Jamie Rubin: So they couldn't export their products.
Joseph Stiglitz:
They couldn't export their products. Their economic situation looked dismal. Anybody looking at the situation said this can't continue. Seeing that, people began taking their money out of the country. And, the reforms that had been done before made it easy for people to take their money out of the country. And as they
took money out of the country, it became a self-fulfilling prophecy. Their debt GDP ratio, the ratio of how much they owe to the size of the economy, was actually very moderate. It was actually less than the United States.
Jamie Rubin: They weren't really in major deficit
Joseph Stiglitz:
They were not in major deficit. But, even with that moderate debt, if interest rates soar, if interest rates go to ten, 15, 20, 25 percent, then even a country with a moderate level of indebtedness is going to find itself in problems. But it became a self-
fulfilling prophecy. But the ultimate source of the problem was the exchange rate mechanism,
Jamie Rubin: Which was Argentina's decision.
Joseph Stiglitz:
It was Argentina's decision, with the encouragement of the IMF that makes sense when it was put in, in the beginning of the '90s.
They had had hyper-inflation. Very high increase in prices. This was a way of bringing down inflation, and it worked, in bringing down inflation. But people ... that's not the only thing that makes an economy work. You have to create jobs, you have to create employment, and by 1995, they were facing double digit
unemployment. They survived what's called the Tequila crisis, the Mexico crisis, but they learned the wrong lesson from that. They said, the fact that they survived that crisis meant they could survive any crisis. They should have put them on warning.
Jamie Rubin:
Let's talk about the Bush administration's current policy. The treasury secretary, Paul O'Neill, is in Latin America this week. He'll be meeting with people in Argentina, and Brazil. What do you think his message should be, and how do you think they will be reacting to the policies of the U.S. Treasury Department in Latin America?
Joseph Stiglitz:
Well, I wish the policy were going to be a good neighbor policy, saying "Look, Argentina, you are in trouble. How can we get your economy started? It's not lending you money that you pay back what we lent you, last year, or two years ago, that we shouldn't have lent,
because it was a bad loan." What they should say is "The way we can restart your economy is the way we helped Mexico restart in 1995". How do we do that? We bought their goods. You buy goods, you create jobs.
Jamie Rubin:
We should open our markets.
Joseph Stiglitz:
We should open up our markets. And that would be a real gesture of a good neighbor.
Jamie Rubin:
So what's an example of that? Argentinian beef? Having no tariffs on that?
Joseph Stiglitz:
Exactly. It's very good beef, by the way. So American consumers would actually benefit from it. Argentinian wheat. Let's open up our markets. Mexico has done a deal with Argentina, to try to buy some of the Argentinian cars. So, some of the neighbors, like Mexico, are stretching out to try to help their
neighbor. It would be great if the strongest country, the strongest economically, and one that preaches free markets, actually practiced what it preaches, and open up our markets.
Jamie Rubin:
How easy would it be for the president and the secretary of the treasury to implement such a decision, to open up American markets on a sort of one-time basis, for a fixed period of time, for Argentinian products? Is that easy to do? Does it need congressional approval? Could it be done easily?
Joseph Stiglitz:
It probably could. It probably would need congressional approval. But the fact is that I think Americans are very concerned about what is going on south of the border. We have a big interest in having political stability. And I think Americans are generous. And that we recognize that this is in a time of emergency, an appropriate response.
Jamie Rubin:
Well, let's talk a little bit about the comments of the secretary of the treasury about Brazil, and about Argentina that have roiled some of the politicians there. In the case of Argentina, he
suggested that American plumbers were somehow going to pay back Argentinian debts. And in the case of Brazil, he just recently said he doesn't think we should send them any more loans, unless we can be sure it's going not going off to Swiss bank accounts. How effective are these comments? Are these blunders? Is there logic behind these comments? What's your view?
Joseph Stiglitz:
I think they are diplomatic blunders, at the very least. I think what Argentina and Brazil need are statements of confidence, not unwarranted criticism. They're factually wrong. The fact is that IMF loans are almost always repaid. So, the real irony is that the IMF dictates polices to these countries. The U.S. is the only country with a veto power at the IMF, basically dictates policies to the
IMF. So you have the U.S. directing economic policies in these countries. But the taxpayers actually pay back the loans. So it's almost like taxation without representation. And they have to pay back the loans, they bear the cost, but they have very little say in the economic policies.
