Nobel sentiment : Joseph Stiglitz and the Washington Consensus.

At gala ceremonies in Stockholm on December 10, Joseph E. Stiglitz, fifty-eight, professor of economics at Columbia, will receive the highest honor of his profession--the Nobel Prize in Economics awarded by the Royal Swedish Academy of Sciences. Stiglitz shares the prize with two other American economists, George A. Akerlof of the University of California at Berkeley and A. Michael Spence of Stanford, for contributions they made back in the 1970s. The Nobel Committee chose them for having "laid the foundation for a general theory of markets with asymmetric information," meaning the unbalanced condition in which "actors on one side of the market have much better information than those on the other." In short, the Nobel Prize-winners have raised significant questions about the prevailing lassez-faire consensus.

Of the three economists, as the Los Angeles Times noted (October 11), "Stiglitz has gone the furthest in pushing the issue in policy circles and producing controversy in the process." More significantly, Stiglitz's recent work, which went unremarked in his Nobel award, has gone very far in laying the foundation for a new dimension of economics incorporating asymmetries not just of information but of wealth and power.

Hours after getting the Nobel news on October 10, Stiglitz spoke to reporters about his expansive approach to economics. "I believe very strongly that economics can make a very large difference...for the better in the world," he said. His recent focus, he pointed out, has been on "the disparity between the haves and the have-nots," particularly on the plight of the world's poorest people. He made clear his intention to pursue those concerns vigorously. "Much of our global economic system is characterized by a lot of inequities," he said. "The global trading regime is one which has been devised mostly by the [industrialized] North for the benefit of the North. It seems to me that one of the very important elements in the agenda going forward has to be to try to redress those inequities."

Perhaps Stiglitz's most comprehensive exposition of his approach is an address he gave on "Democratic Development as the Fruits of Labor" during the January 2000 meeting of the American Economic Association in Boston. Just ending a three-year stint as chief economist at the World Bank, where he frequently challenged policies of the bank and its sister institution, the International Monetary Fund, Stiglitz reflected on how he often felt like a lone voice arguing for positions differing from those springing from neoclassical economics, particularly on policies affecting workers.

"If one didn't know better," he said in his swan song, "it might seem as if the fundamental propositions of neoclassical economics were designed to undermine the rights and positions of workers." He then went on to illustrate how several economic propositions do just that. Heading his list was this one: that labor is just another factor of production, like land and machinery, in the belief that "there is nothing special about labor." Stiglitz offered a rebuttal in economic terms: "Labor is not like other factors. Workers have to be motivated to perform. While under some circumstances it may be difficult to coach a machine to behave in the way desired (for example, trying to get a computer not to crash), what is entailed in eliciting the desired behavior out of a person and out of a machine are, I would argue, fundamentally different."

Using such flawed neoclassical propositions, however, policymakers sent developing countries "a standard message to increase 'labor market flexibility,'" Stiglitz said. "The not-so-subtle subtext...was to lower wages and lay off unneeded workers." As a result, "even when labor market problems are not the core of the problem facing a country, all too often workers are asked to bear the brunt of the costs of adjustment."

Stiglitz, born in Gary, Indiana, and a graduate of Amherst, got his Ph.D. from MIT, became a tenured professor at Yale at the age of twenty-seven, and went on to professorships at Princeton, Oxford, Stanford, and now Columbia. His experience outside academia, first as a member of President Bill Clinton's Council of Economic Advisors and later at the World Bank, sharpened his insights into the asymmetries of wealth and power, particularly as implemented internationally under what the pros call the Washington Consensus.

The Washington Consensus is a free-trade and free-investment strategy for international growth first defined and labeled by economist John Williamson in 1990. It contained no equity issues, because, as Williamson explained later, he found Washington policymakers "essentially contemptuous of equity concerns." Stiglitz was not among the contemptuous, and is not. He argues that the Washington Consensus is too narrow, economically and also morally skewed in favor of the rich. His harshest criticism targets policies imposing and protecting the unrestricted cross-border flow of capital and then, when the fleeing "hot money" creates a broader financial crisis, providing generous financial bailouts.

