Foreign Affairs October 2001

Thanks for Nothing

A former chief economist at the World Bank offers a case study in how heavy-handed interference can break what doesn't need fixing

During the recent demonstrations in Seattle, Quebec City, and elsewhere denouncing the International Monetary Fund and the World Bank, the press tended to dismiss the protesters as fringe reactionaries ignorant of the benefits of globalization. But although no one condones the violence in Genoa, for example, it would be wrong simply to reject many of the protesters' concerns. As the chief economist at the World Bank from 1997 to 2000, I have seen firsthand the dark side of globalization—how the liberalization of capital markets, by allowing speculative money to pour in and out of a country at a moment's whim, devastated East Asia; how so-called structural-adjustment loans to some of the poorest countries in the world "restructured" those countries' economies so as to eliminate jobs but did not provide the means of creating new ones, leading to widespread unemployment and cuts in basic services. The media and the public have since become concerned about this dark side as well—globalization without a human face, it is sometimes called.

However, the issue that is commonly debated—namely, whether we should be "for" or "against" globalization—is not the salient one. As a practical matter there is no retreating from globalization. The real issue is the conduct of the international economic organizations that steer it. If we continue with globalization as it has been managed in the past, its agenda driven by the North for the North, reflecting the North's ideologies and values, the future will not be bright. There will be a backlash in the developing world and increasing conflict with the developed world. There will be greater global instability and rising doubts about the value of a market economy. Those doubts are already reflected in a pervasive hostility toward the IMF in the Third World: in Thailand and Korea, for example, ordinary citizens refer to their countries' debilitating recessions as "the IMF." Yet well-managed globalization has enormous potential for improving the lives of people in poor countries.

Events in Ethiopia offer a case study of the ways in which globalization can go awry, and they highlight the need for reform. In March of 1997, barely a month into my job at the World Bank, I went to Ethiopia to meet with Prime Minister Meles Zenawi. Meles came to power in 1991, after a seventeen-year guerrilla war against a bloody Marxist regime. His victory left him facing seemingly intractable problems. Ethiopia, at the time a nation of 58 million people, had a per capita income of around $100 a year. Droughts had killed millions. Though he trained in medicine, Meles had studied economics at the Open University, in England, and knew that only major changes in economic policy could bring his country out of poverty. During our discussions he showed a deeper and more subtle understanding of economic principles (not to mention a greater knowledge of the circumstances in his country) than many if not most of the international economic bureaucrats I would deal with in the succeeding three years.

These intellectual attributes were matched by integrity: Meles was quick to investigate any accusations of corruption in his government. He was committed to decentralization—to ensuring that the center did not lose touch with the various regions.

At the time of my arrival Meles was engaged in a bitter dispute with the International Monetary Fund, which had suspended its program in his country. At stake was not just some $125 million of IMF money but potentially hundreds of millions of dollars in World Bank loans as well. Traditionally the World Bank is reluctant to lend money unless the IMF certifies that the country in question has a solid macro-economic framework. The provision is well intentioned: history has shown that governments that cannot manage their overall economy do not do a good job managing foreign aid.

The IMF is supposed to judge performance by results. Ethiopia's results could not have been better. It had no inflation; in fact, prices were falling. Output was growing steadily. Meles was demonstrating that with the right policies even a poor country recovering from civil war and famine can experience sustained economic growth. After years of struggle and rebuilding, Ethiopia was beginning once again to receive assistance from Western governments.

Judging by results, then, the IMF should have given Ethiopia an A+. And there were other positive indicators, such as direct evidence of the competence and commitment of the government. For instance, it had cut back dramatically on military spending—a remarkable feat for a government that had come to power by military means—in favor of spending to fight poverty. This was precisely the kind of government to which the international community should have been directing assistance. Yet the IMF had suspended its aid. Why?

The Fund was worried, first, about the role of foreign aid in the government's budget. A poor country like Ethiopia has two sources of revenue—taxes and foreign assistance. The government's budget is balanced as long as those revenues equal expenditures. This may seem like elementary economics—but it is not IMF economics. Although Ethiopia's budget was balanced, the Fund argued that the country's budgetary position was untenable: what would happen if foreign assistance suddenly dried up? Ethiopia should act immediately, the Fund argued, to prevent the possibility of disaster. That meant cutting spending or raising taxes—a difficult action in any country, but especially in a desperately poor one.

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