Stiglitz's comments music to our ears

One of the remarkable concerns of the Nobel laureate economist with respect to the efficacy of the laissez faire in any LDC is that 'leaving things to the market to address the emergency doesn't always work.' Given the experiences of Thailand, Mexico and Argentina (besides Korea and Indonesia), one need not overplay the concerns spoken out by Professor Stiglitz. These nations have had the traumatic experiences of collapsed currency and 'IMF bail out' due to what Stglitz calls 'procyclical' macroeconomic prescriptions handed out by the IMF and the World Bank to run their economic affairs.

By implying that economies too need intervention, Professor Stiglitz seemed to have veered to the Keynesian school of thought that played an effective role in rebuilding war ravaged economies of Europe and the US following the two World Wars. John M. Keynes talked of such government interventionsas opposed to the laissez faire espoused by his predecessor Adam Smithwhich is what the IMF doesn't allow weaker nations to practice. The IMF rather ascribes the instances of poverty in the LDCs to too much of government interference and mismanagement.

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If one must follow anticyclical approaches to neutralise the effects of economic bumps as they move from mixed economies to laissez faire ones, the essential remedy would be to accelerate toward the direction of the status quo. The IMF-imposed structural adjustment programmes in the LDCs are an antithesis to what professor Stiglitz's opinion in such regard is.

Man like professor Stiglitz stands out prominently due to over 2.8 billion people in the LDCs living on less than $2 a day. There is another 1.2 billion that live on less than $1 a day. Given that 44% of those destitute call South Asia their home, Stiglitz has enough reason to warn these nations of the consequences that they might encounter while free wheeling toward market economies without thinking of its consequences.

Take for instance the case of Thailand. In the second half of 1996 and in early 1997, Thai Baht experienced three episodes of speculative pressures, resulting in the substantial reduction of capital inflows into the Thai economy from $22 billion in 1995 to $17 billion in 1996. The international credit rating agency, Moody, downgraded Thailand's credit rating following this reduction (in September 1996). The Baht thus busted and the IMF had to come out with a rescue package to salvage the Thai economy from a total collapse.

The Thai setback had a domino effect in the region and wiped out much of the region's liquidity by mid 1997. A June 1997 survey of the region's economic health indicated a total regional debt (minus Japan) of $340 billion to various international banks. Most of it, about $242 billion, had a maturity of less than a year. Private sector interests held most of the debts with nearly equal amounts owed by private companies ($188 billion) and banks ($171 billion).

Professor Stiglitz also said that the "US put pressure on Korea to open up its capital market." He added, "But then the market sentiment changed and there was a run on Korean fund." Who to blame for this Korean setback? Professor Stiglitz blames the IMF's macroeconomic policies.

As the IMF is faulted with imposing macroeconomic prescriptions on the LDCs, one often fails to analyse the microeconomic performances of such nations amidst external pressures. The microeconomy too is negatively impacted by the government's desire to accumulate forex at the expense of truncated public spending and by the reduced demand from household as massive competition flowing out of globalisation crowds out nascent and weaker domestic industries and inflate the number of jobless people.

As nations surmount such painful difficulties, sane voice like that of Professor Stiglitz's sounds like music to our ears. It however does little to stem the tide of globalisation that seems irreversible in a capitalism-run world order.