• One of the sources of discontent against globalisation is the unrepresentative nature of the high table at global institutions like the IMF and the UN Security Council. Do you see the decision-making process becoming more representative in global financial institutions? There are a lot of changes going on in global financial institutions, most notably at the World Bank where officially they talk about putting the country in the driver’s seat. Even the IMF talks of participation and ownership in their programmes. In the WTO there is discussion about openness and transparency. There is at the very least a beginning of an awareness of the problem which is a step in the right direction. On the other hand, we have to agree it hasn’t gone far enough. At the most fundamental level, the issue is one of governance — who makes the decisions? It’s still the case that at the IMF only the US has the veto power. But it goes beyond that. The IMF makes decisions affecting the lives and livelihoods of people, not just the financial markets — they affect unemployment rates, expenditures on healthcare, education. Yet, the only people sitting around the table are finance ministers and governors of central banks who have an important understanding of financial markets but don’t represent labour, environment, health, education. There’s a fundamental flaw in the nature of decision-making. Finally, for democratic processes to work well there has to be transparency. • You’ve been critical of the IMF’s focus on inflation, and its failure to recognise social costs like unemployment. If you have people from the financial markets, it’s the creditors’ side of the financial markets, not the debtors’ side. The debtors are the consumers, workers, households, firms. They are not represented. So it’s not surprising that the views expressed reflect the creditors’ views. Economists often talk of there being a tradeoff between inflation and unemployment. You can get the unemployment down, but inflation may go up, that’s the risk anyway. Who gets hurt when they have unemployment? The workers. With inflation, who gets hurt? The people whose bonds become less valuable because the value of, say, the rupee is now less. For somebody who is a bond-holder unemployment doesn’t make any difference, but inflation does cost him. The worker worries only about unemployment as long as wages can keep up with inflation which they typically do. This is why it is so dangerous having a political institution that has only one side at the table. When you have both sides at the table, you can balance those concerns off and say, well, if we make it so bad for bond-holders they won’t supply the capital, then we may not be able to grow. And that will be bad for jobs as well. At least you’ll get a balanced discussion. • To many in the developing countries organisations like the IMF are perceived to be pushing a neo-imperial agenda. Is that being paranoid? Just like there is a division of interest between creditors and debtors, in general terms the developing countries are debtors, developed countries are creditors. In a more balanced perspective, also see that in developed countries there are people who sell goods to developing countries, people who invest real money (not lend money) in developing countries. There are many interests in the developed countries that coincide with the interests of the developing countries. When the developing countries do better, they do better. Unfortunately those interests are not represented at the IMF. So only one part of the developed countries’ interests gets represented. • So, it’s not a simple case of us versus them? No, it’s really a group of people in the developed world dictating IMF policies. One of the reasons I’m hopeful of reform being possible is that when you explain that it’s not American policy, maybe you can get a change in policy. • Are you hopeful change will occur? The good news is that these are political institutions and they are somewhat responsive — slowly — to the people to whom they are responsible, and those are democracies, the US and Europe. The result of the protest movements that began in Seattle, Washington, has been increased awareness of these inequities. For most Americans the problem is approached from a moral point of view: it’s wrong what we’re doing. There are others who approach it from their self-interest, and find it is not in their own interest. Both are now on the side of reform. The last presidential election was the first one in which both candidates said something was wrong with the IMF. Normally the problem is that while the IMF, World Bank, WTO loom large in developing countries, in the US the IMF makes no difference at all. It is only because of news coverage of some of the hypocrisies and major failings, of the crises that were managed badly that a broader spectrum of Americans became interested in the subject. Quite honestly, there is a lot of disillusionment, a lot of pressure for change. • Can one then see the IMF returning to its original mandate, of pursuing expansionary policies? That is one area where I have not seen as much reform as I would have liked. They are still excessively focussed on inflation. They are talking more about the importance of having a good social safety net, but they haven’t fully grasped that the most important social safety net is full employment. • But don’t countries receiving aid also have to take responsibility? I think much of the problems of developing countries lie within themselves. But there are two things I emphasise in my book. The first is, life is difficult enough for developing countries, you shouldn’t make it more difficult by having unfair rules of the game. So even with fair trade agreements, a level playing field, many developing countries — perhaps most — would not be successful. It would make things easier, but it would not solve their problems. The second is that these countries in the past have looked to the IMF for advice. And the IMF’s advice is not just advice. Because if you do not follow it, you can be criticised, and as you get criticised capital markets can be scared off. It’s advice with clout, it comes with a stick. In many cases their advice has been misguided. IMF policies made the downturn in East Asia much worse than it otherwise would have been. They made what would have been a downturn into recession. They advised many countries to liberalise their capital markets prematurely, and that led to a boom when the capital rushed in and a crisis when the capital rushed out. And what they gained in the beginning they more than lost in the outflow. • You note that there is no one model of capitalism as the IMF’s one-formula-fits-all appears to imply. I would go even further. The (IMF) variant of the market economy is not a variant that ever existed. It’s a mythical version, that’s why it’s failed. It’s not even American. Our central bank, the Federal Reserve, has a mandate to look at inflation and unemployment and growth. The IMF tells everybody, look only at inflation. They believe in trickle-down economics. The evidence is very strong, trickle-down doesn’t work. They told many countries, privatise your social security. In the Clinton administration we opposed that. • Isn’t it time economists took ownership of their prescriptions? Yes. In the absence of what I would call economic scientists talking about economic issues, you have ideologues pushing a political agenda which may have no basis in economic science. This is even true of the IMF. They said capital market liberalisation was good, as if there was a body of authority, of research. When I went to the World Bank, I said, where’s your research, theory, evidence? They had none. The only way this can be challenged is by other economists. It really requires economists to participate in this debate.
