July 02, 2002
IMF Chief Economist Ken Rogoff Unloads Both Barrels in the Direction of Joe Stiglitz

IMF chief economist Ken Rogoff unloads both barrels in the direction of Joe Stiglitz. The "nut" paragraphs are below. I think that, analytically, Rogoff has the better of the particular point he chooses for his argument. Following what appear to be Stiglitz's prescriptions--lend more with fewer conditions and have the government print more money to keep interest rates low--seems that it would have been overwhelmingly likely, in all the cases I know well, to end in hyperinflation or in a much larger-scale financial crisis as the falling value of the currency eliminated every firm's and bank's ability to repay its hard-currency debt and sent the entire country's financial and industrial system into bankruptcy.

Stiglitz would have to argue that universal bankruptcy is not that bad: that legal deals would have been quickly struck to write down debts and get the flow of financial intermediation going again. I'm not that optimistic about what happens once the lawyers enter the picture.


An Open Letter to Joseph Stiglitz, by Kenneth Rogoff, Economic Counsellor and Director of the Research Department, IMF.

Let's look at Stiglitzian prescriptions for helping a distressed emerging market debtor, the ideas you put forth as superior to existing practice. Governments typically come to the IMF for financial assistance when they are having trouble finding buyers for their debt and when the value of their money is falling. The Stiglitzian prescription is to raise the profile of fiscal deficits, that is, to issue more debt and to print more money. You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government's debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF%uFFD1no, make that we on the Planet Earth%uFFD1have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace but, especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.

Joe, throughout your book, you condemn the IMF because everywhere it seems to be, countries are in trouble. Isn't this a little like observing that where there are epidemics, one tends to find more doctors?

You cloak yourself in the mantle of John Maynard Keynes, saying that the aim of your policies is to maintain full employment. We at the IMF care a lot about employment. But if a government has come to us, it is often precisely because it is in an unsustainable position, and we have to look not just at the next two weeks, but at the next two years and beyond. We certainly believe in the lessons of Keynes, but in a modern, nuanced way. For example, the post-1975 macroeconomics literature%uFFD1which you say we are tone deaf to%uFFD1emphasizes the importance of budget constraints across time. It does no good to pile on IMF debt as a very short-run fix if it makes the not-so-distant future drastically worse. By the way, in blatant contradiction to your assertion, IMF programs frequently allow for deficits, indeed they did so in the Asia crisis. If its initial battlefield medicine was wrong, the IMF reacted, learning from its mistakes, quickly reversing course.

An Open Letter
By Kenneth Rogoff,
Economic Counsellor and Director of Research,
International Monetary Fund

To Joseph Stiglitz,
Author of Globalization and Its Discontents
(New York: W.W. Norton & Company, June 2002)

Washington D.C., July 2, 2002

Dear Joe:

Like you, I came to my position in Washington from the cloisters of a tenured position at a top-ranking American University. Like you, I came because I care. Unlike you, I am humbled by the World Bank and IMF staff I meet each day. I meet people who are deeply committed to bringing growth to the developing world and to alleviating poverty. I meet superb professionals who regularly work 80-hour weeks, who endure long separations from their families. Fund staff have been shot at in Bosnia, slaved for weeks without heat in the brutal Tajikistan winter, and have contracted deadly tropical diseases in Africa. These people are bright, energetic, and imaginative. Their dedication humbles me, but in your speeches, in your book, you feel free to carelessly slander them.1

Joe, you may not remember this, but in the late 1980s, I once enjoyed the privilege of being in the office next to yours for a semester. We young economists all looked up to you in awe. One of my favorite stories from that era is a lunch with you and our former colleague, Carl Shapiro, at which the two of you started discussing whether Paul Volcker merited your vote for a tenured appointment at Princeton. At one point, you turned to me and said, "Ken, you used to work for Volcker at the Fed. Tell me, is he really smart?" I responded something to the effect of "Well, he was arguably the greatest Federal Reserve Chairman of the twentieth century" To which you replied, "But is he smart like us?" I wasn't sure how to take it, since you were looking across at Carl, not me, when you said it.

