"Global Storm: Loan Agencies Under Siege"
David E. Sanger
New York Times, April 16, 2000, Section 1, page 1
This article examines the criticisms that have been raised recently against the IMF and World Bank. At one point the article refers to a piece in The New Republic (4/17/00) by Joseph Stiglitz, the former chief economist of the World Bank and one of the world's most respected economists, in which he harshly criticized the IMF's policies. The article summarizes this piece by commenting that "his main complaint appeared to be that it [the IMF] was not willing to adopt his approach to handling the Asian crisis."
Actually, Stiglitz's piece (available online at http://www.tnr.com/041700/stiglitz041700.html ) carefully describes several major problems with the way the IMF conducts itself, the most important of which is its unwillingness to consider alternative views. While the IMF rejected the advice of Stiglitz in handling the East Asian financial crisis, it also ignored the advice of many other prominent economists to both its left and right, including MIT Professor Paul Krugman and Harvard Professor Martin Feldstein. Its recommendation for imposing austerity on nations already facing a recession also defied basic economic theory.
Similarly, Stiglitz noted that the IMF ignored the advice of several prominent economists, in addition to himself, in insisting that Russia move rapidly to privatize its industry before it had a legal and financial infrastructure in place to support this process. As a result of this decision, much of Russia's wealth fell into the hands of a small clique of well-connected businessmen. The economy collapsed, shrinking by close to 50 percent, and much of the population fell into poverty.
In his New Republic article, Stiglitz very clearly details these and other complaints about the IMF. He also has several professional articles that present the substance of his criticisms in considerable detail, as well as numerous references to other research that support his conclusions. The Times article presents nothing to support its accusation that Stiglitz's complaints lack substance.
"Making Room for the Poor in a Global Economy"
Barbara Crossette
New York Times, April 16, 2000, Section 4, page 1
This article purports to examine the best way to improve the living standards of the poor in developing nations. The article is dismissive of the critics of the World Bank, International Monetary Fund and World Trade Organization, commenting: "Slogans and oratory do little to illuminate the profound complexity of human development in the new economic order. From a village-eye view where life is harshest, some development experts say, nothing could be more irrelevant than global theories or rants against multinational corporations."
The article does not identify any experts who hold this view. In fact, one of the central issues in the current debate over the pace and direction of globalization is the future of semi-subsistence agriculture in the developing world. The United States, along with organizations like the World Bank, IMF and WTO, has been insisting that developing nations remove tariff barriers to imported food and subsidies for domestic agriculture. In most developing nations a large portion, sometimes a majority, of the population is still employed in semi-subsistence agriculture. Their future will be determined by the outcome of this debate over development policy.
The article does not explain the basis for its disapproval of criticisms of multinational corporations.
"Demonstrators Are United by Zeal for 'Global Justice'"
David Montgomery
Washington Post, April 16, 2000, page A28
This article discusses the motivations of the people protesting against the IMF and World Bank in Washington. At one point the article presents the response of the IMF and World Bank that "they employ proven methods for helping countries stabilize and grow their economy."
This claim is not supported by the evidence. The countries that have been subject to IMF structural adjustments have generally experienced little or no improvements in living standards. By comparison, nations have often achieved rapid improvements in living standards when following development paths not approved by the IMF, such as import substitution or "crony capitalism."
"Financial Leaders Meet as Protests Clog Washington"
John Kifner with David E. Sanger
New York Times, April 17, 2000, page A1
This article reports on the protests at the meeting of delegates to the IMF and World Bank in Washington. At one point, the article comments that "several leaders of smaller nations said during the meeting that they were alarmed by reform proposals ... that would limit the size and duration of the fund's loans during economic crises. They fear that it would reduce the money made available to them." It claims that this is ironic because many of the protestors want to weaken the fund in order to help poor nations.
It is worth noting the leaders of poor nations had endorsed the protesters demands at the G-77 summit in Havana over the weekend. This was reported in news articles in both papers. This article does not identify any of the leaders of poor nations who hold the view attributed to them in this article.
