The IMF Strikes Back
by Kenneth Rogoff
Published in Foreign
Policy Magazine
Straight Talk --
Rethinking capital
controls,When
should we keep an
open mind?
Finance &
Development
An Institution that
Eases Financial Pain,
A Commentary By
Kenneth Rogoff
Published in the
Financial Times,
September 27,2002
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the Right Path? A
Commentary By
Kenneth Rogoff
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Vedomosti
Moral Hazard in IMF
Loans,How Big a
Concern? A
Commentary By
Kenneth Rogoff
Finance &
Development
Views &
Commentaries for
2003 2002 2001 2000
1999 1998
Kenneth S,Rogoff
An Open Letter
1
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
At the outset,I would like to stress that it has been a pleasure
working closely with my World Bank colleagues—particularly my
counterpart,Chief Economist Nick Stern—during my first year at the
IMF,We regularly cross 19
th
Street to exchange ideas on research,
policy,and life,The relations between our two institutions are
excellent—this is not at issue,Of course,to that effect,I think it is
also important,before I begin,for me to quash rumors about the
demolition of the former PEPCO building that stood right next to the
IMF until a few days ago,No,it's absolutely not true that this was
caused by a loose cannon planted within the World Bank,
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.
2
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
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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 19
th
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 K?hler 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
1
Used as opening remarks at a June 28 discussion of Mr,Stiglitz's book at the
World Bank,organized by the World Bank's Infoshop
2
For example,"It was not just that IMF policy might be regarded by softheaded
liberals as inhumane,Even if one cared little for those who faced starvation,or the
children whose growth had been stunted by malnutrition,it was simply bad
economics." Joseph Stiglitz,Globalization and Its Discontents,p 119,
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