My reason for telling this story is two-fold. First, perhaps the Fund staff who you once blanket-labeled as "third rate"—and I guess you meant to include World Bank staff in this judgment also—will feel better if they know they are in the same company as the great Paul Volcker. Second, it is emblematic of the supreme self-confidence you brought with you to Washington, where you were confronted with policy problems just a little bit more difficult than anything in our mathematical models. This confidence brims over in your new 282 page book. Indeed, I failed to detect a single instance where you, Joe Stiglitz, admit to having been even slightly wrong about a major real world problem. When the U.S. economy booms in the 1990s, you take some credit. But when anything goes wrong, it is because lesser mortals like Federal Reserve Chairman Greenspan or then-Treasury Secretary Rubin did not listen to your advice.

Let me make three substantive points. First, there are many ideas and lessons in your book with which we at the Fund would generally agree, though most of it is old hat. For example, we completely agree that there is a need for a dramatic change in how we handle situations where countries go bankrupt. IMF First Deputy Managing Director Anne Krueger—who you paint as a villainess for her 1980s efforts to promote trade liberalization in World Bank policy—has forcefully advocated a far reaching IMF proposal. At our Davos [World Economic Forum] panel in February you sharply criticized the whole idea. Here, however, you now want to take credit as having been the one to strongly advance it first. Your book is long on innuendo and short on footnotes. Can you document this particular claim?

Second, you put forth a blueprint for how you believe the IMF can radically improve its advice on macroeconomic policy. Your ideas are at best highly controversial, at worst, snake oil. This leads to my third and most important point. In your role as chief economist at the World Bank, you decided to become what you see as a heroic whistleblower, speaking out against macroeconomic policies adopted during the 1990s Asian crisis that you believed to be misguided. You were 100% sure of yourself, 100% sure that your policies were absolutely the right ones. In the middle of a global wave of speculative attacks, that you yourself labeled a crisis of confidence, you fueled the panic by undermining confidence in the very institutions you were working for. Did it ever occur to you for a moment that your actions might have hurt the poor and indigent people in Asia that you care about so deeply? Do you ever lose a night's sleep thinking that just maybe, Alan Greenspan, Larry Summers, Bob Rubin, and Stan Fischer had it right—and that your impulsive actions might have deepened the downturn or delayed—even for a day—the recovery we now see in Asia?

Let's look at Stiglitzian prescriptions for helping a distressed emerging market debtor, the ideas you put forth as superior to existing practice. Governments typically come to the IMF for financial assistance when they are having trouble finding buyers for their debt and when the value of their money is falling. The Stiglitzian prescription is to raise the profile of fiscal deficits, that is, to issue more debt and to print more money. You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government's debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF—no, make that we on the Planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace but, especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.

Joe, throughout your book, you condemn the IMF because everywhere it seems to be, countries are in trouble. Isn't this a little like observing that where there are epidemics, one tends to find more doctors?

You cloak yourself in the mantle of John Maynard Keynes, saying that the aim of your policies is to maintain full employment. We at the IMF care a lot about employment. But if a government has come to us, it is often precisely because it is in an unsustainable position, and we have to look not just at the next two weeks, but at the next two years and beyond. We certainly believe in the lessons of Keynes, but in a modern, nuanced way. For example, the post-1975 macroeconomics literature—which you say we are tone deaf to—emphasizes the importance of budget constraints across time. It does no good to pile on IMF debt as a very short-run fix if it makes the not-so-distant future drastically worse. By the way, in blatant contradiction to your assertion, IMF programs frequently allow for deficits, indeed they did so in the Asia crisis. If its initial battlefield medicine was wrong, the IMF reacted, learning from its mistakes, quickly reversing course.

No, instead of Keynes, I would cloak your theories in the mantle of Arthur Laffer and other extreme expositors of 1980s Reagan-style supply-side economics. Laffer believed that if the government would only cut tax rates, people would work harder, and total government revenues would rise. The Stiglitz-Laffer theory of crisis management holds that countries need not worry about expanding deficits, as in so doing, they will increase their debt service capacity more than proportionately. George Bush, Sr. once labeled these ideas "voodoo economics." He was right. I will concede, Joe, that real-world policy economics is complicated, and just maybe further research will prove you have a point. But what really puzzles me is how you could be so sure that you are 100 percent right, so sure that you were willing to "blow the whistle" in the middle of the crisis, sniping at the paramedics as they tended the wounded. Joe, the academic papers now coming out in top journals are increasingly supporting the interest defense policies of former First Deputy Managing Director Stan Fischer and the IMF that you, from your position at the World Bank, ignominiously sabotaged. Do you ever think that just maybe, Joe Stiglitz might have screwed up? That, just maybe, you were part of the problem and not part of the solution?

