Joseph Stiglitz, a former chairman of President Clinton’s Council of Economic Advisors, was perhaps best known for his scathing blasts at the World Bank’s sister institution, the IMF, and the Fund’s interest rate policies in Asia’s crisis countries. But as chief economist at the World Bank he committed a multitude of other sins in the eyes of the so-called “Washington Consensus”.
| Stiglitz: disagreed with the IMF | ||||||
Stiglitz, for example, had the gall to lambast privatization in eastern Europe and Africa, arguing that legal systems, among other factors, weren’t ready to support the change.
He told countries to go slowly when they started to think about liberalizing their capital markets – one of the keys to globalization. And he turned thumbs down at the increasingly successful movement to set up funded, individual retirement accounts, an idea that even US presidential candidate Al Gore recently found a way to endorse.
Somebody at the US treasury Finally decided that too much was enough and Stiglitz was sent packing at the end of last year. He has returned to a teaching post at Stanford University in California.
But that didn’t close the book on the Stiglitz story. World Bank President James Wolfensohn decided that the wayward iconoclast should have the last word in his showdown with the US Treasury. So, he put Stiglitz in charge of the committee that recruited the Bank’s new chief economist. “That may have been Wolfensohn’s way of saying that he wanted another Joe,” says Sebastian Edwards, who served as chief economist for the Bank’s Latin America and Caribbean Department from 1993 to 1996.
Any choice with a Stiglitz imprimatur, of course, was bound to raise hackles. In the case of Nicolas Stern, the World Bank Staff Association spoke out, objecting on the ground that Stern’s brother serves as the Bank’s vice president for human resources. That broke a standing rule against nepotism. Stiglitz conceded the need to avoid giving unfair advantages to the relatives of Bank employees. “It is absolutely imperative to make sure that arm’s length procedures are in place,” Stiglitz told Euromoney, “whenever the rule is broken.”
Three people served on the selection committee – two of them from outside the Bank.
Stern’s brother recused himself from the process. “My response to the charge is that our task, as a committee, was very simple, but difficult,” Stiglitz Fires back. “We were told to Find the best people for the job and not many could Fill the bill. Safeguards were in place and we fulfilled our mandate.”
Stern takes charge of the intellectual part of the Bank within months of in-coming IMF managing director Horst Köhler’s arrival and at a time when bad blood remains between the two institutions as a result of positions taken by Stiglitz. Stern served briefly under Köhler at the EBRD and observers are watching to see whether the previous relations between the two will affect relations between the Bank and the Fund.
For his part, Stiglitz simply assumed that conflict with the Fund would be inevitable. It is, after all, a different institution with a very different mandate and different policy advice, so the argument goes, will Flow from that mandate. The Bank’s priority is to reduce poverty and promote growth. The Fund’s major focus is economic stability. Stiglitz thought that it was only natural to oppose high interest rate policies that the IMF pursued in many countries because they choked off growth and hurt poor people. “Many of these differences run very deep in the two organizations,” says Stiglitz.
Stiglitz also chafed at the understanding worked out between the Bank and the Fund whereby they get together and give countries joint advice. The institutions aim for a united front out of fear that open discussion about policy might be confusing. Stiglitz, on the other hand, took the view that mission teams should present a debate so that countries can make choices with more knowledge. “Where there are legitimate differences in views, large uncertainties about the results of policies and differences in consequences for distribution,” he argues, “those discussions should not go on behind closed doors. I think that undermines democratic values.”
Controversy surrounding this year’s World Development Report presents Stern with yet another messy situation just as he arrives.
Ravi Kanbur, director responsible for the report, resigned in June over policy differences. Kanbur was critical of the push to emphasize growth at the expense of policies designed to promote greater equality. He set an unwelcome precedent. No WDR director had resigned in the past, and next year the WDR director will report to Stern.
Stiglitz had been redesigning the WDR in recent years based on the view that economists don’t have all the answers and the answers that they published in earlier WDRs often turned out to be wrong. But that didn’t prevent the Bank from using the WDR to send powerful messages. The 1997 WDR, for example, said that the Bank didn’t know how to stop corruption, but that it was a serious problem that deserved lots of attention. And last year’s WDR pointed out that over 50% of the people in developing countries are going to live in urban centres, signaling a major change in the nature of the Bank’s work over the decades ahead. “We attempted to shift the WDR from what were crisp pabulum messages, orthodox messages,” said Stiglitz, “to use it as a vehicle for opening up debate on a higher level. A lot of people resented that.”
There’s no shortage of challenges to greet Nick Stern.
Chief economists at the IMF have often stayed for 10 years or more. Chief economists at the World Bank recently have averaged two-and-a-half or three years in the job. What impact do you think you can have, given this tradition of outsiders who only stay for a few years?
