Stiglitz [was: Re: Haiti/Venezuelan Updates (49 Kb worth)]

Adam,

I think you might be interested in the work of the economist Joseph Stiglitz, 
a pioneer in the study of markets with asymmetric information (for which he 
was named Nobel laureate in 2001).  He's the Chief Economist and a VP at the 
World Bank, and I take some comfort in that.  I haven't had a chance to read 
any of his books or papers, but I saw his Nobel acceptance speech, which is 
available online somewhere, and it was pretty damn interesting.  His monthly 
column is included below.

David


Iraq's Next Shock Will be Shock Therapy
Stiglitz E. Joseph

With one exception - the actual military "victory," which looks increasingly 
Pyrrhic - President Bush's Iraqi adventure has been marked by repeated 
failures. Scant signs of weapons of mass destruction have been
found, and, according to David Kay, America's chief arms inspector, the 
stockpiles either never existed or were destroyed years ago. So Bush simply 
ignored the data, gathered by Hans Blix's UN inspectors, and the
evidence on which he based his case for war seems to have been largely fabricated.

Worse still, it is now clear that Bush never had a plan for when the war 
ended. Instead of moving towards peace and democracy, the situation in Iraq 
remains so dangerous that Paul Bremer, the American occupation
leader, is using instability as his rationale for avoiding democratic 
elections this year.

Of course, America tried to keep real order in some places, revealing a lot 
about what it truly valued in Iraq. When Baghdad fell, the oil ministry was 
quickly protected, while museums and hospitals were allowed to be
looted.

If there was not outright corruption in the $7 billion in contracts awarded to 
Halliburton, whose former chairman was Vice President Dick Cheney, there was 
undoubtedly a strong whiff of crony capitalism. Halliburton
and its subsidiaries have been ensnared in charges of war profiteering ever 
since, and have had to pay back millions of dollars to the US government.

Now, everyone agrees, the most important task - beyond creating a democratic 
state and restoring security - is reconstructing the economy. Blinded by 
ideology, however, the Bush administration seems determined
to continue its record of dismal failures by ignoring past experience.

When the Berlin Wall fell, the countries of Eastern Europe and the former 
Soviet Union began transitions to a market economy, with heated debates over 
how this should be accomplished. One choice was shock
therapy - quick privatization of state-owned assets and abrupt liberalization 
of trade, prices, and capital flows - while the other was gradual market 
liberalization to allow for the rule of law to be established at the
same time.

Today, there is a broad consensus that shock therapy, at least at the level of 
microeconomic reforms, failed, and that countries (Hungary, Poland, and 
Slovenia) that took the gradualist approach to privatization and the
reconstruction of institutional infrastructure managed their transitions far 
better than those that tried to leapfrog into a laissez-faire economy. 
Shock-therapy countries saw incomes plunge and poverty soar. Social
indicators, such as life expectancy, mirrored the dismal GDP numbers.

More than a decade after the beginning of the transition, many postcommunist 
countries have not even returned to pre-transition income levels. Worse, the 
prognosis for establishing a stable democracy and the rule of
law in most shock-therapy countries looks bleak.

This record suggests that one should think twice before trying shock therapy 
again. But the Bush administration, backed by a few handpicked Iraqis, is 
pushing Iraq towards an even more radical form of shock therapy
than was pursued in the former Soviet world. Indeed, shock therapy's advocates 
argue that its failures were due not to excessive speed - too much shock and 
not enough therapy - but to insufficient shock. So Iraqis
better prepare for an even more brutal dose.

There are, of course, similarities and differences between the former 
communist countries and Iraq. In both cases, economies were pervasively 
weakened before they collapsed. But the Gulf War and sanctions
weakened Iraq's economy much more than communism weakened the USSR's.

Moreover, while both Russia and Iraq are heavily dependent on natural 
resources, Russia at least possessed demonstrated abilities in some other 
areas. Russia had a highly educated labor force, with advanced
technological capabilities; Iraq is a developing country.

To be sure, Russians went decades without opportunities to exercise 
entrepreneurship, while Ba'athist rule did not suppress Iraq's merchant class 
and entrepreneurial spirit in any comparable way. But Iraq's location
puts it at a distinct disadvantage compared to Russia and many postcommunist 
states: none of Iraq's neighbors is doing particularly well economically, 
while many postcommunist countries sat next door to the
European Union during the 1990's boom. Most importantly, ongoing instability 
in the Middle East will deter foreign investment (other than in the oil sector).

These factors, together with the ongoing occupation, make quick privatization 
particularly problematic. The low prices that the privatized assets are likely 
to fetch will create the sense of an illegitimate sell-off foisted
on the country by the occupiers and their collaborators.

Without legitimacy, any purchaser will worry about the security of his 
property rights, which will contribute to even lower prices. Furthermore, 
those buying privatized assets may then be reluctant to invest in them;
instead, as happened elsewhere, their efforts may be directed more at asset 
stripping than at wealth creation.

If Iraq's prospects are as dismal as my analysis suggests, any international 
contribution to the US-driven reconstruction effort is likely to be little 
more than money flushed down the drain. This does not mean that the
world should abandon Iraq. But the international community should direct its 
money to humanitarian causes, such as hospitals and schools, rather than 
backing American designs.

The World Bank and other institutions considering assistance through loans 
face even greater difficulties. Piling more debt onto Iraq's already huge 
obligations will only make matters worse. If Iraq's economy falters
as a result of a misguided economic reconstruction program based on shock 
therapy, the country will be further indebted with little to show for it.

The dream of Iraq's American invaders was to create a stable, prosperous, and 
democratic Middle East. But America's economic program for reconstructing Iraq 
is laying the foundations for poverty and chaos.

--
Joseph E. Stiglitz, a Nobel laureate in economics, is Professor of Economics 
at Columbia University and was Chairman of the Council of Economic Advisers to 
President Clinton and Chief Economist and Senior Vice President at the World 
Bank. His most recent book is The Roaring Nineties: A New History of the 
World's Most Prosperous Decade.
Copyright: Project Syndicate, February 2004.
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