Jamie Rubin:
Just a couple of years ago, Washington looked to Latin America as a great success story. The continent had gone democratic, that nearly all the countries had adopted the free market philosophy that we pushed. Do you think we've lost all those gains we put in place over the last 20 years?
Joseph Stiglitz:
I think we clearly oversold and not only did we oversell, what we sold was not the right set of policies. We sold market economics and democracy and that was right, but we didn't sell a broad variety of that, we didn't sell a version that was appropriate to these countries. And we actually, in many cases ,undermined democracy because rather than presenting the countries with alternatives, explaining to them here is this form of capitalism, that form of
capitalism, this form of institutions, that form of institutions, confronting them with choices that would effectively strengthen their democracies by making those choices, they were told over and over again that there was one way and now that way has not worked.
Jamie Rubin:
Polls have suggested that now some two-thirds of the people in these Latin American countries that are going through this economic turmoil have turned against democracy as their preferred form of government. How troubled should we be in America? Does that have a negative impact on us?
Joseph Stiglitz:
I think we should be very troubled. I mean the turmoil in our neighbors to the south inevitably will cause problems for us, if only through migration and we have an enormous amount of familial connections between Americans and people in Latin America. But I
think more fundamentally, I think Americans are committed to democracy. We believe, and I think it's true, it is the system we really believe in. And it is of concern to us when democracy fails and people perceive that
democracy fails. And one of the problems is that they've had democracies in which they've not had the ability to make choices over basic economic principles, economic systems. They were pushed down their throat by the U.S. Treasury, by the IMF, and so they don't feel like these were their policies. They were told democracy, but they were told you have to do these things. And so there's an incongruity between the rhetoric of democracy and the actual practice.
Jamie Rubin:
You've been critical of the way in which the International Monetary Fund has approached these bailouts in Latin America and around
the world. But here we have a situation where Argentina is in this great depression, where Brazil, its neighbor, is suffering, as well. Should the IMF be helping to bail these countries out now?
Joseph Stiglitz:
I think the fundamental problem in these countries is trying to get their economies started again. Money from the IMF that goes to repay money to the IMF or money to the World Bank or money to the Inter- American Development Bank
to repay international creditors is not going to help restart the economy. What they need is access to markets. What they need is credit that will go into the firm's working capital.
Jamie Rubin:
So they could export their goods.
Joseph Stiglitz:
So they can buy the inputs that produce the goods that they can export. So it's not high finance that's really important. What's really important is markets and working capital.
Jamie Rubin:
So, you would agree with the approach of the Bush Administration, where they have been reluctant to go through another exercise where the IMF gives large-scale loans to the Argentines and the Brazilians.
Joseph Stiglitz:
Well, I think that it would be a good idea if they could whatever they can to restore confidence in these economies. What they've been doing is saying we'll give you money in return for which you have to cut back on your expenditures, make the recession worse, make
your economy worse and that will undermine confidence. The IMF was originally created over 50 years ago under the intellectual aegis of Keynes, and his idea was ...
Jamie Rubin:
The founder of modern economics.
Joseph Stiglitz:
The founder of modern economics, and he was writing in the period of the Great Depression. He said sometimes economies, market economies, don't work. And when they don't work, there's an important role for government. There's a role for government in trying to stimulate the
economy, to get the engine restarted. A word that was used was "prime the pump." And money that goes into the economy to help prime the pump would be helpful.
Jamie Rubin:
So, you are saying that the Administration should be looking at both an IMF-type approach where you are priming the pump with additional funds to help them create confidence, and trade liberalization so that they can export their goods.
And in your view, is the Bush Administration doing either of those things?
Joseph Stiglitz:
No. But let me emphasize. Most of the discussion on IMF loans is not made with prime the pump. Most of the money that the IMF
is talking about is money would just go to repay the international creditors and in that sense would do very little to prime the pump.
Jamie Rubin:
So, would you favor or oppose IMF conditional loans to Argentina?
Joseph Stiglitz:
What I would prefer and favor is IMF loans to Argentina that would insist and demand on expansionary policies that would restore their economy and direct the money to provide trade credit, to provide working capital to get the economy started. But money that doesn't do that ...
Jamie Rubin:
Just goes to repay old debt ...
Joseph Stiglitz:
That is really a side show.
