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ECONOMY | 09-04-2022 00:21

Joseph Stiglitz: ‘The world needs an institution like the IMF – if we didn't have it, we'd invent it’

Nobel Prize winner and influential economist Joseph Stiglitz on neoliberalism, Argentina’s IMF debt deal and his protégé, Economy Minister Martín Guzmán.

Joseph Stiglitz, Nobel Prize winner, Martín Guzmán’s mentor and, of late, the "Argentine Covid miracle" man, explains the incipient changes taking place within international financial institutions, while underlining his critique of them. 

The influential economist and Columbia University professor, 79, is not a fan of electricity subsidies, though he stresses the importance of the state’s role in tackling poverty. Arguing for the prioritisation of growth, he demolishes liberal economic theories and praises the economic course being taken by Argentina’s government in this feature interview.

 

Doctor, after the failure of neoliberalism, the libertarians have emerged as popular leaders in some countries, like Argentina, talking the paradox of the idea that the economic result of the free market achieve optimal efficiency in the Pareto principle [the so-called '80/20 rule'], according to which no-one's welfare can be improved, without making someone else worse. To what do you attribute this kind of thinking? 

Well, neoliberalism dominated public discourse for almost four decades from the time of [Ronald] Reagan and the United States, [Margaret] Thatcher in the UK. It was never supported by sound economics, there was never an economic theory that could justify that kind of market fundamentalism. It was a combination of special interests, like the financial sector that wanted to be deregulated, fossil fuels that didn't want to be regulated and want to pollute the environment. It was a combination of those special interests with an ideology that could not and was not justified by economic theory. Now we've had 40 years of these doctrines in which growth came down and the fruits of what limited growth there was were enjoyed by relatively few people at the very top. The world has experienced unprecedented instability like the 2008 financial crisis. It wasn't able to address the climate inequality crisis or, in the United States, the opioid crisis. So the failures of neoliberalism are evident not just in a country like Argentina, but all over. And that's why I think there is a very strong movement today to rethink the foundations of both economic theory, but also economic policy. 

 

The libertarians, more than the liberals and the neoliberals, take the free market to a level of almost a God, and therefore they are opposed to states intervening, including the distribution of the generation of wealth through taxes. Is this a metaphysical idea, a metaphysical problem like quasi-religious beliefs?

Well, first, let me say libertarianism is even worse in the following sense. It doesn't realise that one person's freedom can be another person's ‘unfreedom.’ So for instance, my right to carry a gun, which a libertarian would say is a basic right, means that another person's right to live is taken away – when that gun explodes and is shot, other people die. So in a complex society, we're always balancing various rights and some rights should have some more primacy than other rights. And I think the right to live is more important than the right to carry a gun! So we have to constrain unfettered behaviour. Another example: the right to pollute. Is it right to result in the world facing climate change and all of us facing enormous costs? People with asthma may not be able to live! 

Now, the other problem that libertarianism has is it doesn't sufficiently appreciate what we as a society can do together, that no individual on their own could do. And doing that together may require adaptation. Let me give you one example: we've been through this terrible episode of Covid-19. We are now protected, in many places, as a result of the mRNA vaccines, they've made an enormous difference. The basic research for the mRNA vaccines was funded by the US government and governments in other countries. If the government hadn't, if we hadn't acted together through collective action, through government and paid taxes to support that, the deaths would have been so much higher than the high level that they already have been. So the libertarians do not seem to understand these basic principles. The irony is that many of the libertarians in the United States made their money in the high-tech sector, which benefited from the basic research of a US government financed by taxpayers – the development of the Internet and the development of the first browser. So, you know, they want to take the benefits of public expenditure, but they don't want to pay their fair share of supporting this. 

 

Professor, exploiting your quality as a teacher. Can you sum up what has been happening since the end of Bretton Woods? Then we saw globalisation and its crisis that we have today. How could you sum up the last 50 years of economic evolution? 

Well, I mean, first, let me say that the world is always evolving, always changing. One of my critiques of neoliberalism and those related ideas was that they had a very static view of the world. They thought you could just write down a set of rules and figure out what the optimal rules were and let the system play out, but we are always being confronted with the things that we did not anticipate, we could not have anticipated. We had the 9/11 [attacks], we had then the financial crisis of 2008… who could have anticipated that America would have [Donald] Trump and the insurrection of January 6 and the kind of paganism towards globalisation that he brought out, who could have anticipated Covid-19? And now who could have anticipated Russia's invasion of Ukraine? So we have to begin with a certain degree of modesty and say the world is always changing and we have to develop institutions that respond to this changing world. 

