[1] The views presented here are solely those of the author and not those of any institution with which he is or has been affiliated. The author would like to acknowledge the helpful comments and assistance of Halsey Rogers and Maya Tudor.
[2] The link between economic well being and social and political stability had clearly been of concern to Keynes, one of the key founders of the Bretton Woods Institutions. Recall his The Economic Consequences of the Peace (1920), in which with clairvoyant insight he saw the dangers of the adverse consequences of the reparations payments being imposed on Germany by the Versailles Treaty. We have, unfortunately, been reminded of this link over the past year. One of the most severe economic downturns of the postwar period is the depression that has fallen upon Indonesia, where output in 1998 is projected to be 16 percent below its 1997 level (which itself was dampened by the crisis which began in October 1997). It is somewhat ironic that the Indonesian depression was in no small measure caused by the social and political upheaval, itself induced in part by contractionary monetary and fiscal policies that had already reinforced the economic downturn that followed the currency and financial sector crises.
[3] The first "development" loan was given to Belgium, to help the Congo. See Kapur, Lewis, and Webb (1997), p. 98.
[4] For an articulation of this view, see Greenwald and Stiglitz (1987). While it was widely recognized that Samuelson’s neoclassical synthesis, arguing that once macroeconomic problems were solved, markets provided an efficient resource allocation, lacked foundations, another strand of thought (real business cycle and new classical theory) tried to develop a consistent intellectual framework by arguing that markets worked efficiently all the time. To be sure, there were economic fluctuations, but these were the efficient market responses to external shocks. While employment did vary, it was only because individuals chose to enjoy more leisure at certain times (like recessions), in response to these changing economic circumstances.
[5] The general theorem is articulated in Greenwald and Stiglitz (1986), who show that when information is imperfect and markets incomplete—that is, essentially always—there exist interventions in the market, which respect these limitations, and which can make some individuals better off without making anyone else worse off.
[6] For a general articulation of this view, see Stiglitz (1989).
[7] This view has been put forward, e.g. by Hellman, Murdock, and Stiglitz (1997), Aoki, Murdock, and Okuno-Fujiwara (1997) and World Bank (1997).
[8] See Stiglitz (1991), Krueger (1987), Shleifer and Vishney (1994), Edlin and Stiglitz (1995).
[9] For early discussions, see, for instance, Tiebout (1956) and Stiglitz (1977 and 1983).
[10] See Stiglitz (1995) and the Economic Report of the President, (1997).
[11]Interestingly, this view seemed to predominate in the early days of the Bank, when the Bank’s shareholders were reluctant to provide funds for Belgium, partly because of its exclusively contractionary monetary policy. See Kapur, Lewis, and Webb (1997), p. 98.
[12]Which helps pay for incremental costs associated with environmentally beneficial projects.
[13]It has been exploring the creation of a Prototype Carbon Fund (PCF) which would facilitate carbon trading at the global level under the Clean Development Mechanism, and could be expanded to incorporate trading in emission permits.
[14]Voting rights in these international institutions are markedly different than in the United Nations, where, in the General Assembly, each country gets a single vote, regardless of its size. In the IMF and the World Bank, voting rights are proportional to the contributions of the countries that support those institutions, which, in turn, are related to their GDP. Thus, the United States has the largest "vote."
[15] My point here is not to discuss whether there might be advantages that result from independence to offset the presumed disadvantage arising from weaker democratic accountability, but only to focus on some of the consequences. Note, however, that while there is some argument that independence leads to better performance of economies in terms of certain intermediate variables (like inflation), there is no evidence that in terms of the variables of ultimate concern, output and real incomes, and their growth variability, that performance is superior. See Alesina and Summers (1993). And even in terms of the former, questions have been raised. Stiglitz (1998f0 Some countries, like India, without independence, but a strong anti-inflation consensus, have pursued low inflation policies. On the other hand, independence of the central bank in Russia has enabled it to pursue a more inflationary policy than the government might have desired. Independence in countries without democratic institutions raises further problems: Had the Indonesians been persuaded to have an independent central bank during the Suharto era, the transition to a more democratically accountable regime might have been even more difficult.
[16] For articulations of these views, see Wolfensohn’s address to the Annual Meetings of the World Bank and IMF (Wolfensohn 1998) and my Prebisch lecture at UNCTAD (Stiglitz 1998b).
[19] For instance, consider what would have happened if the United States had undertaken a thorough reform of its preferential taxation of real estate and its misguided agricultural policies in the midst of the S & L crisis in 1989. Clearly, these were distortionary policies that not only interfered with the overall efficiency of the economy, but also were directly related to the real estate boom at the root of the crisis. Yet had those policies been reformed during the crisis, the collapse of a small but important segment of the U.S. financial system would have overtaken the entire system. As a result, one effect of that collapse—the recession of 1991-1992—would almost undoubtedly been far more severe. Timing of reforms is critical, and the middle of a crisis was clearly the wrong time for those reforms.