Jamie Rubin:
OK, so you're not so concerned as the Bush Administration is about re-establishing confidence
so that investors can return to Argentina and provide private investment as a way of priming the pump for economic growth.
Joseph Stiglitz:
Investors are going to wait to see whether the economy is restarted. You don't go in general investing in the economy when you have 25 percent unemployment, when you have riots in the streets because people are starving. That's not the kind of environment, and nothing
that the IMF has proposed would do anything to alleviate what I view as the major source of lack of business confidence.
Jamie Rubin:
So, in the long term, one wants to establish business confidence, but in the short term one has to get their economy moving.
Joseph Stiglitz:
Exactly.
Jamie Rubin:
OK.
Joseph Stiglitz:
We had the same debate back in the United States in the Great Depression. There were some people who said that the only way we would restore the economy in the United States in the Great Depression was to cut back on the expenditures because we had a deficit, because
the economy's tax revenues had gone down, because we were going into a depression. There was the other view, which is the Keynesian view, which said we have to prime the pump and get the economy going. Hoover tried the first strategy and the economy sank deeper and deeper into depression, and Franklin Roosevelt was an
important factor in the New Deal in starting the second strategy and it was only then that we got out of the depression ...
Jamie Rubin:
So, in your view, the IMF today and the leaders of Argentina today are behaving like Herbert Hoover?
Joseph Stiglitz:
I think there's too much of that kind of strain of thinking that if we only cut back expenditures more that the economy will recover. And there is very little evidence to suggest that that will work, and a lot of evidence to suggest that further cutbacks in expenditure will just feed the downward spiral of the economy.
Jamie Rubin:
All right. So where do we find our Franklin Roosevelt in Argentina? The political system is very difficult. Presidents are resigning, foreign ministers are resigning, finance ministers are resigning. Is there any prospect of an FDR for this terrible tragedy?
Joseph Stiglitz:
One of the strengths of Argentina is that it has enormous human capital, a very well educated labor force. There is every hope that out of these very, you know, very well educated
labor force, somebody will rise. But it will only be successful if they're put in an economic environment in which they can help the economy get out. And that will require the international community to open up their markets. Rather than just going on with the free market
rhetoric, let's actually do something, let's actually be a good neighbor. Open up our markets to their goods. Europe open up its markets to their goods. Already one of their neighbors, Mexico, is opening up its markets, made a special arrangement with
Argentina and automobiles. This kind of thing ought to be replicated and that will give hope to the people and provide a strength to a new government that will allow it to take a position of leadership that will restore confidence
in their society.
Jamie Rubin:
So are you of the view that the policies of the International Monetary Fund, the current
administration, the previous administration, you put all that together and damage has been done to the idea of free markets and democracy in Latin America and it's the fault of these policies rather than the fault of the governments in place?
Joseph Stiglitz:
Clearly, some responsibility has to fall within the countries. Ultimately, they make the decision. They made the decision to borrow money. They made the decision to follow the advice of the IMF. But the problem is that there was a lot of bad advice, and when you're a relatively small economy and you're confronting
the power of big international institutions, the economic power of the largest economy in the world and they say "This is the right thing, you should do this," it's very hard for politicians to stand up and resist that kind of pressure. And so in my mind, certainly we ... and
when I say we, the United States Treasury, the IMF, Western advisors, bear a high degree of culpability.
Jamie Rubin:
OK. Let's talk about some solutions. Many have suggested the problem here is that when an American company or an American individual gets deeply in debt, they can declare bankruptcy and go to Chapter 11, and that there's no Chapter 11 for countries. Do you believe that this is a problem that can be solved?
Joseph Stiglitz:
Yes, and I do believe that Chapter 11 or some bankruptcy proceeding is required. In the East Asia crisis, I strongly said that what was needed was a super Chapter 11. Rather than forcing these countries to repay the debt, much of which was corporate debt, in some cases governments wound up assuming the
responsibility of corporations, so it was like nationalizing the private debts. So at the same time, they were privatizing the national liabilities. Unfortunately, at that time, there was resistance at the IMF to this kind of approach. They said,
"Oh, that's like reneging on debt contracts, credit contracts." But bankruptcy has been part of Western capitalism, part of capitalism since its beginning. What there should be is more use of bankruptcy type mechanisms. In the 19th
century, when countries couldn't repay their debts, Germany, France sent their troops into Mexico, for instance, and forced them to repay ...
Jamie Rubin:
Their stuff.
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