"In East Asia [especially during the early 1990s]," Stiglitz says, "it was reckless lending by international banks and other financial institutions, combined with reckless borrowing by domestic financial institutions--combined with fickle investors--that may have precipitated the crisis. But the costs, in terms of soaring unemployment and plummeting wages, were borne by workers. Workers were asked to listen to sermons about austerity and 'bearing pain' just a short while after hearing, from the same preachers, sermons about how globalization and opening up capital markets would bring them unprecedented growth."

More and more analysts see eye to eye with Stiglitz on the perils of unrestricted international capital markets. The most vocal economist among them, Jagdish Bhagwati, also a professor of economics at Columbia, identifies Wall Street by name as a guilty party and beneficiary. Even the Economist, in its September 28 survey of globalization, concedes that one of the clearest lessons of the past few years is that "foreign capital is a mixed blessing," especially in the case of short-term lending and borrowing by banks, which "are systematically protected from the consequences of their reckless behavior." But unlike the Economist, Stiglitz presses the question of responsibility for such policies.

"Finance ministers and central bank governors have the seats at the table [of intergovernmental financial institutions]," he said in a June 2000 interview with The Progressive magazine. "Finance ministers and central bank governors are linked to financial communities in their countries, so they push policies that reflect the viewpoints and interests of the financial community and barely hear the voices of those who are the first victims of dictated policies."

Stiglitz singles out the U.S. Treasury Department for blame, since it shapes the U.S. position on international economic policy, which then often becomes the policy of the IMF and other intergovernmental financial institutions. At a conference convened by the AFL-CIO and the Washington College of Law last February, he said: "We would never be content to delegate domestic economic policy to the Treasury. In today's world, it is equally misguided to delegate international economic policy to the Treasury, or even to the Treasury and State. A broader range of voices, including those of labor, must be heard." That has yet to occur.

More than most economists, Stiglitz grasps that giving nongovernmental groups a voice in global economic decisions can help identify problems and find workable solutions. Organized business is often accepted in this role; organized labor is not. At a high-level meeting held in October in Shanghai, for example, the Asia-Pacific Economic Cooperation Forum, an international organization of government and private leaders from the United States and twenty other Pacific Rim countries, allowed participation by business but not by labor. Stiglitz believes that although business belongs at such meetings, it should not monopolize the private-sector role.

Unlike some critics on the left and right who favor closing down the IMF and similar institutions, Stiglitz sticks to advocating reform. Indeed, top officials of the U.S. Treasury also seemed to be in a serious reform mode three years ago, when a financial crisis was sweeping much of the world. Robert E. Rubin, then Treasury secretary, even suggested that strengthening the "architecture" of the international financial system should include implementing core labor standards throughout the world. But when the financial crisis faded, so did almost all interest by policymakers in reform.

Stiglitz holds that there is no single "best" strategy for development, that different policies impose different costs and confer different benefits on different groups, and that the choices of alternatives should be made through a democratic process. As a replacement for the Washington Consensus, he offers what he calls a new Democratic Consensus, built around "democratic, equitable, and sustainable development." Among its components, he said in his Boston address, are these three principles: (1) the rights of workers should be "a central focus" of development policy; (2) "labor unions and other genuine forms of popular self-organization are key to democratic economic development"; and (3) worker representatives should be heard at every level, from the workplace all the way up to the international level.

Are those ideas radical ones for a mainline economist? Not really, according to Daniel Rodrik, professor of economics at the Kennedy School of Government at Harvard. "What is striking about Joe's views," Rodrik says, "is not that much their substance (similar and often more 'radical' views are expressed, using appropriate economics jargon, in academic seminars and conferences) but that they were offered by such a prominent neoclassical economist in a quasi-public forum. Economists tend to close rank, and defend the orthodoxy in their public comments, even when their own research runs counter to them."

Robert A. Senser, a former labor attache in the U.S. Foreign Service, edits Human Rights for Workers (www.senser.com).