[20] Feldstein (1998) argues that many of the conditions imposed on Korea by the IMF in the bailout of December 1997 crossed that line. For instance, whether or the extent to which the Central Bank should be independent, and whether its exclusive mandate should be the maintenance of price stability, are hotly contested propositions even among economists. They are ultimately political decisions. Indeed, in the United States, when Senator Mack proposed changing the charter of the Federal Reserve Board from its current broad mandate, which includes "maximum employment, stable prices, and moderate long-term interest rates" (Board of Governors, 1994) to an exclusive focus on price stability, I and others in the Clinton Administration had little trouble convincing the President that, should the Senator pursue in advocating this change, the issue should be made a central one in the upcoming election. The threat sufficed to bury the proposal. Korea did not have a history of inflation, such as might warrant inclusion of such a major political reform as a condition for receiving assistance.
[21]Caprio and Klingebiel (1997). For more extensive discussion of these issues, see World Bank (1998b) and Furman and Stiglitz (1998a)
[23] The tendency of managers with failing projects to delay abandoning projects has long been noted in the organizational literature, which has referred to the phenomenon as "escalating commitment." The phenomenon appeared puzzling to economists, who repeated the maxim that bygones should be treated as bygones: previous investments should be treated as sunk costs. At each moment, the issue should be, what is the best policy going forward. But the economists’ naïve reasoning ignored the agency problem: the manager’s personal reputation was at stake. See Jensen and Meckling (1976) and Staw (1981).
[24] One other group typically does have considerable knowledge—the lenders who are part of the bail-out—but they have obvious vested interests.
[25] What may be at stake is not so much the reputation of the institution or agency as a whole, but of particular individuals who have been influential in making the decisions. These individuals have, of course, an incentive to make it seem that what is at stake is not their own personal reputation, but that of the institution.
[26] See Stiglitz (1998a) for a discussion of some of the incentives for secrecy at play within public agencies, and the conflict between public and private interests.
[27] It is of course, possible that there may be some hypocrisy in these stances. For a more extended discussion of the relationship between transparency and economic performance, and a discussion of the political economy of transparency, see World Bank (1997c), Kaufmann, Mehrez and Schmukler (1998) and Furman and Stiglitz (1998a).
[29] This broader agenda often brings the Bank beyond the traditional domains of economic analysis. There has been some concern whether in doing so the Bank is going beyond its charter, which proscribed it entering into politics. But it has increasingly become recognized that issues like corruption, transparency and democratic processes have profound effects both on development and poverty. See, for instance, Knack and Keefer (1997), Sen (1997) and World Bank (1997a).
[30] For a brief discussion of these different positions, see Stiglitz, (1997a).
[31] It is clear that the prescriptions that came to be called the Washington Consensus are not sufficient for development, since many countries that followed the precepts have still failed to achieve even moderate levels of growth. Beyond this, there is even a question whether they are necessary for successful development. China, which is by all accounts the most successful of the low-income countries and which accounted in aggregate for two-thirds of the entire increase in incomes among the low-income countries between 1978 and 1995, did not follow many of the key precepts of the Washington consensus. For further discussion on the Washington Consensus, see Williamson (1990). Throughout this paper, I have in mind a somewhat different conception of the Washington consensus than the one originally outlined by my colleague John Williamson (1990), who coined the term. As Williamson (1997) himself notes, the term has evolved over time to signify a set of "neoliberal" policy prescriptions, rather than the more descriptive usage that he originally intended in discussing reforms undertaken by Latin American economies in the 1980s.
[32] See World Bank (1993) and Stiglitz (1996).
[33] See the World Bank’s 1998 World Development Report: Knowledge for Development (World Bank 1998a).
[34] See World Bank (1997a, 1998b).
[35]While South Asia and Sub-Saharan Africa together received only 6 percent of FDI and 12 percent of the aggregate net resource flows to all developing countries, the East Asia region received 44 percent of FDI and 34 percent of the aggregate net resource flows. See World Bank (1998e).
[36] Examples from 1998 include credit guarantees for a repo facility in Argentina and for a power plant in Thailand.
[38] See World Bank president James Wolfensohn’s 1996 address to the Bank/Fund Annual Meetings in Washington (Wolfensohn 1996). For a more extended discussion of the concept of knowledge as an international public good, and the role of the World Bank as a Knowledge Bank, see World Bank (1998b) and Stiglitz (1998c) and the references cited there.
[40] In fulfilling this role, its multinational nature is important. It does not, for instance, represent the interests of the telecommunications company of any particular country.
[41] See, for instance, Feldstein [1997]
[42] On this point, see, for instance, Sachs (1996). Overloading the agenda is of especial concern in those countries with limited institutional capacities. Indeed, there have been complaints that the inordinate amount of time that key government officials have had to spent negotiating these conditionalities reduced the amount of time they had available for engaging in constructive development efforts.
[43] See in particular, Stiglitz (1998e).
[46] This viewpoint was put forward forcefully by John Neville Keynes more than eighty years ago. See Keynes (1917).
[47]Though there is some controversy even over this diagnosis. See Furman and Stiglitz (1998).
[48] See, for example, James Wolfensohn’s address to the 1998 Annual Meetings of the Bank and Fund (Wolfensohn 1998).
[49]While the percentage of the world’s population living in absolute poverty (under US$1 per day) has generally declined since the 1970’s, the absolute number of poor has risen.