Jamie Rubin:
You've taken some very strong views about the effect of these loans, and the motivation of these loans. Some say that the International Monetary Fund, the IMF, is really supporting banks, and the American bankers who made these loans. But I'm sure that people who work at the IMF don't view it that way. What is the best case you could make for why the IMF has approached the problem the way they have?
Joseph Stiglitz:
Well, let me first try to describe why I feel so strongly. As an example is what happened in Indonesia. In Indonesia, there were billions of dollars to bail out the foreign banks, to strengthen the currency that would allow Western bankers to get repaid at favorable terms. But
when it came to few millions, for maintaining subsidies for food and fuel, for the very poorest in the country, the IMF said there's no money. And their policies led to an economic downturn, that converted the downturn into recession and to a
depression, at the end. Magnitude.
Jamie Rubin:
So they cared about the bankers rather than the people of these countries. Now obviously an IMF official doesn't think that's what they did. What is your best case, for how they go to sleep at night, after having made these decisions?
Joseph Stiglitz:
Well, they view it as absolutely necessary to restore confidence. That's the word they use all the time. Confidence in the country. If you get confidence in the country, then everything else follows. So, if you got confidence, then, an exchange rate stabilized, then people wouldn't pull their money out of the banks, and that would allow the economy to get restarted. What that misses, for instance, is the fact that the fundamental problem, in Argentina, for instance, was this over-valued exchange rate, mismanagement of privatization.
Confidence is not going to start selling goods for them with their over-valued exchange rate.
Jamie Rubin:
But investment might help them to produce the goods that they can sell. And the IMF economists would say that they're trying to create a climate in which businesses from abroad will invest in Argentina, help them to rebuild their plants, and sell goods that can be sold on the open market, and without that climate, foreign investment will not come into Argentina. And that is important. Do you agree with that?
Joseph Stiglitz:
I agree. They make one simple mistake. An economy, in which you have 15,-20 percent unemployment. When national income is falling, incomes are falling. Poverty is increasing. It is not going to be an environment in which businesses are going to want to invest. No matter how stable the exchange rate. Anybody looking at what is going on, is going to say this is a situation which is ripe for social and political
turmoil.
Jamie Rubin:
So that's more of a long term goal, rather than a short-term goal, in this crisis. Is that your view?
Joseph Stiglitz:
My view is that it is absolutely important to create a good business climate.
Jamie Rubin:
Over the long term.
Joseph Stiglitz:
Over the long term. And to do what you can in the short term. But pushing an economy into a recession or depression is creating a bad business climate. So my view is that they actually are going counter to what they are saying that they want to do. I think that if you restore an economy's strength very quickly, which is
what Malaysia did, and East Asia, or what Korea did . . . Once you start restoring an economy to a level of prosperity, then investors say, "Well, this is a place I want to invest."
Jamie Rubin:
But Korea followed the IMF prescription.
Joseph Stiglitz: No, it didn't.
Jamie Rubin:
Kim Dai Jung said that he wanted to put on these, austerity measures to respond to the IMF's requests.
Joseph Stiglitz:
Very quickly they did two things. One, they had a rollover, a forced rollover of loans. Which was like a bankruptcy, a stand-still provision, which is the kind of thing the IMF had resisted everywhere else. Secondly, rather than shutting down the banks, as the IMF had insisted in
Indonesia and Thailand, what they did is they recapitalized the banks. The government recapitalizing said, "OK, we're nationalizing the banks. That's what we need to do now. And, in two, three, four years, we'll
reprivatize them." And now Korea is in the process of reprivatizing them. So it really went very much against the IMF philosophy. A third example is the IMF said the government should take a hands-off policy on restructuring. Which is what it said in, say, Thailand. Basically nothing happened. In Korea and in Malaysia, they took a very strong view and said, "We have some problems here. We're going to need restructuring. If we don't do it quickly, the economy's going to suffer."
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