"Analysis: Bank, IMF Shifting Terms of Debate"
John Burgess
Washington Post, April 18, 2000, page A1
This article reports on the efforts of the World Bank and IMF to portray themselves as institutions that are changing in light of the criticisms made by outside economists, members of Congress and the protestors in Washington, D.C. At one point the article asserts that the IMF "has acted as an international auditing firm…. What they most wanted to see was ledger numbers coming into balance in the aggregate, not a cut, say, in malnutrition."
This is an extremely generous characterization of the IMF's function which does not coincide with its actual record. In many cases it has insisted on policies that bear little obvious relation to bringing a nation's ledger numbers into balance. For example, in the case of South Korea, it insisted that the government assume responsibility for private debt incurred by South Korean banks and corporations. While this may have improved the ledger of western lenders, it increased the debts of the South Korean government.
The IMF also insisted that the South Korean government allow foreign ownership of domestic firms. This demand was consistent with former Commerce Secretary Mickey Kantor's urgings that the U.S. use the IMF to get as much as possible from the East Asian financial crisis, since this allowed U.S. firms to buy up South Korean firms at steep discounts. This measure also did not help South Korea's ledger in any obvious way.
"World Trade Officials Pledging to Step Up Effort Against AIDS"
John Kifner with David E. Sanger
New York Times, April 18, 2000, page A1
This article reports on the professed commitment of the World Bank to combating AIDS in Africa. According to the article, the World Bank has pledged "to commit 'unlimited money' to fight AIDS in poor countries."
The article does not note that one of the factors that has made it far more difficult to combat the spread of AIDS in poor countries has been the TRIPS agreement, which was associated with the Uruguay round of GATT that created the WTO. This agreement applies U.S.-style patent law to developing nations. Patent protection raises the price of AIDS drugs in developing nations by several hundred or even thousand percent above the competitive free market price.
The World Bank, along with IMF, has pressured developing nations to sign on to the TRIPS agreement. It is very unlikely that the "unlimited money" that the World Bank is now pledging to combat AIDS will be anywhere near as large as the additional expenses associated with enforcing patent protection on AIDS drugs.
At one point the article asserts that the World Bank has slowed debt relief for poor nations because "wealthy nations have been slow to commit the money necessary for debt relief." This is inaccurate. The World Bank, and more importantly the IMF, have large reserves which could be tapped for this purpose, so that debt relief could go forward even without a commitment of additional funds. The fact that these institutions are unwilling to dip into their reserves for debt relief suggests that the Bank's pledge of "unlimited money" may not be a very large commitment of money.
"IMF Points to a Big Accomplishment: It Met on Schedule"
Joseph Kahn
New York Times, April 17, 2000, page
This article discusses the meeting of the IMF and World Bank. At one point it asserts that the these institutions are being prevented from forgiving more debt of poor nations by the failure of the U.S. Congress and other national legislatures to appropriate additional money for debt forgiveness. This article also fails to mention that these institutions have sufficient reserves to cover the cost of debt forgiveness. They are choosing not to dip into their reserves for this purpose.
More about the IMF and World Bank.
"Dow, Nasdaq Enter Free Fall"
Sharon Walsh and John M. Berry
Washington Post, April 15, 2000, page A1
"Wall St. Collapse Tests Faith in 'New Economy'"
Sandra Sugawara
Washington Post, April 15, 2000, page A1
These articles discuss the plunge in the stock market the previous week. Both include somewhat misleading comments on the determinants of the stock market's value. For example, at one point the first article notes that "many analysts stressed that the economy is still in the midst of its largest expansion ever." This is actually not true, since the '60s expansion was considerably larger (although shorter), but more importantly it is irrelevant. Stock prices depend on future corporate profits, not the overall health of the economy. Even if the economy continues to grow at a healthy pace, it will have little positive effect on stock prices if profits don't also grow rapidly.
The second article refers to the price/earnings ratio of stocks as "one conventional measure of valuation." The price to earnings ratio is the standard measure of stock values. There is no economic theory that justifies holding stock unless the shares ultimately generate profit.
