World Bank Bigwig Blames Economists for Bad Advice

By Abby Scher and Phineas Baxandall

This article is from the July/August 1999 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org/archives/1999/0799scher_baxandall.html

Subscribe Now

at a 30% discount.

This article is from the July/August 1999 issue of Dollars & Sense magazine.

issue 224 cover

Did you find this article useful?

Click here to support D&S!


The World Bank's chief economist took Western economists to task for their blind adherence to the market and blamed them for Russia's economic debacle in a scathing speech at the World Bank's annual development conference in April.

The economist, Joseph Stiglitz, chided his audience that markets are less capable of governing the world than most economists think.

For proof, he noted the dramatic gap between the economic health of China which devised its own economic strategy and Russia, where "Western advisers march[ed] in with their sure-fire recipes for a quick transition to a market economy."

"Over the decade beginning in 1989, while China's GDP nearly doubled, Russia's GDP almost halved," he said. With its own blend of markets and government planning, China "succeeded not only in growing rapidly, but in creating a vibrant, non-state-owned collective enterprise sector."

Stiglitz is no radical. Formerly the chair of Clinton's Council of Economic Advisers, Stiglitz is a liberal who supports power for workers and unions as a counterweight to that of elites. Still, his mild criticisms of the market annoy the economists running the Treasury Department and prompt the media to paint him as a maverick. Because the United States is the World Bank's largest shareholder, his bosses at the Bank have muzzled him on occasion. But Stiglitz also represents a real constituency within the bank. And for the many poor and indebted countries that borrow from the Bank, Stiglitz's public criticisms of neoliberal economics ring true and enhance the Bank's credibility.

"It's been very interesting," says Njoki Njehu, director of Fifty Years is Enough, a coalition that opposes the operations of the World Bank and the International Monetary Fund (IMF). "Stiglitz has been talking on and off the record on how the IMF failed." The two sister institutions were founded in 1944, the World Bank to provide poor nations with long-term loans for development and the IMF to offer short-term loans to countries whose currencies lose value in international markets (see Ellen Frank and Dr. Dollar, this issue).

Njehu sees Stiglitz's remarks as part of a larger Bank strategy "to distance itself from the IMF." This strategy became especially noticeable last summer when the U.S. Congress balked at giving the IMF another $18 billion to "stabilize" world capitalism, says Njehu.

"It's significant because he is the chief economist of the World Bank like [Harvard economist] Jeffrey Sachs, he's adding to the critique."


Excerpts from Stiglitz's speech:


Why the failures [in Russia]? Not surprisingly, those who advocated shock therapy and rapid privatization argue... there was too little shock. The reforms were not pursued aggressively enough. The medicine was right; it was only that the patient failed to follow the doctor's orders! Never mind that the West had been jubilant over the restoration of democracy, and that democratic processes repeatedly rejected the medicine that the doctor prescribed.

I want to argue here, however, that the failures of the reforms that were widely advocated go far deeper to a misunderstanding of the very foundations of a market economy, as well as a failure to grasp the fundamentals of reform processes... At least part of the problem was an excessive reliance on textbook models of economics. ...especially since the typical American-style textbook relies so heavily on a particular intellectual tradition, the neoclassical model...

How those recommendations are used, or abused, is not an issue from which economists can simply walk away. And this is especially so in those instances where one of the arguments for the economic reforms is either failures in the political process or their impact on the political process itself. It is time for the doctors to rethink the prescription...

It has long been recognized that a market system cannot operate solely on the basis of narrow self-interest. ... Property systems are in general not completely self-enforcing.

[An alternative strategy] would push toward decentralization. The idea is to push decision-making responsibility down to the levels where people can more directly control their agents or where peer-monitoring can operate... This strategy would also entail energizing some of the more subdued segments of the population, such as the workers and their unions. If oligarchs and/or managers are looting an enterprise and destroying people's future jobs, then any national pride in being "long suffering and enduring" is quite misplaced. Those who are being hurt should have the information and the organizational capacity to vigorously protect their interests, not just to depend on some reform elite to act in their best interest.... Many countries, in effect, adopted the policy to "privatize now, regulate later." ...While privatization was supposed to "tame" political intrusion in market processes, privatization provided an additional instrument by which special interests, and political powers, could maintain their power. For instance, in a variety of dubious arrangements, political allies of the reformers "bought" assets (e.g., with money borrowed from the government or from the banks to which the government gave charters), with part of the "profits" generated thereby being recycled to support the political campaigns of the reformers.

One of the theories that promotes privatization independently of a competitive or even regulated environment is the "grabbing hand" theory of the government. The state is seen as the primary source of the problems: interfering in state firms and preying on private firms. The emphasis is on government failure, not market failure. Privatization of enterprises and depoliticization of economic life are the overarching policy goals. ... The grabbing hand theory sees the state as being irredeemably corrupt (while the private sector is viewed through rose-colored glasses. Yet the resulting program of transferring assets to the private sector without regulatory safeguards ("depoliticization"), has only succeeded in putting the "grabbing hand" into the "velvet glove" of privatization. The "grabbing hand" keeps on grabbing with even less hope of public restraint. The rapid liberalization of capital accounts allowed the aforementioned "banking sector" to spirit tens of billions of dollars of loot out of Russia each year while the architects of capital account liberalization negotiated more billions of international debt. Economic and political forces (incentives) are at play, with far different outcomes than predicted by the proponents of the grabbing hand theory (some of whom are still arguing that, 10 years after the beginning of the process, with output plummeting and inequality soaring, we are being too hasty in reaching a judgment). And why should we be surprised? It is not the first time that strong vested interests have used political processes to maintain and strengthen their economic interests. What is remarkable about this episode is that economists, who should have known better, had a hand in helping create these interests...

Clothing the grabbing hand in a velvet glove does not solve the underlying problem of irresponsible power, public or private. That is why I have urged a strategy of decentralization to push power down to the levels where people can use local institutions (e.g., enterprises, associations, and local governments) to protect their own interests and marshal their resources to incrementally rebuild functioning institutions on a broader scale.

end of article