Hello and welcome to The Interview on France 24. I am very pleased to welcome Joseph Stiglitz, a Nobel Prize winner in Economics, former Chairman of Bill Clinton’s Council of Economic Advisors, and former World Bank Chief Economist. Thank you very much for being here with us.

 

Dominique Strauss-Kahn has been appointed as the new head of the IMF (International Monetary Fund). He’s French, he’s a Socialist, and he’s a former Minister of Finance. What do you think of this appointment?

 

I think it’s a good appointment. I think the way he was appointed raises some important issues – which I think even he recognizes. This makes it more difficult for him to accomplish what he would like to accomplish.

 

The problem is that IMF governance – the rules by which these institutions operate, including the rules by which their heads get chosen – does not conform to what everybody would view as best practices, democratic practices today. It’s still run as an old boy’s club. In the same way it was run 60 years ago when it was founded. The head is always European. Nobody asks, “Who is the most qualified person?” It was just that Europe decided that they wanted Strauss-Kahn, and the United States said, “Whoever Europe wants, we’re behind.”.

 

Right. Dominique Strauss-Kahn was actually supported by the European Union and the United States, but also by emerging countries such as Brazil.

 

You were among the first to criticize the IMF, in your book Globalization and Its Discontents…

 

Dominique Strauss-Kahn has already said he wants emerging countries to be better represented within the IMF. Do you think that’s a priority?

 

Very much so. Because the success of the IMF depends on its credibility, on the fact that others take it seriously (including developing countries receiving its advice). Now, it is seen as, you might say, the mouthpiece of the creditor countries, of those who are providing credit, of the financial institutions. In the crisis of 1997 (and we’re celebrating the tenth anniversary of that crisis), it was very clear that, what was paramount in the policies of the IMF was not the well-being of Thailand, Indonesia, Korea and the other countries facing the crisis. What was paramount in the interests of the IMF was for the creditors to get their money back. And if that meant these countries went into a recession or a depression, well, so be it.

 

One of the reasons that the IMF today has a problem is that it behaved so badly in these crises a decade ago.

 

Should voting rights reflect emerging countries? Should they reflect economic power? For example, should China have more rights within the IMF?

 

It’s very clear that voting power ought to recognize the large changes we are seeing in economic power among the countries of the world (the increase in China, the increase in India, and increases in other emerging markets). But that’s not enough. It’s important for the voice of the poor countries, the voice of the borrowing countries, to be heard. After all, the actual income of the IMF doesn’t come from the advanced industrial countries. The IMF’s money comes from the revenues that it makes from lending. So it’s a peculiar situation where the poor countries are actually providing the financial support for the IMF, even though they have very little voice.

 

So they should be recognized…

 

Joseph Stiglitz

They should be recognized and their voice needs to be heard, much, much more clearly.

 

But how, practically speaking, should voting rights change? You have 185 countries. Isn’t it very difficult to be fair and efficient?

 

Well, I think there are a number of proposals on the table. One proposal, for instance, is what is called a “double majority vote” whereby you have to get majority vote among what you might call donor countries, and a majority vote among emerging markets. So that you hear both sides of the story. The problem now is that there is such a preponderance of votes on the part of the rich countries that rich countries don’t have to pay any attention to poorer countries. And they don’t. If you need a double majority, i.e. a majority vote among borrowing countries as well as lending countries, you would be more sensitive about drafting policies that represented the global consensus.

 

Do you think these reforms could actually be achieved during Dominique Strauss-Kahn’s mandate?

 

Yes I do. I think everybody recognizes that there have to be dramatic changes. The business model of the IMF is just fundamentally flawed. The business model, as I said before, depends on people borrowing and paying interest to finance the IMF. Nobody wants to borrow from the IMF because it has been such a bad lender.

 

The moment that Indonesia, Brazil, Argentina, etc. could get enough money – from whatever source – to pay back the IMF, they did.

