Do you think that the current corporate implosions will undermine the force of the free-market fundamentalists -- who you identify as the Washington Consensus? Will fears of a lack of U.S. regulation extend to the world of international development?

Well, what we're beginning to understand is that Wall Street is not the font of all wisdom that a lot of people in the '90s tried to sell it as -- especially the people on Wall Street. For instance, in the 1990s Wall Street pushed for capital market liberalization -- opening up companies to speculative money that could come in and out overnight. We now realize that capital market liberalization has contributed a great deal to the instability in the world: to the East Asia crisis, the global financial crisis. At the beginning of that crisis, Wall Street, U.S. Treasury, IMF said, Oh that's not the source of the problem. In fact, they said, speculative money is too small to be possibly a problem. A year later, when Long Term Capital Management was in trouble, the same kinds of people were saying that we need to bail out Long Term Capital Management because if we don't, this one firm -- one firm! -- could bring the whole global financial system down. Now, that kind of inconsistency, that kind of hypocrisy, caused a lot of people concern. Now what we're seeing is that there's a systemic problem; it's not just one company, it's many companies. And I think that breaking of the confidence in Wall Street is leading people to reexamine not only Wall Street but the influence it has had on the IMF, and in turn, the IMF policies and their consequences for the developing world.

Let's talk about those policies. You focus on Russia as an example of a failed IMF country, citing decreased gross domestic product, increased poverty and a widening gap between rich and poor -- most of it caused by a rapid, corrupt privatization process. But when I was reading about the new class of Russian oligarchs, I couldn't help but think that they -- not the IMF -- were the real source of the problem. Why not focus on holding the thieves accountable rather than blaming the IMF?

But incentives matter, and if we don't create the right incentives, we get bad behavior. As we talked about with the case of Enron, we had incentives to overstate profits, to get the stock prices up, and they responded to those incentives. In the case of Russia, the IMF helped create incentives that led to people taking their money out of the country. Let me explain: The IMF pushed these countries to have very rapid privatization, before they had corporate governance, while the economy was still in recession, and they pushed the privatization so rapidly that it was almost inevitably a corrupt privatization. At the same time, they pushed them to open up their capital markets. Think of yourself as one of the oligarchs that have managed to persuade Yeltsin to give you -- for a pittance -- these natural resources worth billions of dollars. Then you're told effectively by the IMF that you can either invest that money in Russia, which was in recession or depression, or take that money to the United States or a secret bank account. If you're smart enough to get Yeltsin to give you a billion dollars, you're smart enough to take your money out. Moreover, you would recognize that if you left your money in Russia, there was a good chance that in a couple years' time, the successor of Yeltsin might say, You got that money illegitimately. We want it back. And if you have your money in the United States or Cyprus bank accounts, they can't get it back. If you have your money in Russia, they can get it back. So it was their own self-preservation that led them to take their money out. But of course, as they all did that, the economy of Russia went further and further down. The culpability lies with setting up incentives that led people to behave that way.

Critics have argued that you underestimate the gains that have come from IMF policy, which you identify as the high-speed "hare" approach, compared to your gradualist "tortoise" approach. Poland, for example, underwent "shock therapy" and came out better than other countries in the region, like Ukraine, which followed a more gradualist approach.

Let me put it in the following way. What is fast and what is slow depends on what you're doing. Poland quickly brought down hyperinflation; that needed to be done fast. It brought down hyperinflation to moderate levels, 18-20 percent. It didn't push it further than that in the first instance. It then began a process of very gradual reform. So it, Hungary, Slovenia -- these were the tortoises. These tortoises have won the race. They are the economies with a GDP that's higher than it was 10 years ago. The hares are further behind. Their GDP is much lower than it was 10 years ago. Now of course there are some that are neither tortoises nor hares -- that aren't doing anything: Belarus, Ukraine. No one said that those are models you ought to follow. The model was, yes, have reforms but have it in a paced, balanced way. And Poland, Slovenia, Hungary show that there were alternatives to the "shock therapy." In fact, the deputy prime minister of Poland in 1993-95, when they were going through these changes, was very explicit that their success was a result of their not following shock therapy policies. It was that they did it with a systematic, gradual policy of structural reform. There are some things that you can do quickly, but changing societies, you can't do overnight. But if you do it in the right way, you actually do it in a reasonable length of time.

What is a reasonable length of time -- particularly when it comes to identifying what's succeeded and failed?

