Stiglitz’s ideas for reform include shifting more power from within the international financial institutions to the developing nations themselves, which is likely to be resisted by the governments of those countries. However, he offers a number of practical ideas for reform that may be more achievable, including: allowing developing nations more leeway to intervene in their capital markets to reduce instability; reforming bankruptcy law to make greater allowances for commercial bankruptcies resulting from macroeconomic disturbances; improving banking regulations in the developed and developing world to lead to more effective cross-border lending and less instability; and better managing risk so that the large developing nations would assume some of the currency risks that have produced severe difficulties for small nations such as Thailand.
An Idiosyncratic Soros
A more idiosyncratic and interesting critique of the world economic order comes from George Soros, the well-known hedge fund operator and philanthropist. George Soros on Globalization (Public Affairs, 2002), like the Stiglitz book, finds fault with institutions such as the IMF and also complains about the ideas of “market fundamentalists,” but Soros’s critique is more evenhanded.
The author accepts that policymakers have been trying to do the best they can with the knowledge and techniques available. He is more modest than Stiglitz in his prescriptions, taking it as a given that wholesale policy change at these institutions is unlikely. Instead, he suggests some practical reforms, such as allowing the central banks of developed nations to accept treasury securities from selected developing countries that are experiencing liquidity problems. Another of his reforms is his idea for making international institutions such as the World Bank less dependent on their shareholder governments: He recommends that the institutions’ directors be chosen on the basis of their personal and professional qualifications, appointed for fixed terms, and given more independence, which is the way that governors of the U.S. Federal Reserve are selected.
But Soros’s most powerful argument is exceedingly idealistic. Although he counts himself “an ardent supporter of globalization,” he believes that it can continue and succeed only if the industrialized nations — especially the U.S. — vastly increase the amount of foreign aid they offer to the developing world. He is not a Pollyanna about the chances of this happening. Foreign aid is unpopular, he notes, because it has produced such poor results in the past. He offers ideas to improve its efficiency that are based on his own experience as a philanthropist. Instead of foreign aid being doled out on a government-to-government basis, with the donors retaining control over the aid they provide, Soros recommends that foreign aid be managed by boards composed of nationals of the recipient countries, who are empowered to work with the local government when they can and independently when they cannot.
One way to pay for increased foreign aid, he suggests, is to enact a tax on foreign exchange trading. Supporters of such a tax in the past have claimed it could reduce volatility in the foreign exchange market. Soros disagrees, but he supports the idea as a convenient way to simply raise the money.
Soros theorizes that if foreign aid accomplished more, Americans would be more willing to pay for it. One encouraging sign, he notes, is the success of the Jubilee 2000 movement, a network of activists and church groups from more than 60 nations that has encouraged industrialized nations to forgive the debts of the poorest countries — something not considered possible 10 years ago.
Soros’s book is somewhat disorganized. It was finished just before September 11 last year, and he then unwisely decided to tack on a muddled peroration about geopolitics. But his views on the international economy and globalization are heartfelt, and his ideas on ways to improve the world are invariably interesting and original.