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Letter published in Respublica

September 3, 2002

Ms. Zamira Sydykova
The Editor, Respublica

Dear Ms. Sydykova:

Let me thank you for your intended efforts to better inform the Kyrgyz public about the merits of globalization, by reprinting in your August 28 edition an interview with Prof. Joseph Stiglitz originally published in the French journal “Nouvelle Observateur” . Such efforts would undoubtedly have been better rewarded if Prof. Stiglitz had indeed limited himself, in the interview, to discussing the many complex issues surrounding globalization, rather than continuing his ongoing campaign to vilify the IMF.

The opinions expressed in the interview are but a small sample of what is contained in his recent book, “Globalization and Its Discontents,” that was reviewed in the June 8, issue of the widely read and highly respected magazine, “The Economist.” In its July 6, 2002 issue, “The Economist” summarized its review as follows:

We said that the book was not about globalization, as it claimed to be; that its criticisms of the Fund were poorly argued; that it was muddled and badly written; that its tone was unbearably self-righteous; that the policies it proposed were in important instances unworkable; and that it made reckless accusations of personal misconduct that were completely unwarranted. Aside from that, we quite liked it.

The opinions expressed in the interview that you have reprinted have no greater merit. To summarize, Prof. Stiglitz, (a) accuses Fund staff of being market fundamentalists, or in the colorful prose used in the interview, “market bolsheviks”; (b) criticizes the Fund for advocating excessively tight macroeconomic policies during the Asian financial crisis, advice that he asserts was only in the interest of large foreign commercial banks; and (c) insinuates that Fund advice is blind to the impoverishment that it causes, and heedless of alternative viewpoints. Prof. Stiglitz also seeks to paint the former Managing Director of the IMF, Michel Camdessus, as being callous and heartless about the impact of Fund policies on the poor. Let me respond to each of these points in turn, some of which are covered in greater detail in the open letter from Ken Rogoff, Director of the Research Department at the IMF, to Prof. Stiglitz, that is posted on the IMF website at http://www.imf.org/external/np/vc/2002/070202.htm.

Prof. Stiglitz has labeled us as “market fundamentalists,” but we at the IMF do not believe that markets are perfect, as he claims. Indeed, the July 6 issue of “The Economist” noted that, “The IMF’s very existence affirms the idea that markets sometimes get things wrong, and that actions by public agencies is necessary as a result.” However, at the Fund, we do believe that there are many instances of government failure as well, and that by and large, that is a bigger problem than market failure in the developing world. This should be self-evident to everyone in Kyrgyzstan, where the need to address corruption has been identified as one of the pillars of the country’s poverty reduction strategy.

Prof. Stiglitz has been a longstanding critic of the Fund’s handling of the Asian financial crisis of 1997-98, and so it is worthwhile considering his proposals for assisting a distressed emerging market debtor. He has argued on a number of occasions that an appropriate response is to increase government spending and print more money. Such a “Keynesian” response, he believes, would have prevented the recessions supposedly caused by IMF prescriptions. This view is hard to support. Countries typically come to the IMF when they are unable to find buyers for their debt and the value of their currency is falling. Under these circumstances, it is hard to see how issuing more debt and printing more money will make either the debt or the currency more attractive. To the contrary, international experience suggests that when countries in a crisis increase spending financed by printing more money, inflation increases, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace, but especially the poor. Prof. Stiglitz’s views about the disastrous impact of Fund policy on economic growth are also not borne out by the relatively rapid recoveries in the Asian countries. Indeed, countries that implemented Fund programs thoroughly, have also recovered faster, and it is noteworthy that three years after the crisis, Korea’s GDP in real terms was 13 percent higher than its precrisis level.

In this regard, the experience in Kyrgyzstan is instructive. In the early years of transition, the conduct of fiscal and monetary policies was severely complicated by the need to put in place basic institutional structures—such as the introduction of the national currency and to identify sustainable expenditure commitments—as well as general disruptions caused by the initial structural reforms. While inflation was brought under control and growth had resumed, the macroeconomic position was not strong enough to offset the pressures stemming from the Russian financial crisis of 1998. In the period after the Russian crisis, the government and the NBKR have been very successful in restraining fiscal policy and the growth of money supply. The remarkable decline in inflation from nearly 40 percent in 1999 to just 3.7 percent in 2001, and indeed to under 1 percent for the year to date, is the direct result of tight macroeconomic policies. The exchange rate has also been broadly stable for more than 2½ years now. In fact, a sharp increase in the demand for the som in recent months has produced pressures for an appreciation of the currency, an event that would have been considered unthinkable not so long ago. And as in Asia after its financial crisis, macroeconomic stabilization in Kyrgyzstan has been accompanied by significant real GDP growth, on average of about 5 percent per year.

It is equally baseless to suggest that Fund policies are designed without due consideration of their impact on poverty. For the poorest countries in the world, the Fund provides assistance under the Poverty Reduction and Growth Facility (PRGF), programs supported by which are based on national Poverty Reduction Strategies, the preparation of which is characterized by a wide participatory process. Kyrgyzstan, at present, receives assistance under this facility, the establishment of which reflects the Fund’s acknowledgement of the special challenges associated with poverty alleviation.

More generally, Fund programs in individual countries have been adjusted to respond to the needs of the most exposed segments of society, especially the poor. In many countries, social safety nets have been expanded to provide unemployment compensation, targeted food subsidies and other support. In this regard, it should be noted that in Kyrgyzstan, the package of wage, pension and social benefits increases that compensated for the increase in electricity tariffs earlier this year was introduced with the full support of the Fund.

Against this background, Prof. Stiglitz’s attempt to characterize the former Managing Director of the IMF, Michel Camdessus, as callous and unconcerned about the suffering supposedly caused by Fund stabilization programs, is symptomatic of the personal slander that has characterized his attacks on the Fund. The introduction of the Enhanced Structural Adjustment Facility, the Fund’s first concessional lending facility for poor countries; its transformation to the PRGF and the enhancement of its poverty oriented focus; and the 10th quota increase, which strengthened the voice of developing countries in the Fund, are all initiatives that Mr. Camdessus played a crucial role in shaping. These, and many other initiatives adopted during his tenure at the Fund, point to his very special concern about the poor and underprivileged of the world. Moreover, with special reference to the alleged conversation that Prof. Stiglitz had with Mr. Camdessus, as in many other instances, the record does not support Prof. Stiglitz’s account of the event. Shortly after the inception of the Fund programs in the Asian countries, fiscal deficit targets were in fact widened very considerably in the crisis countries.

The Fund is an institution that is closed neither to alternative viewpoints, nor to admitting and learning from its mistakes. Indeed, Prof. Stiglitz’s own account of how he persuaded the Fund not to pursue financial liberalization in Ethiopia is one instance of the former. The dramatic increase in the transparency of Fund operations (almost all documents prepared by the Fund are now available on its public website), and its efforts to prioritize conditionality are examples of reforms undertaken in response to criticism. They demonstrate clearly that the Fund practices what it preaches.

Very truly yours,

Bhaswar Mukhopadhyay
IMF Resident Representative

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