I certainly expect to stay a good time, but I can’t tell you what that is. I spent six years as chief economist of the European Bank for Reconstruction&Development. Some of my predecessors were here for much longer than two or three years. Hollis Chenery, I think, stayed for 11. At the same time, some of my predecessors have shown that you can indeed achieve things in a reasonably short time frame. I think that deepening the involvement of the developed economics group in operations and strategy is something that can start now and be effective quite quickly. Some research programmes, you can get moving in a year or two and produce results. So, I think that you can be quite effective within a time horizon of two or three years even though that would be shorter than I would intend.
What is your research agenda and how do you expect it to differ from recent past priorities ?
Of course, each chief economist has his own enthusiasms. There’s absolutely no doubt in my mind that the Bank’s poverty focus is right.
It’s something I’ve worked on all my life.
Within that, I would lay strong emphasis on investment climate issues. I think that the environment in which people and business work is of absolutely fundamental importance, if it is to generate economic opportunities. That includes things like the reduction of bureaucratic harassment and corruption. It means setting a functional legal and regulatory framework. It requires Financial institutions that work. It means promoting effective corporate governance. It means, of course, macroeconomic stability.
I think the identification of the poor and the measurement of poverty over time actually involve quite difficult conceptual and empirical issues. The focus on promoting the well-being of poor people should be even stronger. The poverty reduction strategy papers – prepared by each country – will form the foundation of much of what the Bank, and also the Fund, will be doing. So the analytical basis for understanding movements in poverty and targeting policies to the poor is going to be extremely important.
I think the whole area of public service delivery is very challenging and important.
Why is it that education systems operate so much better in one part of India than another or in one country than another? There are enormous differences in effectiveness for a given expenditure. But these public services are absolutely fundamental for enabling the poor to participate in a more competitive market economy.
| Stern: still draws on his experience of Indian village life since the 1970s | ||||||
You lived in an Indian village for a year and produced a pioneering study of how the poor actually function. What insights based on that experience are you expecting to use as chief economist?
I’ve gone back to the village many times since 1974/75 when we were staying there. That was the deepest intellectual experience of my life in development. We have data from the village that goes back to 1957. So, we had the chance to watch one place develop over a long period of time. I think that the insights come partly from the intense observation of the way in which people live, but also from looking at the changing economic and social conditions in one place since 1957.
The life that people lead is, in some respects, quite similar to our own. You expect that, because human beings are human beings.
You do a day’s work. Then, you sit down and have a cup of tea and chat with your friends and tell stories and gossip and talk about politics. So, there’s a lively communal interchange that I hope would be similar to the best parts of our own existence.
But – and this I think is most important – there is the deep vulnerability. A serious illness or the death of a breadwinner is a catastrophe. You are vulnerable to crop failure, if you are in agriculture. You are even more vulnerable to the absence of work in hard times, if you’re an agricultural labourer. Even if you’re lucky enough to get a better-paid job in a nearby town, you can lose it and it may take you a while to Find another one. These vulnerabilities in health, employment and income are of a kind that we Find it very hard to understand. The notion of insecurity is very deep and poverty is in large part associated with that vulnerability as we said in this year’s World Development Report.
It’s also the case that, particularly if you’re poor, you can really get pushed around.
As in most places, there are some unpleasant characters – the local heavies – often associated with things, for example, like sugar cane rationing. Such people tie up particular areas of activity. You can get pushed around by anybody in authority. It could be the people allocating credit in a rural development programme. It could be the agriculture extension workers. There are all sorts of ways in which the weak are vulnerable and pushed around in ways that are much more severe and humiliating than we’re used to in richer economies. Your chances of change, of moving about and changing yourself, are more limited too. It’s not so easy to acquire an education or to retrain and to do something else.
This is a village which has changed slowly, but it has changed and that’s important. There was the big increase in irrigation that came in the early 1970s. Agriculture changed from single cropping to double cropping and that had a strong effect on people’s incomes. High-yielding varieties also helped. There was more employment in the nearby town and those two things give some grounds for optimism. So, the standards of living have improved. It has been slow but you can see it. But life remains hard and very vulnerable.
How strongly, if at all, are you going to push the Stiglitz agenda of turning back the Bank’s support of globalization, openness and the removal of capital controls?
I think that Joe [Stiglitz – outgoing World Bank chief economist] would share with me and many others support for the great benefits which Flow from opening economies. I never saw an attack on trade in Joe’s agenda. That certainly wouldn’t be part of my story either.
But I think that it’s very important to distinguish between trade on the one hand and capital on the other. Joe argued that we need to be careful about the speed and manner of capital account liberalization. I think that liberalization is the right direction, but the question of how you do it and at what pace depends enormously on the strength of Financial institutions in a particular country. I suspect that’s a view many people would now share. I don’t see either of those positions as an attack on globalization.
I also think it’s important to recognize that you need some continuity in a research unit.
It would be quite wrong to change research programmes radically just because another chief economist comes in. And Joe and I share many interests. Neither Joe nor I would claim to be primarily macroeconomists. We will do macroeconomics, because an economist has to be an all-round economist. And it’s a very important part of the story. But neither of us has published very much in macro. So, you’ll see an emphasis on structural development and micro issues in my agenda just as you saw that in Joe’s.
