Economic Reporting Review
By Dean Baker

April 24, 2000:

IMF/WORLD BANK

"Global Storm: Loan Agencies Under Siege" 
David E. Sanger 
New York Times, April 16, 2000, Section 1, page 1 

This article examines the criticisms that have been raised recently against the IMF and World
Bank. At one point the article refers to a piece in The New Republic (4/17/00) by Joseph
Stiglitz, the former chief economist of the World Bank and one of the world's most respected
economists, in which he harshly criticized the IMF's policies. The article summarizes this piece
by commenting that "his main complaint appeared to be that it [the IMF] was not willing to
adopt his approach to handling the Asian crisis." 

Actually, Stiglitz's piece (available online at http://www.tnr.com/041700/stiglitz041700.html )
carefully describes several major problems with the way the IMF conducts itself, the most
important of which is its unwillingness to consider alternative views. While the IMF rejected the
advice of Stiglitz in handling the East Asian financial crisis, it also ignored the advice of many
other prominent economists to both its left and right, including MIT Professor Paul Krugman
and Harvard Professor Martin Feldstein. Its recommendation for imposing austerity on nations
already facing a recession also defied basic economic theory. 

Similarly, Stiglitz noted that the IMF ignored the advice of several prominent economists, in
addition to himself, in insisting that Russia move rapidly to privatize its industry before it had a
legal and financial infrastructure in place to support this process. As a result of this decision,
much of Russia's wealth fell into the hands of a small clique of well-connected businessmen.
The economy collapsed, shrinking by close to 50 percent, and much of the population fell into
poverty. 

In his New Republic article, Stiglitz very clearly details these and other complaints about the
IMF. He also has several professional articles that present the substance of his criticisms in
considerable detail, as well as numerous references to other research that support his
conclusions. The Times article presents nothing to support its accusation that Stiglitz's
complaints lack substance. 

"Making Room for the Poor in a Global Economy" 
Barbara Crossette 
New York Times, April 16, 2000, Section 4, page 1 

This article purports to examine the best way to improve the living standards of the poor in
developing nations. The article is dismissive of the critics of the World Bank, International
Monetary Fund and World Trade Organization, commenting: "Slogans and oratory do little to
illuminate the profound complexity of human development in the new economic order. From a
village-eye view where life is harshest, some development experts say, nothing could be more
irrelevant than global theories or rants against multinational corporations." 

The article does not identify any experts who hold this view. In fact, one of the central issues in
the current debate over the pace and direction of globalization is the future of semi-subsistence
agriculture in the developing world. The United States, along with organizations like the World
Bank, IMF and WTO, has been insisting that developing nations remove tariff barriers to
imported food and subsidies for domestic agriculture. In most developing nations a large
portion, sometimes a majority, of the population is still employed in semi-subsistence
agriculture. Their future will be determined by the outcome of this debate over development
policy. 

The article does not explain the basis for its disapproval of criticisms of multinational
corporations. 

"Demonstrators Are United by Zeal for 'Global Justice'" 
David Montgomery 
Washington Post, April 16, 2000, page A28 

This article discusses the motivations of the people protesting against the IMF and World Bank
in Washington. At one point the article presents the response of the IMF and World Bank that
"they employ proven methods for helping countries stabilize and grow their economy." 

This claim is not supported by the evidence. The countries that have been subject to IMF
structural adjustments have generally experienced little or no improvements in living standards.
By comparison, nations have often achieved rapid improvements in living standards when
following development paths not approved by the IMF, such as import substitution or "crony
capitalism." 

"Financial Leaders Meet as Protests Clog Washington" 
John Kifner with David E. Sanger 
New York Times, April 17, 2000, page A1 

This article reports on the protests at the meeting of delegates to the IMF and World Bank in
Washington. At one point, the article comments that "several leaders of smaller nations said
during the meeting that they were alarmed by reform proposals ... that would limit the size and
duration of the fund's loans during economic crises. They fear that it would reduce the money
made available to them." It claims that this is ironic because many of the protestors want to
weaken the fund in order to help poor nations. 

