Criticism of Neoliberalism: Interview with Joseph Stiglitz

Criticism of Neoliberalism

Interview with Joseph Stiglitz

[Nobel Prize winner Joseph Stiglitz was a prominent economic advisor of the Clinton administration (1993-1997) and vice-president of the World Bank (1997-2001). In this time he turned into a critic of an unregulated globalization. His public criticism of neoliberalism and the policy of the International Monetary Fund (“The Shadows of Globalization”, 2002) made him a spokesperson of the anti-globalization movement. He was one of the main speakers at the 4th World Social Forum in Bombay/India in January 2004. This interview originally published in: Trend Online zeitung, February 2004, is translated from the German on the World Wide Web, http://www.trend.partisan.net/trd0204/t050204.html.]

Trend: You are a spokesperson for many people who raise fundamental criticism of the World Bank, the International Monetary Fund and the World Trade Organization. They urge a reform of these institutions and more democracy. What revealed the erroneous developments to you?

Stiglitz: As vice-president and chief economist of the World Bank, I could observe these institutions from within. Above all I had opportunity to see how the International Monetary Fund functions. The problem in realizing sensible reforms was striking. Speaking openly about these reforms proved even more difficult.

The reason in my opinion is the way that these institutions act. Who makes the decisions? The management of the IMF consists only of finance ministers and heads of central banks. Only this interest group has a voice. If merely improving accounting procedures or technical matters were involved, no one would challenge them. However the decisions of the IMF have immediate effects on the unemployment rate, the environment and the public health system.

As one example, the intervention of the IMF in Thailand led to budget cuts and increased unemployment. The government had to reduce the expenditures for AIDS-preventive measures after achieving enormous advances in combating AIDS. When the IMF withdrew, the number of AIDS-cases rose again. The IMF programs affect all parts of society although only the financial world is heard. Other voices are not even sought.

Trend: Would you still describe the IMF as a standard bearer of neoliberalism?

Stiglitz: Yes, although there is no coherent underlying philosophy. Although neoliberalism claims to rely entirely on the free market economy, that means no state intervention, I had very different experiences when I was an economic advisor of president Clinton. Everyone defended the free market economy, except in his or her own fields. Everyone was against subsidies, except in their own lines.

Now look at how the neoliberal doctrine of the free market economy was applied on the foreign exchange market. What did the IMF do when the West Asian crisis broke out? The IMF utilized a fund of billions upon billions of dollars to help American, Western European and western banks out of a tight spot.

Trend: Wasn’t that interventionism?

Stiglitz: The IMF intervenes selectively. The IMF has billions to support the banks. But the IMF claimed there were no funds when the poor in Indonesia asked for a few million dollars for food.

Trend: Where do you see the greatest danger of neoliberalism?

Stiglitz: Firstly, neoliberalism doesn’t stimulate economic growth and secondly, doesn’t increase efficiency.

Trend: Aren’t there experts who would deny this?

Stiglitz: Still the evidence is unequivocal. As an example, Latin America regarded as the greatest success story of neoliberal doctrine. In the past, Argentina enjoyed a credit rating of A+ assigned by the IMF. Now look at the country after swallowing the reforms dictated by the IMF for ten years. The numbers are clear. The growth rates of the last decades are half as great as those of the 50s, 60s and 70s – before the reforms.

The economic situation is worsening. Where growth can be registered, the top ten percent profit. The poorest of society ended up with nothing. The conditions of most people worsened. As a result, neoliberalism doesn’t produce growth and creates social inequality.

Trend: You claim as a kind of mantra that neoliberalism helps certain interest groups, for example public finance, capital and the rich elites in some countries. How is it politically possible that these interest groups can force these conditions on developing countries?

Stiglitz: Firstly, I’d like to emphasize again: Neoliberalism is a kind of mantra or religion. In my work for which I received the Nobel Prize, I stressed that markets left to themselves, particularly in developing countries, are inefficient. The state must intervene with these “incomplete” markets.

The “invisible hand” that should provide for greater efficiency is invisible because it doesn’t exist. Therefore the theory of neoliberalism has no basis. The liberalization of capital markets exposes developing countries to an enormous risk. On top of that, countries like China successfully attract investments without liberalization, without opening themselves to the speculative money streams that flow in and out over night. One cannot build any factories with such capital.

Trend: Do you understand why social-democratic heads of government like Tony Blair or Gerhard Schroeder are so reserved in criticizing the institutions of the IMF or the World Bank? They even proclaim a neoliberalism with a human face.

Stiglitz: In many countries, Social Democrats have developed a fear of the financial markets.

Trend: Because they don’t understand them?

Stiglitz: Because they don’t understand them. And because people tell them that governments are irresponsible when they criticize the financial markets. The markets react with higher interest rates intensifying the financial situation and the budget deficits of countries. Therefore politicians only reach their social-political goals with difficulty.

Trend: And are voted out of office?

