Stiglitz about International Monetary Fund
According to Stiglitz, globalization can lead to a failure or success, but this will depend on its management (93). He explains that if globalization is managed by the national government through embracing the characteristics of a particular nation, then it will lead to success (Stiglitz 93). Further, the scholar argues that it is easy for globalization to result in a failure in case it is left in the hands of international institutions, for example, the International Monetary Fund (IMF).
Stiglitz argues that the intervention of the IMF contributed to the East Asian financial crisis in the late 1990’s. It was due to some of its specific policies that included trade liberalization, fiscal austerity, high rates of interests, liberalization of capital markets, as well as its privatization of state assets (Stiglitz 97). Following the East Asian financial crisis heightened by the IMF policies, Russia failed to adapt to a market economy. Similarly, these regulations contributed to a disaster, as argued by Stiglitz, since the rate of Russia’s developments failed miserably in Sub-Saharan Africa and exacerbated a financial meltdown in Argentina. The IMF failed to support investment opportunities that would be productive for East Asia. Its demands in relation to credit of quality were not favourable, and only well-planned loans supported by sector work and good economic progress would promote effective implementation of policies (Stiglitz 100). As a result, the IMF gave out loans with strict conditions that hindered the growth of the local economy, interfered with the spread of democracy, and seemed to favor multinational corporations.
As argued by Stiglitz, all interventions on the part of the IMF were based on the general formula of a free market. The IMF attempts to support free market economies could not work efficiently in preventing the East Asian financial crisis. Otherwise, at first it should have provided funds to national governments to establish institutions that would protect local commerce, as well as the public. According to Keynes, if markets are left by themselves, it will result in a market failure (Stiglitz 107). His major concern was that free markets would lead to persistent unemployment in the economy. Therefore, he advocated for a collective global action since measures taken by one country might spill over to another. For example, one country’s exports are imports for another country. Similarly, the IMF supported capital market liberalization and failed to establish institutions that would regulate the financial sector (Stiglitz 107).
According to Stiglitz, it contributed to the destabilization of the East Asian economies leading to inflation caused by massive short-term capital investment inflows. Stringent loan conditions by the IMF resulted into fiscal austerity raising rates of interest dramatically (Stiglitz 109). As a result, it lead to widespread bankruptcies devoid of legal protection, high rates of unemployment with no social security, and the withdrawal of foreign investments.
Stiglitz also argues that despite the IMF’s key agenda of promoting growth and stability in less developed countries (LDCs), it is in pursuit of other one. He believes that funds are not channelled towards supporting global stability and helping less developed countries to achieve economic success (Stiglitz 196). Therefore, the scholar speculates that taxation and its undesirable effects may be on the IMF’s agenda. He argues that the latter can afford funds to bail out a bank, but it is not ready to promote significant sectors of the economy, like the educational and health sectors among others (Stiglitz 204).
According to Keynes, the IMF should assist LDCs to achieve full growth of employment rates (Stiglitz 206). However, Stiglitz could not comprehend why the IMF did not perform this task. Therefore, the IMF’s objective should not be limited to its original mandate of promoting global stability only. Hence, it should make sure that the countries threatened by the recession are adequately funded in order to implement expansionary monetary policies. Stiglitz further argues that the IMF is in pursuit of financial community interests rather than supports developing countries to achieve economic stability. It implies that its objectives constantly diverge from each other. Therefore, Stiglitz argues that there is a need for reforms in the IMF, as well as in the World Bank, instead of closing them (Stiglitz 206). These organizations should help less developed countries, which are faced with many challenges that include AIDS and malaria pandemics, environmental concerns, as well as poverty due to the lack of sufficient resources to meet the demands of the growing population.
Therefore, Stiglitz supports Keynes’ ideology that indicates that equitable growth needs to be considered first in order to maintain economic stability in LDCs. He advocates for a steady, careful, and sequential approach, which is based on developing financial institutions instead of supporting free market mechanisms. According to Stiglitz, the IMF should support privatization, worker safety nets, education, land reforms, competitive policies and health service infrastructure that will help LDCs achieve economic stability (207).
As it has been pointed out by Stiglitz, various countries need to adopt different development strategies in order to achieve their economic objectives. He suggested that it is necessary to ensure the promotion of democracy both locally and internationally for successful implementation of global economic policies. Democracy is significant since it helps in achieving economic growth and stability, facilitates the free flow of information, and supports a decentralized economy, which promotes efficient and equitable allocation of resources. Hence, the scholar argues that LDCs should have voting rights in the IMF and WTO coupled with public accountability (Stiglitz 208). According to Stiglitz, supporting democracy is more important than supporting business.