You say that the IMF is tone deaf and never listens to its critics. I know that is not true, because in my academic years, I was one of dozens of critics that the IMF bent over backwards to listen to. For example, during the 1980s, I was writing then-heretical papers on the moral hazard problem in IMF/World Bank lending, an issue that was echoed a decade later in the Meltzer report. Did the IMF shut out my views as potentially subversive to its interests? No, the IMF insisted on publishing my work in its flagship research publication Staff Papers. Later, in the 1990s, Stan Fischer twice invited me to discuss my views on fixed exchange rates and open capital markets (I warned of severe risks). In the end, Stan and I didn't agree on everything, but I will say that having entered his office 99 percent sure that I was right, I left somewhat humbled by the complexities of price stabilization in high-inflation countries. If only you had crossed over 19th Street from the Bank to the Fund a little more often, Joe, maybe things would have turned out differently.

I don't have time here to do justice to some of your other offbeat policy prescriptions, but let me say this about the transition countries. You accuse the IMF of having "lost Russia." Your analysis of the transition in Russia reads like a paper in which a theorist abstracts from all the major problems, and focuses only on the couple he can handle. You neglect entirely the fact that when the IMF entered Russia, the country was not only in the middle of an economic crisis, it was in the middle of a social and political crisis as well.

Throughout your book, you betray an unrelenting belief in the pervasiveness of market failures, and a staunch conviction that governments can and will make things better. You call us "market fundamentalists." We do not believe that markets are always perfect, as you accuse. But we do believe there are many instances of government failure as well and that, on the whole, government failure is a far bigger problem than market failure in the developing world. Both World Bank President Jim Wolfensohn and IMF Managing Director Horst Köhler have frequently pointed to the fundamental importance of governance and institutions in development. Again, your alternative medicines, involving ever-more government intervention, are highly dubious in many real-world settings.

I haven't had time, Joe, to check all the facts in your book, but I do have some doubts. On page 112, you have Larry Summers (then Deputy U.S. Treasury Secretary) giving a "verbal" tongue lashing to former World Bank Vice-President Jean-Michel Severino. But, Joe, these two have never met. How many conversations do you report that never happened? You give an example where an IMF Staff report was issued prior to the country visit. Joe, this isn't done; I'd like to see your documentation. On page 208, you slander former IMF number two, Stan Fischer, implying that Citibank may have dangled a job offer in front of him in return for his cooperation in debt renegotiations. Joe, Stan Fischer is well known to be a person of unimpeachable integrity. Of all the false inferences and innuendos in this book, this is the most outrageous. I'd suggest you should pull this book off the shelves until this slander is corrected.

Joe, as an academic, you are a towering genius. Like your fellow Nobel Prize winner, John Nash, you have a "beautiful mind." As a policymaker, however, you were just a bit less impressive.

Other than that, I thought it was a pretty good book.

Sincerely yours,

Ken

Posted by DeLong at July 02, 2002 06:32 PM | Trackback

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Comments

I think you're being much too hard on Stiglitz and the evidence is actually on his side. Big loans with few conditions worked very well in Mexico, and your lack of optimism about bankruptcy proceedings appears to be misplaced when one considers the cases of Malaysia and Indonesia. And Argentina is not exactly giving us a great example of the success of the "austerity^2" option. There are worse things than hyperinflation. Furthermore, you and Rogoff are being a bit unfair when you describe the Stiglitz policy alternative as "printing money"; this is a very loaded way to describe a generic loose-money policy.

Rogoff is utterly disingenuous to write "You seem to believe that when investors are no longer willing to hold a government's debt, all that needs to be done is to increase the supply and it will sell like hot cakes". There is the small matter of restructuring the old debt to consider! He is also, I think, being less than perfectly candid in his implied claim (made in part of the letter not reproduced here) that the IMF invented the idea of sovereign bankruptcy procedures and Stiglitz was against them.