Stiglitz: And are voted out of office. However even when their reelection is not at stake and they honestly pursue their social-political goals, revenues must be increased in the billions to afford the interest payments because the financial markets have lost their trust in them. The margin in budget questions becomes very restricted. Despite good intentions, politicians all over the world are intimidated. Therefore those who don’t belong to any government have a special obligation to raise their voices.

Trend: Every day approximately $1.5 trillion circulates around the world in speculative trade. 80 percent is short-term or “hot” money. In the meantime, loud voices urge a control of these capital movements. What is your opinion?

Stiglitz: The Tobin tax is a tax on streams of capital. There are two reasons for this tax. Firstly, we need a source of revenue to pay for the necessary goods of the world community. Global needs also rise with increasing globalization.

We need funds to finance the struggle against AIDS and other worldwide sicknesses, the war against terror, against destruction of the environment and against poverty in developing countries. To reach minimum goals, we need $50 billion for the developing countries alone.

Thus we need additional revenues to finance these important global needs that benefit all of us.

We lack this source of revenue. At present the US can extort the rest of the world. The US refuses to pay further contributions to the UN only because of disagreement with one decision or another. An international institution cannot be treated this way.

For me the Tobin tax has an enormous symbolic value because it says that the financial markets ruled the world in the last years. The financial markets have brought us instability at the expense of the poor populations in the developing countries.

The Tobin tax is more than a symbol because it could actually achieve something. The Tobin tax could serve as a source of revenue for financing goods of the world community. This is more than symbolic.

The Tobin tax is a confession that we must act together on the global plane in this era of globalization. We need resources to advance a sensible development policy, reduce poverty and tackle health and environmental policy questions.

As a result, the Tobin tax serves two goals: it creates a basis on which we can fight these problems on a global plane and redresses the imbalance arising through free capital traffic. This capital traffic has inflicted much havoc on the world.

Trend: Supporters of the Tobin tax say that it can achieve little by itself since too many loopholes exist through which capital can flow. In your opinion, is Europe large enough to introduce this tax in a single-handed effort?

Stiglitz: Certainly. This tax doesn’t cause any damage even if it cannot completely stabilize the financial markets. Stopping these speculative activities will not bring disaster on the world. Global economic efficiency will not be impaired.

Europe must be concerned that the processing of these transactions is not shifted outside Europe. This tax should be in effect for transactions made by EU citizens irrespective of where they were handled.

To that end, a whole new basis of control must be created in Europe. For me, the key question is: Is it practicable? I regard this as a purely technical question.

Trend: Is it technical or political?

Stiglitz: It is technical and political. Can the body of law be promulgated so it cannot be evaded? At present I still have problems with the conversion of the Tobin tax, above all as to derivative- and option businesses. Nevertheless these problems can be solved.

The actors on the financial markets are very inventive in the evasion of taxes. I recognized this during my time in the White House. This tax should not only be symbolic. I want a tax that achieves something.

Trend: Isn’t it time for a paradigm change? In the last 20 years, the economy has forced politics off the road. Hasn’t the time come for politics to gain the upper hand again as a creative social instrument? Don’t we need a moral revolution?

Stiglitz: Sustainable values must be included in our decision-making.

By the way some decisions currently made in the US lack both an economic and a moral foundation, above all in relation to human rights.

As an economist, setting the economic over the political is not central. Rather the economic approach should be based on a scientific foundation. What is sold nowadays as economics is in reality an ideology or a religion.

Giving greater attention to scientific aspects in the decision-making process would be a great step forward. Economics emphasizes the necessity of so-called tradeoffs. In other words, economics recognizes that some political measures favor one group and not others. Economics analyzes the risks, costs and advantages and then leaves it to the politicians – after weighing these tradeoffs – to make the right decisions. Thus economics should still be subordinate to politics if it acts sensibly.

Unfortunately the ideology that is presently passed off as economics represents an undermining of economic principles. It insists there is only one single solution, the neoliberal solution.

Trend: Should simple citizens be occupied with these economic questions?

Stiglitz: Yes, indeed. Many of these questions are simple to understand. One doesn’t need to be an academic with a doctorate to understand that cutting public expenditures in an economic downturn reduces demand and intensifies the downswing.

Trend: Am I right in assuming you have reservations about social movements and globalization critics taking to the streets?

Stiglitz: No. Globalization critics fulfill a very important function by bringing very explosive themes to the public, themes not adequately considered that influence the life of billions of people in the world. This cannot be appreciated highly enough.

At the end of our discussion, I’d like to confirm my belief in democratic dialogue. Some of these themes are very complex and complicated and must be tackled scientifically. I am very sympathetic to the values of these globalization critics.

I seek a much more democratic international structure that helps poor people in developing countries. I am worried about the environment. Therefore we are 100 percent on the same line as to our values.

Analyzing the evidence and applicability of these approaches and reflecting whether they can actually function is important to me as an economist. Merely hoping that they will function is not enough.