In particular, in 1944, when the Bretton Woods institutions were founded, we still had colonialism as the order of the day and the World Bank was founded in part to help reconstruction after World War II. Then we had decolonisation, but a lot of the relationships remain the kind of power relationships of the colonial era – some people call it economic colonialism. And over time, the emerging markets became more and more important. And yet they did not have the same voice in the international institutions like the World Bank and the IMF, so clearly, the international institutions have not kept up with the changing times. It's still the case that the president of the World Bank is appointed by the United States, and sometimes there's a good appointment – I think Jim Wolfensohn was a great appointment – but sometimes the appointments are not so good. But it seems to me to be unconscionable in the 21st century that one country, one advanced country, should appoint the head of the World Bank and sometimes the person appointed has relatively little knowledge of development, which is the central mission of the World Bank. So that just as an example of the necessity of reforming the Bretton Woods institutions.

Now the good news is that there have been major changes at the IMF. You know, when I wrote my book Globalization and its Discontent, I had a lot of discontent with the IMF. I thought the IMF was increasing inequality, was causing instability, stymying economic growth, and I have to say that in the subsequent years there have been major changes at the IMF – they're focusing much more on global public goods like climate change, and I think the new agreement with Argentina represents potentially a major departure in the kinds of stance, the kinds of programmes they are. It was a programme without austerity that was designed to promote economic growth, so that's an example of change that is going on slowly. Yes, but at least a change. 

 

Do you think the IMF really understands the Argentine economic team's view of the multi-causality of inflation, that inflation is multi-causal? 

Well, I think that they did grasp that, it was imperative for Argentina to continue to grow – that was the first imperative that if Argentina didn't grow, poverty would increase, the ability to repay creditors would be impaired, confidence in international institutions would be impaired. It was very important, I think, that they realised that there would be a programme that sustained growth and, with that, maintained debt sustainability. 

Now, inflation is important, but we have to understand that there are multiple facets of inflation – inflation is going up in the United States, inflation is going up in Europe. [It’s] complex. Some of it has to do with oil energy prices, some of it has to do with food prices, but some of it is very… peculiar, you might say. One of the highest sources of inflation in the United States is used car prices and that has to do with a shortage of chips, which are used in the production of cars and then has to do with a fire in a factory in Japan and some of the failures in ordering enough chips during Covid-19… but the point I want to make is that the view of inflation that Milton Friedman had 40 years ago is absolutely wrong. His view was it was always a monetary phenomenon. What we are seeing today is supply side shocks. One has to have a comprehensive programme to try to address inflation, and one has to have, I would say, in the case of Argentina, a balanced programme that can sort of bring inflation under control, while protecting the economy and its growth, and my understanding is that was the hope with this programme. 

You know, when the [Alberto] Fernández government took over, Covid-19 was just beginning, there were so many things that have happened since then… We all have to recognise that how things turn out will depend partly on the programme, but also on events beyond our control. The Russian invasion of Ukraine is clearly an event beyond our control, and what happens to energy prices is an event well beyond Argentina's control. 

 

And, Professor, do you think the pandemic has softened or weakened international financial institutions like the IMF and that Argentina has had a better deal as a result of the pandemic?

I think the reason that Argentina has gotten a better deal, what I would say is a reasonable deal, is because of a change in the IMF – in the direction that I've been advocating for a quarter-century and it has been slow in coming. I think the reason it's a better deal is that we have now a long, long history of the old-style programmes not working. The programme with Argentina a few years ago under the Macri government didn't work, and Argentina's experience is similar to that of many other countries where austerity was imposed not only in the developing emerging markets, but also in Europe. So this long history of failed programmes is, more than anything else I think, what has led people to think that we have to try another way, we have to try another set of policies. 

 

And doctor, how much do you think that Donald Trump's government had to do with the IMF loan to Mauricio Macri’s government? Could it have been related to ensuring a right-wing government wins the election? 