Posted by: Daniel Davies on July 2, 2002 11:37 PM

I agree with the previous posting. I have not read Stiglitz's book but for me is very clear that Rogoff is trying to stigmatise his views as completely unreasonable and heretic and opposed to those in "planet earth". This is very unjust. I have always defend IMF from radical criticism, but the possibility of applying less budget and monetary restrictions when a country is in trouble is not crazy, and must be taken seriously. In fact I think Rogoff just helped the point that Stiglitz made “IMF officials are deaf to opinions outside of it”.
There’s a thing that really disgusted me. The emotional black mailing. “In the middle of a global wave of speculative attacks, that you yourself labeled a crisis of confidence, you fueled the panic by undermining confidence in the very institutions you were working for. Did it ever occur to you for a moment that your actions might have hurt the poor and indigent people in Asia that you care about so deeply? Do you ever lose a night's sleep thinking that just maybe, Alan Greenspan, Larry Summers, Bob Rubin, and Stan Fischer had it right—and that your impulsive actions might have deepened the downturn or delayed—even for a day—the recovery we now see in Asia?”
I believe IMF officials- and any person in any job for this matter- must do his job guided by his principles and beliefs and never act contrary to them or say lies just because he thinks on the consequences. There are many reasons to this and Rogoff should know them, once you enter the lying game you loose your integrity and you may even be mistaken about what you think were the consequences as I think is the case. (politicians do this al the time but I hope IMF staff is still made of economist and not politicians) One great example is Argentina where many IMF officials didn’t say or do anything when things really looked bad because they were afraid of causing more harm, things were delayed and got worse and finally default was inevitably, maybe things could have been handled in a different way earlier. This is nonsense, IMF must do their job with integrity

Posted by: Rafael Loring on July 3, 2002 02:42 AM

"There are worse things than hyperinflation"

What exactly would those things be? And, more importantly, how does experiencing a hyperinflation eliminate them?

Presumably, Mr Davies is referring to an economic depression, unemployment, or something to that effect. If that is the case, I can assure anyone interested that hyperinflations do not solve those problems.

Hyperinflations (and, in general, very high inflation episodes which fall short of "hyper") are recessive. Who would invest in a country where there isn't a means of exchange? They are impoverishing: salaries, even if inflation indexed, typically go behind the inflation rate, and thus workers lose purchasing power. In addition, the goods whose prices go up faster are typically foodstuffs - so lower income families are the ones more affected. Inflationary taxes are regressive: they impact on those who can do nothing more than hold money balances - but not those who have their financial assets outside the country.

How do I know this? Well, I'm from Argentina. I'm 21, so I don't exactly remember my country's last hyperinflation - but I'm also an Economics major and have studied it at university. Additionally, I'm experiencing first-hand the effects of high inflation (and let me tell you, ever since the devaluation in January things are wuite worse, and not a bit better).

As for Argentina being an example of the failure of "austerity" options, you should gather from the following paragraph that we were anything but austere. The worst part is that social public spending was particularly ineffective, from any point of view. Public schools are the last resort of those who can't afford even a religious school (Argentines are quite Catholic, so sending kids to a Catholic school isn't as troublesome as it could be in the States). Public hospitals are in complete disarray. Income support programs are payoffs to party members who gather votes in low income areas.

I'm sure Dr. Stiglitz had nothing but good intentions when suggesting that Argentina should be spending more, not less. But he probably never saw that Argentina's government ran deficits even while growing at annual rates around 7% AND selling every government enterprise in existence (telecommunications, natural gas, oil, water, mail, airports, trains, you name it).

I've come to think that sometimes American economists suggest policies as though they thought that developing countries were small erplicas of the United States. They do not take a moment to analyze the idiosincracies of the countries they "advise". Someone knowledgeable of Argentina would have never advised (as Joseph Stiglitz and, alas, Paul Krugman did) to devalue the peso, abandon the currency board AND continue to run deficits. Unfortunately, they did.

Posted by: Maria Eugenia on July 3, 2002 05:40 AM

I would have thought that the combination of inflation and austerity which is being imposed on Argentina right now is quite clearly worse than inflation alone. It would presumably be possible to look at statistics on absolute poverty in order to work out whether conditions were worse than those which prevailed during the hyperinflation; I note that banks continued to trade during hyperinflation and continued to allow access to deposits.

