Joseph Stiglitz’s (“Dealing with Debt,” Spring 2003) discontent apparently continues to be more with the International Monetary Fund (IMF) than with globalization per se. In this piece, he elaborates on some of the themes previously developed in his recent book and adds a few new ones. As always, he refuses to pull punches even if some of them miss, in contrast to his scientific work as a Nobel prize-winning economist.

Stiglitz leads off by offering three elements of a well-functioning global financial system required to get his seal of approval: financial transfers that go from rich to poor countries, rather than the reverse; an institutional framework which prevents financial crises; and an orderly process for permitting sovereign bankruptcy in the developing world.

I would certainly join the author in lamenting the fact that the United States has become the world’s largest borrower, that the more dependable and long-term foreign direct investment flowing to developing countries is badly distributed, and that the footloose flows of short-term capital usually act pro-cyclically, governed by actual or expected interest rate differentials or currency fluctuations, rather than real rates of return. I also join him in the view, now gaining ascendancy, that international capital markets should be opened only gradually. What is less clear than the diagnosis is the cure. Are the high debt levels incurred by many developing countries entirely the fault of the lenders, bilateral and multilateral? And just what are the rules for liberalizing capital markets gradually, in line with countries’ “enhanced economic growth”? The reason that China gets a lot of foreign direct investment and Sub-Saharan Africa gets very little is not simply a function of rich country malevolence but is dictated by profit-seeking, not charitable, impulses. Admittedly, not enough public foreign capital goes into health, education, and the environment; but recipients are not entirely without bargaining power in setting priorities. Also, I do not understand why one should equally castigate foreign investment in extractive sectors and those employing local labor—if at low wages. The latter proved a godsend in East Asia during the 1960s and 1970s, not only contributing to rapid growth but also to improved equity.

Stiglitz pays a lot of attention to the perversity of short-term capital flows and here his accusation that both the US Treasury and especially the IMF provided relatively knee-jerk, across-the-board support to opening capital markets, short- as well as long-term, hits home. Admittedly, reforms of local financial institutions are needed before any gradual capital market liberalization makes sense. But it is not fair, once again, to lay the Latin American debt problem entirely at the door of US interest and exchange rate policies. Stiglitz rightly condemns the IMF’s excessive ideological zeal, but he may be in danger of a similar crime. Market and donor failures are prominent here while governments and recipients are virtually exempt from blame. Challenging the conventional wisdom makes for good reading, but having the pendulum swing excessively does not necessarily yield good political economy.

I have a related concern with Stiglitz’s single-minded suggestion that Keynesian fiscal policies should be applied to developing countries facing downturns, as in the aftermath of the East Asian financial crisis. One can agree that the IMF made a number of mistakes during that particular episode—by initially preaching bank closures in Indonesia, peg maintenance in Thailand, and high interest rates everywhere—but it would also be fair to acknowledge that the IMF showed evidence of learning and a growing realization that confidence cannot be restored by deepening a country’s recession. However, I certainly do not agree that developing countries have the same cyclical excess capacity problem Keynes was addressing as relevant to advanced countries in the 1930s. Moreover, Keynes’ proposal for a larger international fund at Bretton Woods focused on giving countries more time for adjustment, not correcting the normal ups and downs of the business cycle.

Stiglitz sees the global financial system as failing and the global reserve system as the main culprit. He goes to great lengths to demonstrate the high costs of having to hold reserves, especially for poor countries. While I agree that minimal reserves should be held for transaction purposes and not as instruments for growth, unpredictable market events do not emanate only from uncertain financial markets but also from the real side, especially in the case of the developing countries.

Finally, Stiglitz comes out in support of an international bankruptcy regime not very different, as far as I can make out, from the proposal of the IMF’s Anne Krueger, recently modified to eliminate any preferred status for the IMF. Once again, however, the moral hazard objections to the scheme are not addressed and, at least for the short run, the US Treasury’s preference for collective action clauses is, surprisingly, endorsed.

So, all in all, I did not find much value added here to Stiglitz’s earlier wake-up call volume. He is always stimulating and some of his critiques pointing to inadequacies in our current global financial system are well taken. I wish I could say the same for the care of the diagnosis and the cures proposed.