We are never really sure, but what we do know historically is that if Russia's economy is down 30 percent from what it was [in 1989], and let's say they start growing 4 or 5 percent a year, it's going to take them another decade or two just to get back to where they were. In that sense, yes, there will be ups and downs; the race is never over. But the shock therapy has cost the Russian people enormously, not only in terms of GDP. Their life expectancy is down while the rest of the world has life expectancy increasing. These are the kind of consequences that have resulted. Poverty went from 2 percent of the population to over 40 percent in 1998. These are just enormous changes.

You've argued that part of the problem is that the IMF doesn't pay attention to these social costs. Why is that? Why don't they look beyond things like GDP?

There are two or three answers to that question. One of them is that their major responsibility has been macroeconomics. At one point, the head of the IMF even said "we aren't concerned about poverty." They wanted to just look at macroeconomics -- and in fact, they didn't do a very good job of that. Secondly, they believed, a lot of them, in trickle-down economics: If you can succeed in getting [an economy] to grow, everyone would benefit.

In the United States, we've rejected trickle-down economics; you have to have pro-poor growth policies if you're going to succeed. It isn't necessarily true that a rising tide lifts all boats. Some are left behind.

Thirdly, they had a fixation on financial markets. Historically, people with that kind of focus worry more about inflation than they do about unemployment [because inflation does more immediate damage to their investments]. They worry less about poverty than they do about what will happen to the capital markets. In my view, a lot of that has been shortsighted. It is a mistake to ignore the social and political consequences of policies. Even if you don't worry yourself about poverty, it is bad economics. When the IMF cut out the subsidies for the food and fuel to the poorest people in Indonesia, it led to riots. Those riots led capital to flee and that exacerbated the economic downturn, the depression, in the country. So ignoring the social consequences is bad economics.

What do you make of the crisis in Argentina? Two people were killed June 26 in protests, while their economic minister was in Washington asking for the IMF to reinstate an $18 billion credit line. Should the IMF give in?

The issue in Argentina shows that the IMF still hasn't learned a lesson about the risks of contractionary fiscal policy. For 60 years economists have said that when you're in a recession you need expansionary fiscal policy. In the United States, during the much milder recession of 2000-01, both Democrats and Republicans said we need a stimulus. But what was the IMF doing in Argentina? The same thing it did in East Asia, which was insisting on a contraction, making the downturn even worse.

But you argued in your book that less IMF intervention should occur overall because lenders have come to expect and depend on international bailouts; they've been encouraged to loan money to high-risk borrowers because the IMF has acted like an insurance policy. So perhaps the IMF refusal to help is a necessary evil, a way to correct expectations.

The general principle that bailouts have not worked is becoming increasingly recognized. The bailouts did not work in Indonesia, Thailand, Korea, Russia, Brazil and now in Argentina. I don't think that the critical issue facing Argentina today is outside money. Most of the money that Argentina is likely to get will do nothing more than repay already existing loans. What Argentina needs to do is restart their economy. The human resources, the physical resources are still there. What they need is money, not to repay the IMF, not to repay the other loans that are outstanding, but money that can go to corporations that will allow them to buy the inputs, that will allow them to start producing goods that they can then sell and export.

So not a bailout but rather a stimulus ...

They need a stimulus, and that will require some money. But that's very different from a bailout. And what worries me is that if the price of getting a bailout is more contraction, it's going to exacerbate the problems.

Even if the IMF is still screwing up in Argentina, there are signs of reform. They've accepted responsibility for the Asian crisis and have enacted many reforms in the past few years. Are you encouraged by the institution's progress?

There have been some very encouraging signs. Now, they are recognizing the importance of poverty and the consequences of their policies for poverty.

What's your take on the anti-globalization protest movement? By trying to abolish the IMF, a stance also favored by Milton Friedman, are they making matters worse? Or are they an important catalyst for change?

I think that globalization -- which is nothing more than the closer integration of the countries of the world, as a result of lowering transportation costs, communication costs, the elimination of artificial barriers -- is something that's going to be with us. As this integration occurs, as we become more interdependent, we need to have rules and regulations. So if anything, today we need international institutions more than ever. The problem is that confidence in these institutions is lower than ever.

So my view is that if we abolished the IMF, we'd end up re-creating it. And the real danger is that we'd re-create it with some of the same blemishes that it has today. So it makes much more sense to me to work on reforming the institution; to return it to its original objective, which was to help countries facing an economic downturn have the resources to stimulate; so that a downturn in one country doesn't stimulate a downturn in its neighbors. Getting it to go back to some of its original mission is the right direction for it to go.

Recent Stories