Stiglitz did not endorse the 7% deficits during the boom years and it is wrong to claim that he did. It is also entirely wrong of the IMF to pretend that they did not endorse the Argentine currency board.

Posted by: Daniel Davies on July 3, 2002 06:35 AM

Poverty conditions now are worse than during hyperinflation, but that comparisong by itself says nothing. During the 1989 and 1990 hyper poverty conditions were much worse than in 1988 and 1992. Today, poverty is caused both by increasing inflation and by the economic depression, which was not at all alleviated through currency depreciation (of course, there were other aggravating factors, so I'm not saying that the abandonment of the currency board caused the crisis by itself - just that it did nothing to make it better). In this context, poverty has increased since January. This, mainly due to the fact that depreciation drew the pesos-price of basic products (milk, meat, bread - all goods which are tradeable or have tradeable inputs) up, while the depression kept salaries constant, and even lowered them.

Banks did continue to operate during the hyper, but, of course, the degree of "bankarization" in Argentina was incredibly low. During the 90's, deposits grew at annual rates exceeding 30%. Much more transactions went through banks in 2001 (and still today) than in 1989. Besides, there was a deposit freeze in 1990, and in fact it was the memory of that what pushed people to withdraw their deposits last year - thay already knew that in bad times the government was willing to strip them of their dollars.

Additionally, banks during the '80s extended little or no private credit.

The ironic thing is, problems with banks were compounded by the devaluation, not eased. That's because - and here is the key fact that economists from abroad don't seem to understand - Argentines do not want pesos. Sure, they'll take them to buy things, but not as a store of value - because frankly, it isn't. So both deposits and loans were denominated in dollars, and devaluation put debtors in a tight spot. Of course, that would have come eventually, but a more gradual approach would have prevented the sort of measures that were put into place (assymetric pesification of deposits and debts, reprogramming of time deposits, etc).

As for "austerity", it was imposed by the lack of financing. And who would finance a country whose legislators loudly applauded the announcement of default on all sovereign debt? Literally applauded. Congress was in session (both chambers together), and representatives stood up from their seats and celebrated default. That cannot be a good way of attracting investors, and if I were a country giving funds to the IMF, I'd certainly speak against giving one more cent to Argentina. The other way of finance is monetary emission, and they're already doing that.


I don't intend to defend the IMF - I think their policies throughout the '90s were somewhat misguided - but the ignorance with which Stiglitz and others talk about Argentina is depressing.

Posted by: Maria Eugenia on July 3, 2002 07:25 AM

There's video of Rogoff and Stiglitz going face-to-face on the World Bank's web site at http://www.worldbank.org/wbi/B-SPAN/sub_stiglitz.htm

(Even though the opening comments tell the audience it is "off the record", which brought a chuckle.)

See Rogoff instructing Stiglitz about what "we Earthlings" know of life outside the Gamma Quadrant. Enjoy.

(BTW, does this mean that Star Trek terminology has officially entered the lexicon of economics?)

Posted by: Jim Glass on July 4, 2002 03:34 PM

You know that when a guy gets a favorable notice in a liberal Catholic monthly like "Commonweal"--as Stiglitz did a few months agho, he is in for a very rough time from the Establishment.

Posted by: on July 7, 2002 04:10 PM

I agree with Daniel Davies. Joseph Stiglitz`s criticism of the IMF approach to solving emerging market financial crises is fundamentally right. It is unfair to depict IMF critics as advocates of hyperinflation and fiscal profligacy. The key question is if there are alternatives to pure fiscal and monetary restraint which are able to reduce the costs of financial shocks in terms of unemployment and GDP while making it possible to restore growth and access to external finance faster.

If we analyse in hindsight the East Asian and the Russian crises and we look at Argentina right now it is clear that IMF policies are at least incomplete.

High inflation is clearly a social evil, but a currency board is not a sustainable way to achieve monetary stability with today´s capital markets. Furthermore, the liquidity and sometimes even the solvency perception of a country for investors has a lot to do with its ability to sustain output growth.

Fiscal belt-tightening was never a relief for foreign investors holding argentinian bonds. I think that they would have preferred a solution which, through debt restructuring, international financial assistance and the end of the currency board, allows Argentina to recover near potential output growth and to generate public revenues.

Gonzalo García

Posted by: on August 6, 2002 06:22 AM
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