 

Because they resent the IMF…

 

They resent the way the IMF behaves. That the IMF says, “Do this!”, “Do that!”, and imposes conditions is bad enough. But many of the conditions they impose are not good for developing countries. They are based on ideology, they are based on old-fashioned economics... Just to give you one example, one of the sources of the global financial crisis, the East Asia crisis of 97-98, was capital-market globalization; opening up markets to destabilize…

 

Shock therapies…

 

Yes, exactly. And destabilizing capital flows that can go in and out overnight. When the IMF tried to change its charter to allow it to force countries to do things like this, I asked the obvious question: “Where is the evidence that this is good for the developing countries?” At the World Bank, we have plenty of evidence showing that it led to more instability, and evidence that it did not lead to more growth.

 

Finally, in 2003 – years after they messed up so many countries – they decided to do a study. And the conclusion was the only conclusion it could have reached: that the evidence did not support their view that it promoted stability or growth. But they said, “This is inconsistent with economic theory.” It was inconsistent with their economic theory (which was based on perfect information, infinitely-lived individuals, perfect competition, perfect markets…). But, in the kind of economic theory that I had helped develop, over the past 25 or 30 years (factoring imperfect information, people living only finite lives, imperfect markets of a whole variety of kinds), this was exactly what was predicted.

 

So part of the problem is that you have an ideology, and an economic theory, that are out of tune with reality.

 

Right. But, as you said, Argentina, Brazil and Indonesia actually paid back their debt to the IMF. So how can the IMF rebuild the credibility it has lost?

 

What it has to do is change its governance to make sure it reflects the interests of the borrowers and not just the interests of creditor countries. But it also has to change its economics. It has to recognize that the world today is not well described by those perfect-market models, those neo-liberal theories that have consistently failed in providing prescriptions for economic growth.

 

So it’s going to take a lot of change. And it’s difficult. It’s difficult because you have people who have been trained in one way of thinking (you have a staff of 1,000 people). It’s going to take a lot of work to change the mindset.

 

What about the American policy towards the IMF? Does that count as well? I mean George Bush’s policy…

 

That has caused one of the deepest problems. The United States is the only country that has effective veto power at the IMF. And the Bush administration – in every aspect – has been determined to destroy multilateralism. So you have a multilateral institution – which is important, I think, because, as the world has become more integrated, it has become more important for us to work together – but that multilateral institution has given veto powers to a country that is committed to unilateralism and to American exceptionalism. And what makes it even more difficult is that, today, there are a lot of global instabilities, a lot of problems in the way in which the global financial system operates. And, at the core of those problems is the American economy (America’s imbalances, our huge trade and fiscal deficits…). Last year, the US borrowed US$ 850 billion from countries that were poorer. The richest country in the world could not live within its means. How can it lecture other countries on how they are to behave, when it cannot live within its means?

 

Also undermining the IMF are bilateral relationships between donors and countries in need. China, for instance, helps African countries directly in exchange for access to their raw materials. What do you think about these bilateral relationships? And what part should multilateral institutions play?

 

I think that, in the world today, you have what we call a rich ecology. You need both multilateralism and bilateralism. The problem is, again, the United States: the richest country in the world, squandering billions. In fact, I have calculated that the total cost of the Iraq war is going to reach US$ 3 trillion. Squandering US$ 3 trillion in Iraq but not having enough money to help the poorest countries in the world…

 

Right now, China is contributing to infrastructure in Africa more than the World Bank and the African Development Bank combined.

 

That’s serious competition for the institutions…

 

It is. China is spending more than the United States. While the United States has been focusing on the war in Iraq – and losing.

 

So you mean China should be included in this multilateral approach…

 

Very much so. China is actually, in many ways, trying to act more cooperatively on many of the issues in Africa. For example, its technology in building roads is really impressive. I just got back from Ethiopia… there you see how quickly they can build roads even in very bad conditions. They have real competence there. But there are many other issues where a multilateral approach is really needed.

 

Thank you very much, Joseph Stiglitz. This is the end of The Interview. Stay with us on France 24.