Tuesday, April 1, 2008


In this chapter, as the name indicates, the Author has dissected the modus operhandi of the operations followed by the International Monetary Fund (IMF) in the developing nations of the Asian, the Latin American and the African continents. The fund did choke the economic freedom and impinged upon the “economic sovereignty” of these countries by the way of ‘bounding’ their choices to choose a trajectory of their economic growth. These Countries around late 1980s and early 90s had already been suffering of fiscal deficit, hyper inflation, extra ordinary rate of unemployment, etc for a while and needed money to stabilise their economy which was already in shambles and the IMF in the name of macroeconomic stabilisation programme left no stone unturned to foist upon the agenda of Privatisation, Liberalisation and Globalisation as a panacea under the auspices of the Washington consensus despite of the fact that these countries were ill equipped in terms of structures of the market and the governance to implement this agenda.
Privatisation: The idea of privatisation is based on the belief that the govt has no business to do business of private goods. The author says that although privatisation of the economy may be a nice idea but it has hit the poor very hard especially in the developing nations like morocco where the govt. was forced to pull out from business of poultry under the IMF condtionalities and thus a gap was created which was not plugged in by any private player immediately, consequent of which the subsistence poultry farmers were hit very hard and this led to unemployment. The author has used this example to support his point that how the developing countries were compelled to make “forced choices” under the IMF brinkmanship which dumped growing industries (like poultry in morocco) in the developing countries and eventually the poor were victim in absence of social security network. Prof. Stieglitz mentions that the fund did force the recipient countries to privatise their economic units even before social security net of the workforce was put in place. Not only social security was put at the stake, there were no competition and regulatory mechanisms in place before privatisation which later on, in some Latin American countries led to the social unrest accompanied by the problems like alarming unemployment, high crime rate, urban violence etc. The author also mentions in this chapter that even legal mechanisms were not strong enough to control corruption that got aggravated under the Fund’s policies.
Liberalisation: 1990s onwards the wave of liberalisation, particularly the liberalization of money markets and the trade liberalisation under the influence of the Washington consensus swept across the developing world with the aim of enhancing income of these countries by channelizing the factors of production from less productive use to the higher productive use based on the theory of comparative cost advantage. Developing countries lacked terribly in what it takes to be successful in the liberal trade regime --------- ‘Education’ and ‘capital’. Consequently, most of the countries that followed the path of trade liberalism observed that the rate of new job formation was less than the rate at which existing jobs were destroyed with an exception of some of the south East Asian countries that opened up slowly. The author has mentioned in the book that the Liberalisation was a much disputed and a debatable idea even in the US at that time but shockingly the Fund was hell bent on implementation of the same in the developing countries. Countries like Bolivia were in the eye of the storm due to the Fund’s policy prescription. The liberal trade regime promoted an unfair agenda (from developing countries’ point of view) that was manifested by the protests in Seattle and Uruguay round of WTO.
The Role of Foreign Investment, Sequencing and Pacing, Trickle Down effect and the Priorities and Strategy of the International Monetary Fund.
Prof. Stieglitz mentions in his book that the foreign investment is one of the most powerful tools of the Washington consensus and a key part of new Globalisation. The consensus is of the opinion that the foreign investment brings along with it new business and the technical expertise that leads to the economic growth and is therefore a panacea to reduce Poverty in the developing world. But the fact of the matter is that the foreign investment, foreign business and technology when intrudes into the markets of developing world demolishes local competition due to the huge financial and technical clout e.g. in the case of soft drinks across developing countries where there is hardly and local domestic brand. Similar is the case with ‘beast of Bentonville’------------ the Wal-Mart. In absence of competition laws local domestic industry has paid heavily in the developing countries. The author has chosen to highlight the case of banking industry liberalisation, which in the developing countries particularly in the Latin American countries like Argentina and Bolivia led to a banking system failure in the year 2001 and the phrase ‘credit for development’ became irrelevant. The fund prescribed these countries to allow their domestic industries to have access to international financing agencies in the form of Foreign Institutional Investors (FIIs) which was even more dangerous prescription of access to notorious “Hot Money” accompanied to Foreign Direct Investment (FDI) which comes only at the price of undermining democratic process especially in sectors like natural resource e.g. mining, Natural oil, etc which are common pool resources. Following of the fund’s policies led to problems like the notorious ‘Dutch disease’----------the currency appreciation that the developing countries could less afford.
The author mentions in the chapter that the whole economic agenda was mis conceived, ill sequenced and paced untimely. Forced liberalisation before social safety nets in place, high rate of destruction of the domestic jobs etc were the biggest blunders according to the author .The blind pursual of the market fundamentalism in the countries where there existed no facilities for the “perfect information” and “perfect market” which are the pre conditions for market fundamentalism was a grave failure of the fund. The author mention that the much celebrated “trickle down effect” or “Trickle down plus” was another failure in the developing countries. Prof. Stieglitz has mentioned that the very idea of trickle down economy was very much debatable even in the US in Bill Clinton’s govt. This policy of trickle down effect in the developing nations like Thailand did nothing best but led to the cutbacks in social sectors like education and health and adversely impacted the country’s fight against AIDS.
Finally, in the last section of the chapter the author mentions that the priorities and the strategies of the Washington consensus were faulty. Author says that whatever the fund had put on its agenda had a negative economic repercussions in the developing countries that the fund’s economists failed to foresee. Prof. Stieglitz mentions that the stated objective of the Washington consensus is to reduce poverty in the developing countries and in this if they could have prioritised issues like land reforms in the developing countries that would have been much useful than trade liberalisation and financial deregulation. The author says that the growth and poverty are related and there is no ambiguity in this, but the manner in which developing countries have followed the Fund’s policy prescriptions has only revealed that the economic growth necessarily do not reduce poverty as desired or stated in the funds objective.

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