Heroes of anti-capitalist protest don’t usually hang out at the Savoy. But Joe Stiglitz is different: the establishment figure who turned on the establishment. He’s a former chief economist at the World Bank and a Nobel laureate. He chaired Bill Clinton’s Council of Economic Advisers and he’s not afraid to tell you about it (‘When I was in the White House…’). He wears a nice suit and a tidy salt-and-pepper beard. He doesn’t even wear Birkenstock sandals, and he looked well at home amid the comforts of the de luxe London hotel when I met him there.
But beneath the professorial façade is a combative mind and an inability to keep his mouth shut — neither of which sat well with the US Treasury during his tenure at the World Bank. His repeated criticism of the International Monetary Fund, especially its handling of the Asian crisis in 1998, put him on treasury secretary Larry Summers’s blacklist, and he was eventually forced to resign.
His first book after leaving the World Bank — Globalization and its Discontents — vilified the IMF for enforcing austere one-size-fits-all monetary policies on countries in dire financial straits. It sold over a million copies in 35 languages. It didn’t make him many friends in Washington, but it turned him into an unlikely champion of the dispossessed.
His latest book — Making Globalization Work — argues that to do as its title says to the benefit of developing countries requires a radical revamp of global financial governance. In his world, lenders would have only themselves to blame if poor countries failed to repay their debts, GDP calculations would take account of ecological damage, limited liability rules wouldn’t protect multinational companies from being made to pay for their sins, and the dollar would no longer be the world’s reserve currency.
These ideas are decidedly left of centre, but Stiglitz admits there’s nothing new about them. What is new — and comes over strongly in person — is his thinking on how to get the big players, led by the US, to take them seriously. To speak to him is to glimpse an alternative future: a foretaste of what President Hillary Clinton’s international economic policy might look like.
Take the issue of international corporate responsibility. He describes the present system as like ‘the Wild West, when the bad guy would roll across the state line’ to safety. Today, ‘bad actors in this game take advantage of globalisation …but they use the existence of boundaries to escape liabilities’. He describes one case in Papua New Guinea where an international company dumped 80,000 tons of contaminated material daily in the course of extracting $6 billion worth of gold and copper. After the mine was exhausted, the company turned its shares over to the Papua government — ‘knowing that the cost of the clean-up was greater than anything they’d get out of the mine in the future’ — and rode across the state line.
For Stiglitz that illustrates a deficiency of globalisation: we worry plenty about cross-border protection of investors but not about protection of countries. How can the law ride across state lines too? He argues that using the developing countries’ courts works for neither side. Multinationals perceive ‘home court bias’ against them — though sometimes, he says, the opposite applies: developing countries’ environmental standards are set too low because of the risk that companies will pull out. Papua New Guinea was so afraid of losing revenue if mining companies left that a law was passed making it illegal to sue for environmental degradation. So ‘either we create international courts’ or we allow companies to defend themselves in their own home jurisdiction. Thus a US company facing a developing country’s claim for environmental damage would have to defend itself against the standards of US environmental law.
An admirable idea — perhaps — but how do you get the US to go along? Well, besides using pressure from the American environmental movement and ‘more enlightened’ companies, you can always use the World Trade Organisation. Stiglitz acknowledges that it won’t be easy, but notes that the US itself has pushed for changes to cross-border limited liability laws — notably in the Montreal Convention, which eliminated low limits of liability when passengers are killed or injured in international air crashes.
Debt relief is another of Stiglitz’s favourite subjects. Even while praising last year’s Gleneagles summit for freeing the poorest countries from much of their debt, he digs deeper. ‘What they didn’t do was ask the more fundamental question: why so many of these countries had these problems of debt. If it was one or two countries, you’d say, “drunk driving”. Of course there’ll be some profligate governments. But when it’s a majority of countries you have to say there’s something wrong with the design of the road, not just the drivers. Where the IMF and the G8 have failed is that they haven’t asked that question.’
His answer: do what markets do, and pass the risk to those who can afford it. ‘One of the reasons that developing countries end up with crushing debt is that they’re forced to bear the risk of interest rate and exchange rate volatility,’ he says. Often volatility is so high that ‘even if you borrow what you thought was a moderate amount, something beyond your control converts it into an unbearable debt’. Well-functioning markets would transfer this risk to those more able to bear it in unstable times. And to do that, you’d need to get rid of the US dollar as the world’s reserve currency.
The greater the volatility, the more people have felt they need to hold ‘safe’ reserves — namely US dollars. But as more and more dollars abound, the less confidence people have in them. They have incentives to inflate the dollar’s value away, and move into other currencies. ‘That’s why we’re beginning to see the erosion of the dollar reserve system.’ Stiglitz would do away with it altogether, and create a new international currency — which he calls ‘global greenbacks’.
The name may sound loopy, but again the idea is not new. Keynes called it ‘bancor’, and an international currency already exists at the IMF in the form of special drawing rights (SDRs) for development funding. The US has vetoed more extensive use of them — hence Stiglitz’s new name. But pundits such as George Soros have advocated extending the SDR system, and Asia already has its own regional version operating (despite US opposition) under the Chiang Mai agreement.
Again, the question is how to get governments to go along with such a radical idea. According to Stiglitz, many smaller governments have already moved out of the dollar. And ‘larger ones would like to, but realise if they did so the dollar would fall even more’. He points out that the US economy could benefit in the long run from ceasing to provide the world’s reserve currency, because reduced demand for US Treasury paper would make it impossible to run up large fiscal deficits. And he thinks Asia and Europe could club together to create a new reserve currency by themselves — then invite the US to join them.
The way Stiglitz tells all this makes it sounds less pie-in-the-sky and more like the first draft of an eventual solution to a substantial problem. So will he continue to issue edicts from his tower in Columbia University, or could he be persuaded to return to government? In his view, the Republicans are not long for this world — the Iraq war will be the end of America’s dalliance with the Right. And if the Democrats call? He’d prefer an advisory role, rather than administrative responsibilities. That’s good news for staff worried that he might be tempted back to the World Bank, where even those sympathetic to his ideas disliked his management style; in 1999 he received one of the lowest evaluations of all senior executives in the Bank’s staff attitude survey.
Joseph Stiglitz’s world would certainly be a fairer one, in which the benefits of globalisation would be more equitably spread. Would it also be a more prosperous world, free of financial crises? For an answer to that, we’ll have to wait and see whether the next President Clinton gives him the tap.
Making Globalization Work by Joseph Stiglitz is published by Penguin/Allen Lane.