But there will be differences in the areas we would focus on. I’ve already mentioned that I regard the investment climate as very important. So, does Joe. But my experience in working at the EBRD made it of particular importance for me. The investment climate was so problematic in eastern Europe and, particularly, the former Soviet Union.
If the Bank is going to learn lessons that can help countries become richer, is it adequate to focus the research on the poorest countries or is it necessary to include the entire gamut of countries?
I think that there should be a focus on poorer countries. But I also think that the Bank is almost unique in terms of its ability to compare experiences across different countries. It has a great advantage in that type of research. To understand how richer countries have become rich is an important part of the story. So, there should be a focus on the poorer countries, but there’s a great deal to learn from comparison with the richer countries. Of course, there are real areas of poverty in the richer areas too. Something like three-fourths of those living on less than $2 per day are in middle-income countries.
What should we expect from the former Soviet Union in the next decade? A period of solid accomplishment or a decade of disaster?
I think their task is more difficult than it was in eastern Europe. Geography is very important in terms of immediate access to markets and openness to those markets. The whole trade structure of Poland, Hungary and so forth turned around very rapidly in terms of exporting toward the west. They were in very different positions from the point of view of history. I think that eastern Europe’s 40 or so years of communism were very different from the former Soviet Union’s 70 or so years of communism. They have had very different experiences in terms of the private sector and reforms. Hungary and Poland had experimented with reforms prior to 1990. That experience was important. Most of agriculture in Poland was already private. Eastern Europe on the whole saw liberation while Russia saw collapse of empire. So, these were very different situations.
They also had a really strange economic structure where, for reasons of political control, very big factories with a very narrow range of production were locked into other big factories thousands of kilometres away. The whole system was very interdependent, very controlled and very vulnerable to collapse when some of the pillars fell away. The experience of hyperinXation and deep poverty that came in many of the FSU countries during the 1990s has engendered a deep scepticism toward reform. The oligarchic structures that have arisen created very strong vested interests that will make some aspects of further reform difficult.
But should we be pessimistic? No. I think that it’s going to be tough over the next decade, but I think that Russia, in particular, does have a chance. You’ve now got a Duma [legislature] that can do business with the president. You’ve got a president who’s energetic and committed to change. You’ve got a macro environment that, for once, is not threatening in the short term. So, I think it’s vital for the international community to support Russia. There is an opportunity to relaunch reforms. If the new government really does take on the underlying structural reforms that are necessary to industrial Firms, Financial institutions, to competition, to the way governance takes place, to tax systems and so on, I would be optimistic that we could see 4% to 5% growth in Russia over the next few years. But those are ifs.
There has been a controversy surrounding this year’s World Development Report. What are your views concerning the consultation process involved with producing this report?
This year’s WDR is going to have strong messages on what poverty means and how it can be reduced. The key ideas that have been in the WDR during its process of gestation are still there. Everyone will see them when it’s published in September. The process of consultation this year was very strong. It had been going on over a two-year period. It produced, for example, “the voices of the poor” which has already been quite influential in the Bank. That section embodied the triad of ideas: opportunity, empowerment and security. These concepts also help us understand policy towards the alleviation of poverty. So, the consultation process was very valuable.
The internet has included many more people in the consultation process than before. And the process was much more intense because the team did a lot of travelling and consulting this year. That carries big advantages in terms of bringing ideas and criticisms. But it also has costs. The team must deal with pressures that are coming from all over the place. I want to think about how we can make the process of consultation strong and serious while at the same time reducing the burden of the exercise.
In the wake of what some people are calling the “WDR scandal”, how much freedom are you going to give to the next director of the WDR?
There is no scandal. The WDR teams are part of this department and this intellectual community. As such, interaction and guidance are important. The WDR is not a document in which one can exercise the freedom to pursue whatever is in the director’s mind. You’re part of a group working on a particular topic.
It is important to interact and stay together and I, personally, will be involved in the way in which the WDR develops. I sign it. It’s part of my job. The type of direction I think it should have will focus on poverty reduction. We will insist on high quality and make sure that the report brings new ideas, that it synthesizes appropriately, and that it draws on the intellectual community inside and outside the Bank.
But if you have a group of very good people working together on a topic, you have to give them some freedom to pursue their ideas. It’s a combination of freedom and direction. But it’s research direction, at the end of the day, from myself. I have worked in, and directed research centres for much of my academic life.
The recent acrimony between your predecessor and IMF officials seems to have left bad blood on both sides. What steps do you plan to take to improve relations with the Fund?
I worked very closely and productively with Horst at the EBRD. We collaborated directly on the strategy that Horst introduced and presented last year at the annual meeting in London. So, I think that would lay a very good foundation for continuing to work together effctively here. I’ve worked very closely with Stan Fischer over very many years. I’ve worked closely with John Odling-Smee who’s the director for European II at the Fund and I’ve worked closely with Vittorio Tanzi in the Fiscal affairs department in the Fund for many years. I’m quite cheerful about that.
