Globalisation and Its Discontents by Joseph Stiglitz [Book Review]

Globalisation and Its Discontents is a book based on the experiences of the Nobel prize-winning economist Joseph Stiglitz. He argues that the International Monetary Fund (IMF) and other institutions have a flawed ideology and have failed developing countries through disastrous policies. Stiglitz explains in detail the role the IMF played in inducing some of the world’s worst crises such as the 1997-1998 Asian Financial Crisis, the 1998-2002 Argentine Great Depression, and the failure of transforming Russia into a market economy.

Stiglitz opens the book by explaining the role designated to the IMF and the World Bank. The IMF was charged with the role of preventing another global depression after the Great Depression — it was to do so by encouraging expansionary economic policies and maintaining high global aggregate demand as emphasised at the time by John Maynard Keynes. However, Stiglitz explained the IMF has diverted away from such views, saying “Keynes would be rolling over in his grave were he to see what has happened to his child.” If the IMF was meant to restrict itself to matters of the macroeconomy such as monetary policy, the World Bank was dedicated to aiding reconstruction and development after World War II by performing financial reforms and tackling trade policies. However, Stiglitz believes the IMF has taken an “imperialistic” view of the separate objectives of these two organisations and has partaken with structural issues, the World Bank’s dedicated responsibility, as this attempt could affect the overall macroeconomic performance.

Chapter 3 discusses the issue with the Washington Consensus Policies, designed to respond to the issues faced in the developing world, and their issues. They were based on the three main pillars of fiscal austerity, privatisation, and liberalisation, and as Stiglitz describes it, were implemented without thought of the economic conditions of each specific country. He provides evidence of an IMF country report composed of irrelevant data taken from another report of a separate country, demonstrating fraudulent and inaccurate data. This absurdity is further supported by how the writers had left the original country's name on the newly created false report.

Stiglitz then goes on to pick apart the failure of the Washington Consensus by explaining how privatisation failed due to the IMF’s assumption that markets can develop quickly enough to meet every need. He argued this is wrong because many government activities such as social security systems and unemployment insurance systems exist due to the lack of well functioning private annuity markets. Next, he tackled the failures of rapid capital market liberalisation. The problem entails stripping away regulations to control the flow of hot money, disincentivising companies from making liquid investments. Also, risks associated with hot money discourages long term investments, which can be detrimental to the long term growth of a developing country.

In Chapter 4, Stiglitz reviews the 1997-98 Asian Financial Crisis and once again provides a comprehensive explanation as to how the IMF had exacerbated this meltdown. One of the main policies proposed by the IMF was a staggeringly high interest rate. The rationale behind this policy was to stabilise the currency by preventing a capital flight and a plunge in exchange rates. This may seem logical, however, South Korea demonstrated that the concerns over highly leveraged firms’ and financial institutions’ ability to repay their short-term loans were the main cause behind such a crisis. This eventually led to foreign banks refusing to lend to South Korean firms and financial institutions. The parallel existed for other East Asian countries where firms with huge debt to equity ratios made them very sensitive to high interest rates such as the 20 percent seen in South Korea. Ultimately, 17 of 30 major Korean firms defaulted. In reality, the high interest rates worsened the recession and had actually drove capital out of the country.

Sitglitz further discussed a range of mistakes by the IMF. Most notably, he mentioned the string of bad decisions in transforming Russia into a market economy, where GDP in the year 2000 was less than two-thirds of what it was in 1989 following the IMF interventions.

Finally, Stiglitz finishes the book by discussing solutions to the problems created by the IMF. One solution was to address the existing problems of governance. The intervention of the IMF has the potential to affect the livelihoods of billions of people in the developing world, yet those who are affected have little say in it. Thus he suggested reforming the voting rights system at the IMF and the World Bank. For example at the IMF, the majority of African countries have very few seats (each seat represents one vote) due to their lack of economic power. As simply offering them more votes is difficult to implement, Stiglitz suggested giving them more seats from which votes are not counted so that at least their voices are heard.

Another crucial point Stiglitz raised was the need to reduce the reliance on bailouts by substituting with the increased use of bankruptcies and standstills. According to him, bailouts of financial institutions in developing countries and developing countries themselves only allow western creditors to earn greater returns than they otherwise would have, leading to moral hazard when lending. Or, these bailouts would be used to maintain exchange rates at overvalued levels longer than they otherwise would have. This allows the rich inside the country to get their money out quickly while the currency retains its value but in fact, leaves the country more indebted without any benefit.

Overall this book was an amazing read, what I really liked was how Stiglitz explained major historical issues in a way so that everyone, especially people without an economic background could understand. He also provided clear solutions to each issue he outlined. However, I do not think this book on its own is anywhere near enough to form one’s opinions on the IMF. This is especially because the arguments are solely based on Stiglitz’s experiences which provides a very narrow point of view, one which many other IMF officials would disagree with. This book should certainly be read in conjunction with other books discussing similar topics such as Bankrupting the Third World by James and Lance Morcan, and Poor Economics by Abhijit V. Banerjee and Esther Duflo.