Oxford University Press book entitled The Tobin Tax), so perhaps Stiglitz isn't up to date here.
The other urgent set of reforms must confront the devastating legacy of microeconomic (not just macro) Washington Consensus commodity pricing of every good or service under the sun, even public goods like water and electricity. I got a sense that there might be a tiny space in the Bank -- maybe widened by Stiglitz -- to push the kinds of decommodified (`lifeline') goods that we have worked so hard for in South Africa (in vain), and that black township residents have been rioting over, the past few years, in the wake of brutal cut-offs of water and power due to non-payment. The Pretoria office of the Bank doesn't want these priced in any kind of cross- subsidised manner (by which those who consume more pay a higher unit price) due to the disjuncture between marginal revenue and marginal cost curves that would make these goods less compatible with privatised delivery (the Bank field staff are big on letting French water companies denude our municipalities of their historic delivery functions).
This line of attack was, at the quick and dirty level I delivered it, not incompatible with a broader (and still orthodox) economic argument cognizant of the need to internalise externalities (such as the public health benefits) associated with traditional delivery of public goods. Stiglitz seemed agreeable, particularly in view of the general concern that 30% of our South African labour market remains unemployed hence the need to `get the prices wrong' in certain respects so as to generate local job-creating development prospects. (The upcoming SA Job Summit will, in contrast, aim at tourism as the kick-start, thus enhancing all the society's worst tendencies.)
It was in this respect that the space Stiglitz seemed -- and I stress seemed -- to open up against a purist neo-classical pricing argument may, one day, penetrate his colleagues' nubile bible-thumping neolib microeconomic beliefs at the scale of, say, the World Bank World Development Report on poverty for the middle of next year (perhaps Stiglitz will by then be really peaking as the guru).
More generally, however, I said that the momentum in the circuits I deal with was running very much against the Bank. After all, how much reformism could be stomached in aspects of gender, ecology, institutional transparency and community participation in (neolib) policy-making when the economic crisis for poor and working people worsened at the Bank's behest. Stiglitz replied in a serious sort of way, considering for a moment whether indeed the role of the Bank was net positive or negative. He thought it was a plus, obviously, because of the institutional mandate to fight poverty. I disagreed on grounds that their poverty-reduction techniques - - straight modernisation theory -- were so thoroughly discredited. We left it at that, with Stiglitz seemingly very open to keep a dialogue going with more far-reaching critics of Bank-think.
What my next post suggests, however, is that we of the Left, or NGO, or social movement, side of things, are yet to establish our own conception of strategy (democratise or fight the embryonic global state??), and of the politics of scale that would allow us to really confront the power of global finance in something more durable than intellectual chit-chat...
Patrick
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Patrick Bond University of the Witwatersrand Graduate School of Public and Development Management #22 Gordon Building, 2 St David's Place, Parktown, Johannesburg MAILING ADDRESS: 51 Somerset Road, Kensington 2094, South Africa Phone: 27-11-488-5700 (home 614-8088) Fax: 27-11-484-2729