The IMF, the World Bank and UN are increasingly looking like yesterday’s ideas for yesterday’s problems.
Of late, the IMF has been on the receiving end of enormous flak. Where was it when the foundations were laid for the credit crunch? Rewind the clock back to the last crisis but one, in parts of East Asia and in Russia, thanks to the way it dealt with that crisis, its name is mud. Maybe we need a new IMF, and World Bank. Well, in saying that, we are in good company.
If there was one theme that emerged above all others at Davos, it was calls for a new world order.
Gordon Brown was at it, so was George Soros, but perhaps most significantly are the ideas that are just beginning to gain global momentum from an economist called Joseph Stiglitz.
Note that name. If you are not already familiar with Mr Stiglitz, then here is a prediction. This is a name you will hear more and more often over the next ten years or so. For Joseph Stiglitz is increasingly being talked about in the same breath as Keynes. If Keynes was the greatest and most-influential economist of the 20th century, Stiglitz seems to be emerging as the top economist in the world in the modern era.
Stiglitz’s views are not dissimilar to Keynes’. In a recent interview with the Telegraph, while talking about a way through the credit crunch, he said, “As a Keynesian, I’d say the biggest back for the buck in terms of immediate stimulus would be unemployment assistance and tax rebates for the poor.” Actually, in this respect, Uncle Joe’s remedy is not that dissimilar from the $150bn tax breaks recently announced by George W. But, he said, “Set against the magnitude of the problem, even a fiscal stimulus package of $150bn is not going to be enough.”
To understand where Stiglitz is coming from, it is first necessary to recall the crisis that made the IMF so unpopular in parts of the world. The East Asia crisis, the Russian credit crisis, and then finally the collapse of Long Term Credit Management, were, in their own way, just as serious as the crisis reverberating around the world today.
The main difference is this. Back then, banks in the West had poured their money into the tiger economies of East Asia and Russia, creating a bubble, which collapsed. The result was nearly catastrophic for the western banks but, in the end, thanks to the action of the IMF and what Stiglitz calls the “Washington consensus,” it was largely the economies of East Asia and Russia that lost out. According to Stiglitz, in his book ‘Globalisation and its discontents’, some people in that region actually date events with respect to that period, describing something as pre- or post-IMF.
So actually, when we celebrate years of uninterrupted economic growth, of the way the global economy managed to avoid recession in the ’97 and ’98 period, just remember, there was a price to pay and that price came in the shape of major economic hardship in some regions.
This experience has in turn affected the attitude of certain developing countries to western institutions. Take India and China, for example, Stiglizt recently said, “These countries managed globalisation: it was their ability to take advantage of globalisation, without being taken advantage of by globalisation, that accounts for much of their success.”
Stiglitz, who was chief economist at the World Bank in 1990, believes that globalised collective action is required moving forward.
George Soros struck a similar note last week when he talked about the failure of market fundamentalism. He says this idea that markets have a self-correcting mechanism is false; in order to propel the global economy forward in a sustainable way, and to create prosperity for all, governments must act in unison.
As for our Gordon, while talking at Davos, he said he wants to see the IMF become like an independent central bank – and as for the World Bank, he wants it to change and become a bank for supporting environmental projects.
The IMF and World Bank were formed after the end of World War II. Their principal architects were Keynes and the American economist Harry Dexter. Because, at the time, the US had all the political clout, the final make up of the institutions was much closer to what Dexter and the US contingent wanted.
But today, the global economy is so completely different, it is inappropriate for the financial institutions that are supposed to make the global economy tick over to be so dominated by the US and Europe. The boss of the IMF, for example, is always a European, the boss of the World Bank always an American.
Maybe all we need to do is reform the IMF and World Bank a bit. It seems more likely, however, that we need to scrap these two institutions and start again – come up with something new. Here is the prediction. This debate will develop, and within a few years will become a major talking point, and don’t be surprised if that name Joseph Stiglitz comes up on TV and appears in the newspapers more and more often.
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