I know the IMF denies this very strongly. And so you were asking me, what is my suspicion? I think the answer is it was an attempt to maintain a right-wing government. I don't think you can understand fully why so much money was given without the conditions that should have been imposed that would likely make the loan productive. I mean, the fact that it gave this money without constraints on money leaving the country, so it was essentially financing capital flight from the country, leaving Argentina more in debt with nothing to show for it. You know, that was a fundamental flaw. Now I understand the argument that was made by some of those at the IMF that said ‘Our objective was to restore confidence and putting those constraints on would have undermined confidence from the market,’ but experience in country after country shows that it is a rare exception that IMF programmes succeed in restoring confidence – there are some examples, but it's a rare exception – and the damage that can be done, as we've seen by capital flight, is enormous. And so in my judgement, you have to ask, why did they do this? Why did they grant loans of that magnitude without any appropriate conditions? And you know, it raises your suspicion.

 

Do you think that Argentina’s new agreement with the IMF, the recent renegotiation that Economy Minister Martín Guzmán made, is a fresh agreement and, at the same time, is an issue for future agreements with other countries?

I hope it is setting a new way forward. In many, many dimensions, let me say that the old way of doing debt sustainability analysis where you don't adequately reflect old growth rates to the nature of the debt restructuring is a fundamental flaw, and this was at least a move in the right direction, the recognition that austerity is not going to make it possible for a country to repay what it owes… So I hope that this is the beginning of a new era. These are large organisations with many stakeholders – a lot of pushing and shoving is going to go on. We began our conversation talking about politics, and the IMF is a political institution. And what I'm hoping is that going forward, the new understandings that we have will be the basis of the new programmes that it has going in the future. 

 

And going back to the year 2018, if at the time of granting the IMF loan, they had imposed conditions that prevented private creditors from taking their money out of the country, would Argentina's situation be different today?

Very much so, that was exactly the point. You know, you can never be sure, but let me say I think there would not have been the drain on Argentina's reserves, that it would have been much easier for Argentina to repay the loan. In fact, a very large part of that US$44 billion that the IMF loaned would still be in the reserves of Argentina, and Argentina would not be facing the crisis today. So there is, in that sense, culpability. 

But let me say it was the government of Argentina, the moderate government, that also supported not having those restrictions, so one can’t just blame the IMF. It was the elected government of Argentina that decided to let that money flee the country, draining the foreign reserves of the country. 

 

Professor, a topic that generates a lot of discussion in the Congress in Argentina is a reduction of the subsidies, it’s one of the IMF’s demands. Do you think that these subsidies should be eliminated or are they a necessity as part of the workers salaries? 

I'm very suspicious of energy subsidies for two reasons. One: the benefit goes disproportionately to those who are better off, you know, the reality is that richer people consume more energy – they consume more of everything, but they consume more energy. So in effect, when you have an energy subsidy, you are subsidising not just the poor, but the rich. It is much better to target your subsidies on the people who really need the money. The second thing is that I've long been very concerned about climate change and the excessive usage of energy, and particularly fossil fuel energy, is the major source of climate change. This is an existential issue for the entire world. And one of the basic laws of economics is that if the price of energy is low, people will use more energy and we will face more climate change. So I think that there are better ways of helping poor people meet their budget, and let me say, you know, I certainly understand with so many people in Argentina in poverty why you have to have some way of helping them – but this is not the best way of doing so. 

 

The finance professor Michael Pettis, who specialises in Chinese economics, tweeted that European and US politicians should grant a major IMF debt forgiveness to Argentina. Do you agree that this debt must be forgiven? 

I think it's a complicated issue. In general, I think that much of the debt that currently exists has to be restructured. Restructuring, meaning some degree of debt forgiveness. 

Argentina successfully negotiated a significant debt restructuring with private creditors. I strongly supported that debt restructuring. The IMF is in a particular situation, it’s the lender of last resort. It is a global public institution that steps in when nobody else can step in. And one has to ask the question: Which debt do you forgive and which debts do you not forgive? And which debts do you restructure and how do you restructure. There may be some cases where there's no alternative, and there was the typical debt restructuring at the beginning of this century, part of the Jubilee movement. But the case of Argentina is special because the loan to Argentina was so large – the largest in the history of the IMF – and it was so flawed that it is in some sense sui generis, it needs to be thought of somewhat differently. But if every country that got over-indebted had debt forgiveness, our international debt-free framework would have to be rethought. So I think the answer to that question is we need to rethink our international debt structure and I've called for a better framework for sovereign debt restructuring. And when asked to try to get a debt restructuring framework based on a set of principles, the United Nations adopted a set of principles in 2015, but a few creditor countries, including the United States, have blocked that. So I would like to see a principled approach to addressing this more comprehensively for the entire world. 

