Market fundamentalism.

ECONOMISTS ARE THE ORACLES of our age, bestowing their wisdom on a world confronted with the dizzying choices of globalization. Throughout the 1990s, they were everywhere: Markets would tremble at the slightest catch in Alan Greenspan's voice; teams from the International Monetary Fund would fly into poor countries to revamp their economies; and finance ministers would appear on television as often as prime ministers. Sometimes, however, the oracles got it wrong.

Just how wrong is one of the many surprising and disturbing revelations that emerge from Globalization and Its Discontents. Part memoir, part primer, part polemic, Joseph Stiglitz's book recounts the crises that devastated the world economy in the past decade. A former chairman of Bill Clinton's Council of Economic Advisers and chief economist of the World Bank, he draws on his experience to attack the IMF for the first contributing to the economic problems of the 1990s and then making them worse. What is striking about this critique is seeing a venerated insider argue so forcefully that globalization has been mismanaged. This is no longer merely a matter of protesters in the street.

Stiglitz's bete noire is the economic approach taken since the: 1980s by the World Bank and the IMF, which he terms "market fundamentalism" Most basically this is the belief, prominent during the conservative ascendancy of the Reagan and Thatcher years, that free markets are always the best way to resolve economic problems. Stiglitz argues that such an approach neglects the fact that markets work poorly when institutions are weak and economic information is not widely available--conditions which prevail in most of the developing world. Stiglitz's theorizing about these issues earned him the Nobel Prize in 2001 but was ignored by IMF ideologues.

The IMF's free-market religion is revealed most clearly by its unshakable commitment to something called "capital-account liberalization"--the removal of barriers that prohibit the flow of capital into and out of countries. Although open capital markets bring some benefits, such as foreign direct investment, they also create a substantial risk of instability. Despite this, the IMF, believing that free capital markets make economies more efficient, pushed liberalization onto developing countries. In Stiglitz's view, this push was the single greatest contributing factor to the economic turmoil of the 1990s, and he illustrates this through detailed studies of the Asian financial crisis and Russia's botched transition to capitalism.

The problem with full capital-account liberalization is that it allows speculative "hot money" to flow into a developing economy--funds that can be pulled out overnight at the slightest shift in investor confidence. For instance, the devaluation of the Thai baht in 1997 prompted just such a reversal. As bankruptcies spread among firms that had borrowed abroad, the IMF made emergency loans to crisis-afflicted countries seeking to shore up their currencies. But they were conditional on rigid reforms: higher interest rates, fiscal austerity, and a reduction in imports.

Stiglitz compares these moves to Herbert Hoover's insistence on a balanced budget during the Great Depression. Higher interest rates prompted more bankruptcies, lower government spending spurred greater unemployment, and reduced imports spread the crisis to other countries by lowering regional income. Policies intended to bolster investor confidence thus had the opposite effect. In Indonesia, for example, the IMF demanded a cut in food subsidies that led to widespread rioting and precipitated that nation's violent political revolution. Asia paid a stoop price for those errors: Unemployment shot up threefold in Thailand, fourfold in Korea, and a staggering tenfold in Indonesia.

In seeking to unravel why the IMF persisted in its approach, Stiglitz argues that the IMF and its masters in the U.S. Treasury Department are fundamentally influenced by Wall Street. He does not allege a conspiracy per se but rather a dangerous mindset. Echoing an argument originally made by trade economist Jagdish Bhagwati, Stiglitz says those who make economic policy generally interact with and are drawn from the financial community, and consequently are attuned to its interests and ideology. The enthusiasm for capital-account liberalization and the emphasis on paying back foreign creditors during the Asian crisis can thus be explained by American and European banks pushing for both. IMF managers can get away with this, Stiglitz argues, because they spend billions in public funds but are not directly accountable to any public authority. To remedy this, he calls for greater transparency and a greater role for developing nations at the IMF, so that it will be forced to defend its decisions to those affected by them.

Although at times he belabors his points, Stiglitz's arguments come across clearly and accessibly, even to noneconomist readers. For the most part they are persuasive, but the author does occasionally overreach. He seems unwilling to credit the IMF for anything it does. For instance, at the onset of the Asian crisis, no one knew for sure what would work and what wouldn't, so it was hardly surprising that officials relied on familiar policies. And when the disastrous effects became apparent, the IMF did change course somewhat. Korea is better often than Indonesia today not just because, as Stiglitz argues, its leaders did not go along with all IMF proposals; the IMF program there was also better designed, particularly in its use of debt restructuring, thanks to the fund's incorporation of lessons learned. Stiglitz's portrayal of the IMF as impervious to change must also be leavened by recent developments: IMF First Deputy Managing Director Anne Krueger's proposal of a "Super Chapter 11" bankruptcy system for countries echoes Stiglitz's own suggestion in the final chapter of his book. Finally, one might wonder what political incentives the U.S. has to relinquish control over the IMF and allow more say for developing nations.

Nevertheless, the impulse to demand greater accountability and transparency within the IMF is a good one. Keynes wrote in a previous age of economic ferment that "the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood" Stiglitz's book vividly illustrates this truth and shows why outsiders must cast a close, critical eye on global economic institutions.

Economics is too important to be left just to the economists.

SIDDHARTH MOHANDAS is an assistant editor at Foreign Affairs.