As the article points out, the current price to earnings ratio for broad market indexes such as the S&P 5000 is more than 30 to 1. This is more than twice the historic average. The Congressional Budget Office projects that corporate profits, after adjusting for inflation, will decline by approximately 4.0 percent over the next ten years. This implies that stocks are over-valued by close to 50 percent.
"Stock Market's Loss May Be Economy's Gain"
John M. Berry
Washington Post, April 17, 2000, page A1
This article presents the argument that the fall in the stock market may be good for the economy, since it will slow growth. Since Federal Reserve Board chair Alan Greenspan was raising interest rates to slow growth, if the falling stock market brings about this effect, then he may not raise interest rates as much.
At one point it presents the view of Michael Levy, the chief economist for BankAmerica Corp, that the size of the wealth effect associated with stocks is quite limited. The article notes that the wealth effect is usually estimated at about 4 percent, meaning that an additional dollar of stock wealth leads to 4 cents of additional consumption. It then calculates that a loss of $2 trillion in stock wealth will lead to a drop of $80 billion in consumption.
While this arithmetic is correct, most economists who have analyzed the stock market in relation to future projections of profit and economic growth, such as MIT Professor Peter Diamond and Yale Professor Robert Shiller, estimate that it was over-valued by between $8 trillion-$10 trillion. The size of the wealth effect associated with a correction of this magnitude is a decline in annual consumption spending of between $320-400 billion. A reduction in consumption of this magnitude would lead to a drop in GDP of 4-5 percent.
"Stay With Stocks, Market Experts Say"
Albert B. Crenshaw
Washington Post, April 18, 2000, page E2
This article reports the advice of investment advisors that people investing for the long-term should keep most of their money in stock. The article does not present the views of any market analysts who argue that the stock market is hugely over-valued. This position has been argued by many distinguished economists, most recently by Yale University Professor Robert Shiller in his new book, Irrational Exuberance (Princeton University Press, 2000). It is surprising, particularly in light of recent events, that this article could completely exclude such views.
"Inflation Index Jumped in March"
John M. Berry
Washington Post, April 15, 2000, page E1
"A Report on Inflation Ignites a Sell-Off -- Technology Rout"
Jonathan Fuerbringer and Alex Berenson
New York Times, April 15, 2000, page A1
"Ice for a Hot Economy?"
Floyd Norris
New York Times, April 15, 2000, page A1
These articles all discuss the rise in the consumer price index (CPI) in March. All three refer to the 0.4 percent rise in the core rate of inflation (excluding food and energy) in March as a surprise to analysts.
It is not clear why this price rise should have been a surprise. The core rate of inflation had been 0.2 percent the prior two months, but there were anomalous factors, such as large declines in apparel, car and hotel prices, which had temporarily depressed the inflation rate in this period. It should have been apparent to a careful analyst of this data that these anomalies would be reversed in later months, leading to the more rapid rate of inflation shown in the March data. (See, e.g., Price Bytes, 2/18/00, and 3/17/00, http://www.cepr.net/Bytes.html ).
"IRS More Likely to Audit the Poor and Not the Rich"
David Cay Johnston
New York Times, April 16, 2000, Section 1 page1
This article reports the finding of a new study, that poor people face a greater likelihood of being audited by the IRS than wealthy people.
"Janitors Struggle at the Edge of Silicon Valley"
Steven Greenhouse
New York Times, April 18, 2000, page A1
This article reports on the plight of janitors who work in major Silicon Valley firms. The article points out these janitors typically earn about $8 per hour in an area where even a small apartment generally rents for over $1000 per month. Such rents force many families to share trailers, garages or other substandard living arrangements.
Dean Baker is an economist and the co-director of the Center for Economics and Policy Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR.
ERR is edited by Jim Naureckas.
More analysis of the New York Times and Washington Post can be found at http://www.fair.org/media-outlets/nyt.html and http://www.fair.org/media-outlets/wpost-newsweek.html.
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