Where's the Beef? (Letters to the Editor)
Joseph Stiglitz's ("Dealing with Debt," Spring 2003) discontent apparently continues to be more with the International Monetary Fund (IMF) than with globalization per se. In this piece, he elaborates on some of the themes previously developed in his recent book and adds a few new ones. As always, he refuses to pull punches even if some of them miss, in contrast to his scientific work as a Nobel prize-winning economist.
Stiglitz leads off by offering three elements of a well-functioning global financial system required to get his seal of approval: financial transfers that go from rich to poor countries, rather than the reverse; an institutional framework which prevents financial crises; and an orderly process for permitting sovereign bankruptcy in the developing world.
I would certainly join the author in lamenting the fact that the United States has become the world's largest borrower, that the more dependable and long-term foreign direct investment flowing to developing countries is badly distributed, and that the footloose flows of short-term capital usually act pro-cyclically, governed by actual or expected interest rate differentials or currency fluctuations, rather than real rates of return. I also join him in the view, now gaining ascendancy, that international capital markets should be opened only gradually. What is less clear than the diagnosis is the cure. Are the high debt levels incurred by many developing countries entirely the fault of the lenders, bilateral and multilateral? And just what are the rules for liberalizing capital markets gradually, in line with countries' "enhanced economic growth"? The reason that China gets a lot of foreign direct investment and Sub-Saharan Africa gets very little is not simply a function of rich country malevolence but is dic tated by profit-seeking, not charitable, impulses. Admittedly, not enough public foreign capital goes into health, education, and the environment; but recipients are not entirely without bargaining power in setting priorities. Also, I do not understand why one should equally castigate foreign investment in extractive sectors and those employing local labor--if at low wages. The latter proved a godsend in East Asia during the 1960s and 1970s, not only contributing to rapid growth but also to improved equity.
Stiglitz pays a lot of attention to the perversity of short-term capital flows and here his accusation that both the US Treasury and especially the IMF provided relatively knee-jerk, across-the-board support to opening capital markets, short- as well as long-term, hits home. Admittedly, reforms of local financial institutions are needed before any gradual capital market liberalization makes sense. But it is not fair, once again, to lay the Latin American debt problem entirely at the door of US interest and exchange rate policies. …