So I reread Globalization and Its Discontents, and I am more puzzled than ever. I cannot figure out what is going on inside Stiglitz's head.
Part of it I think I have figured out. The repeated changes of position--"No! You should not have imposed any conditions on Suharto but lent freely respecting Indonesia's national sovereignty!" "No! You should not have loaned anything to Suharto at all!" "No! You should have loaned to Suharto, and encouraged capital to flow into Indonesia! And been very careful of his face! The longer Suharto stayed in power, the more order defeats chaos, and the better for Indonesia!" "No! Corrupt kleptocrats harm their countries! Clinton and Camdessus should have warned industrial-core companies against investing in Indonesia!"
These repeated changes of position tell me that Stiglitz's main complaint against Summers, Fischer, and all is that they were sitting in the control seat where he wanted to be. He wanted to be the one making the decisions about when to lend in hope and when lending would be hopeless, when the current leader is the best that can be expected and when the best option is to cut off all economic contact and hope the current leader falls quickly. The fact that he's not able to come up with a consistent critique from a consistent position tells me that his complaints aren't intellectual--"staff" complaints that the guiding principles are wrong--but are complaints about implementation--"line" complaints that he could have done it better and ought to have had one of the Bigger Jobs.
Maybe he's right: maybe he could have decided better how to implement policies--how to at one moment decide that the balance of risks was for going ahead with the loan, and at another moment that it was time to give up because the government was simply too corrupt. But when I, at least, take an honest look back, I am impressed not by the number of calls that Bentsen-Summers-Rubin-Camdessus-Fischer got wrong, but by the number of calls that they got right. My ex-boss at the Treasury Alicia Munnell once said, "You know, Brad, in most of my jobs I've thought that I could do at least as good a job as my boss if I had his chair. But not here. Not know. There are good reasons that he [in this case, Lloyd Bentsen] is the Secretary of the Treasury, and I'm just the spear-carrier."
But assume for the moment that Stiglitz does have an underlying intellectual critique--that all that stuff about how the IMF should never have lent to a kleptocrat like Suharto and how private investment from overseas into a country like Indonesia actually harms people is just Stiglitz forgetting what he really thinks. Assume that Stiglitz does believe fully what he seems to believe in about 60% of his book--that the IMF should be lending more money for longer periods of time with less conditionality to countries facing balance-of-payments difficulties in the interest of expanding world economic integration. Then what?
As I understand it, two types of countries come to the IMF for help. The first group are countries that have long been running unsustainable fiscal policies. They arrive at the IMF's door because they are administratively incompetent to raise tax revenues, unwilling to take the initiative to reduce government spending, and no longer able to borrow from the private market the interest due on their already outstanding debt. In this case it is clear--and I presume Joe would agree that it is clear--that the principal function of the IMF is to serve as a scapegoat: to provide an excuse and take the blame for the budget-balancing measures needed to avoid hyperinflation and hyperdepreciation, for someone's perceived real income has to take the hit as the budget swings from deficit to balance.
What is not so clear--even for this first group--is exactly how tough the IMF should be. The IMF's standard operating procedure seems to be to be very tough: brutalize and humiliate the government (both as a way of convincing other and future governments that this is not a good situation to get in, and because the government likes it that way--after all, if the government isn't brutalized, humiliated, et cetera, it has to take a measure of blame for the political decision to take away X's subsidies and actually collect the taxes that Y has owed for years), and enforce strong enough contractionary policies to get the country running a substantial export surplus within two years. After all, the IMF needs to get repaid: if the IMF doesn't get repaid, in the short run the cupboard is bare when the next country needing assistance arrives, and in the long run the IMF is gone as an institution that has "failed" because it has made too many bad loans. Then there will be nobody to provide the loans needed to make expenditure-switching a two-year rather than a 15-day process, and only the Allan Meltzers of the world with their touching faith in the market--only the real market fundamentalists--think that would be an improvement.
Now on this issue I am a lily-livered social democrat: I am with Joe. I do wish the IMF would make larger loans with less conditionality for longer periods of time, first because I am still unpersuaded that IMF-enabled "moral hazard" is a real issue, and second because it seems to me that the IMF's loan collection record is so good that it *cannot* be optimizing (in the sense that I cannot be optimizing on the dash to the airport because I have never missed a plane).
The second group are countries whose fiscal policies may or may not be in intertemporal balance, but which are in trouble because of a large currency or maturity mismatch somewhere in their economy, and something--perhaps something minor--has shocked speculators into believing that this currency or maturity mismatch is big trouble and so has made it big trouble. In the case of a currency mismatch, the country is then stuck: if it raises (safe, central-bank controlled) interest rates high enough to keep panicked speculators willing to hold the currency at its previous value, high interest rates will kill investment and cause a prolonged depression; if it keeps safe interest rates low and lets the value of its currency fall, then the currency mismatch will trigger its own devils brew of problems through what Paul Krugman calls the "open-economy Bernanke-Gertler" channel.
As the value of the domestic currency plunges, the home-currency value of debts contracted in harder, foreign currencies rises. Everyone goes bankrupt. Or, rather, many people go bankrupt, and those who are near bankruptcy are those who are most desperate for additional cash. In such an environment--with the fear of near-universal bankruptcy--risk and default premia spike precisely because anyone who appears on the "borrow" side of the financial market is suspected (correctly suspected) of having large hard-currency debts that have driven them to the edge of bankruptcy, and so everyone lending to them will include a healthy default premium in the interest rate. Safe interest rates stay low, but the risky interest rates at which real people have to borrow spike to very high levels. Thus nobody who wants to undertake investment projects will be able to find financing at any reasonable rate, investment will die, and there will be a prolonged depression.
Thus pick your poison: depression by high central-bank controlled interest rates that maintain the value of your currency but shoot investment spending in the head, or depression by a collapse in the value of your currency that triggers fears of near-universal bankruptcy, financial panic, and the collapse of investment spending.
Here the issues are harder. IMF money gets you a better set of short-term options, and you have to hope to god that the IMF money will open up the sweet spot at which interest rates can be high enough to avoid the large-scale devaluations that in combination with mismatch trigger the collapse of the financial system, and yet low enough not to derange domestic investment through the pure cost-of-capital channel. Whether such a sweet spot exists is an empirical matter. And, afterwards, you have to pay back the IMF even if the sweet spot has not emerged, and even if your IMF credits turned into what IMF staffers in bad situations call with black humor a FIEF--a Foreign Investor Exit Facility.
And here is my question: Joe "Imperfect Information Nobel Prize" Stiglitz should absolutely love this "open economy Bernanke-Gertler" channel that makes depreciation to the max a bad strategy in this second group. It is perfect for his theoretical orientation. The idea that too large a depreciation will, by raising the home-currency value of hard-currency debt, cause all kinds of weird and interesting moral hazard and adverse-selection market failures should be Joe's main course. And the idea that you need a dose of classical higher-interest rate medicine to obtain the Keynesian result of higher investment (because higher safe interest rates --> higher currency values --> less debt --> less moral hazard and adverse selection --> lower risky interest rates available for real-world borrowers) is just the kind of neat theoretical at-first-glance-paradoxical idea to fascinate Joe.
So why the total denial that this channel exists, and is to be feared? It's not that Joe believes that bankruptcy across national borders is quickly resolved. What is it that causes him to believe that financial market failures--adverse selection and moral hazard--are not to be feared when the home-currency value of foreign debt rises rapidly?
I don't understand it.Posted by DeLong at July 07, 2002 09:45 PM