 

And professor, do you think that the IMF should cease to exist? In the future is this an organisation that the world needs or not? 

The world needs an institution like the IMF. If we didn't have the IMF, let's face it, we would invent it. So the question is: Can the institution be reformed? And let me just share with you right now my optimism that it can be, partly because that optimism is based on the fact that it has changed, changed dramatically, in the last decade. 

Obviously, there are a lot more changes that I would like to see, I worry whether the changes that I have already seen will be preserved – there are what you might call recidivist forces that would like the IMF to go back to the old IMF, to reinstate austerity. This is part of, you might say, the global political debate. I'm hopeful. Just like what I see right now going on around the world is the end of neoliberalism, I think that understanding about the changing mindset, that recognising that neoliberalism is a failed set of ideas means that it is more likely than not that the IMF going forward will not embrace neoliberalism. 

 

Professor, in an article that you published for Project Syndicate, you referred to the “Argentine economic miracle.” Do you still believe that Argentina’s growth in 2021 is a miracle? 

Well the word “miracle” always generates a lot of controversy, excitement. I wrote with one of the co-authors of a work done at the World Bank of the “East Asian Miracle” and several people said ‘There was no miracle there, all that East Asia did was do common sense – it saved a lot and invested in infrastructure, it pursued good macroeconomic policies, it paid attention to inequality and poverty, and if you do all the right things, then you grow.’ But the point I was trying to make in that book is that there had never been a part of the world that had grown so fast for so long. 

Now we've come to Argentina. It's the same thing. You don't see 10-percent growth rates very often. Let me tell you that when the United States was recovering from the Reagan recession back in the early 80s, we didn't have growth rates like that. We had a bump up, but it wasn't a 10-percent growth rate. You can say ‘It's not a miracle, all the government did is to have the right policies,’ but having the right policies is hard and getting the results of 10 percent, I still think it's something to comment on, and that was really what I was trying to commend Argentina for.

 

Professor, how do you evaluate the work of the [Fernández] administration and of Economy Minister Martín Guzmán? 

I think they've done a very good job under extraordinarily difficult circumstances. You know, anybody inheriting that level of debt would have found it very difficult, anybody inheriting that level of inflation would have found it very difficult, anybody facing Covid-19, any country around the world would have found it very difficult. Having all three of those in a country with such a high level of poverty is… let me say, it's not a job I would have wanted! It was a really very, very difficult challenge. And the fact that there's been the private sector debt restructuring, that things look very good for the IMF programme, the programme that will not strangle Argentina and enable it to continue to grow… these other problems… you know, inflation is not down very much, but it hasn't exploded. And normally, if you would have thought if you maintain growth and gotten growth of 10 percent, you could have done that, but at a high risk of a much higher inflation figure. So the fact that Argentina has managed to do all of this, keep inflation from growing, recuperate the economy, engage in the debt restructuring in the midst of the Covid-19 crisis… to me, that is a real achievement, 

 

We know that you are the mentor of our economy minister – and surely this has already happened – but if you had to give him one piece of advice, what would it be? 

Well, one piece of advice… that's a really hard question! I would say, I think the hardest aspect of any policy is evaluating the various trade-offs – you could ignore one thing and get a lot of the other. You have to have a balanced programme, and the one piece of advice, I would say is put growth and poverty reduction at the centre of the agenda, keeping inflation tame, but the priority should be what really makes a difference to people. How is their standard of living? That's what's really important, and do it in a way that's sustainable, not just one year, not just two years, but sustainable and that kind of economic programme aimed at long-term real sustainable growth. I think that’s the advice that I gave, and I think that's the strategy that the current government has been following.

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Jorge Fontevecchia

Jorge Fontevecchia

Cofundador de Editorial Perfil - CEO de Perfil Network.

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