It is worth noting the leaders of poor nations had endorsed the protesters demands at the G-77
summit in Havana over the weekend. This was reported in news articles in both papers. This
article does not identify any of the leaders of poor nations who hold the view attributed to them
in this article. 

"Analysis: Bank, IMF Shifting Terms of Debate" 
John Burgess 
Washington Post, April 18, 2000, page A1 

This article reports on the efforts of the World Bank and IMF to portray themselves as
institutions that are changing in light of the criticisms made by outside economists, members of
Congress and the protestors in Washington, D.C. At one point the article asserts that the IMF
"has acted as an international auditing firm…. What they most wanted to see was ledger
numbers coming into balance in the aggregate, not a cut, say, in malnutrition." 

This is an extremely generous characterization of the IMF's function which does not coincide
with its actual record. In many cases it has insisted on policies that bear little obvious relation to
bringing a nation's ledger numbers into balance. For example, in the case of South Korea, it
insisted that the government assume responsibility for private debt incurred by South Korean
banks and corporations. While this may have improved the ledger of western lenders, it
increased the debts of the South Korean government. 

The IMF also insisted that the South Korean government allow foreign ownership of domestic
firms. This demand was consistent with former Commerce Secretary Mickey Kantor's urgings
that the U.S. use the IMF to get as much as possible from the East Asian financial crisis, since
this allowed U.S. firms to buy up South Korean firms at steep discounts. This measure also did
not help South Korea's ledger in any obvious way. 

"World Trade Officials Pledging to Step Up Effort Against AIDS" 
John Kifner with David E. Sanger 
New York Times, April 18, 2000, page A1 

This article reports on the professed commitment of the World Bank to combating AIDS in
Africa. According to the article, the World Bank has pledged "to commit 'unlimited money' to
fight AIDS in poor countries." 

The article does not note that one of the factors that has made it far more difficult to combat the
spread of AIDS in poor countries has been the TRIPS agreement, which was associated with
the Uruguay round of GATT that created the WTO. This agreement applies U.S.-style patent
law to developing nations. Patent protection raises the price of AIDS drugs in developing
nations by several hundred or even thousand percent above the competitive free market price. 

The World Bank, along with IMF, has pressured developing nations to sign on to the TRIPS
agreement. It is very unlikely that the "unlimited money" that the World Bank is now pledging to
combat AIDS will be anywhere near as large as the additional expenses associated with
enforcing patent protection on AIDS drugs. 

At one point the article asserts that the World Bank has slowed debt relief for poor nations
because "wealthy nations have been slow to commit the money necessary for debt relief." This
is inaccurate. The World Bank, and more importantly the IMF, have large reserves which
could be tapped for this purpose, so that debt relief could go forward even without a
commitment of additional funds. The fact that these institutions are unwilling to dip into their
reserves for debt relief suggests that the Bank's pledge of "unlimited money" may not be a very
large commitment of money. 

"IMF Points to a Big Accomplishment: It Met on Schedule" 
Joseph Kahn 
New York Times, April 17, 2000, page 

This article discusses the meeting of the IMF and World Bank. At one point it asserts that the
these institutions are being prevented from forgiving more debt of poor nations by the failure of
the U.S. Congress and other national legislatures to appropriate additional money for debt
forgiveness. This article also fails to mention that these institutions have sufficient reserves to
cover the cost of debt forgiveness. They are choosing not to dip into their reserves for this
purpose. 

More about the IMF and World Bank. 

[Top] 


STOCK MARKET

"Dow, Nasdaq Enter Free Fall" 
Sharon Walsh and John M. Berry 
Washington Post, April 15, 2000, page A1 

"Wall St. Collapse Tests Faith in 'New Economy'" 
Sandra Sugawara 
Washington Post, April 15, 2000, page A1 

These articles discuss the plunge in the stock market the previous week. Both include
somewhat misleading comments on the determinants of the stock market's value. For example,
at one point the first article notes that "many analysts stressed that the economy is still in the
midst of its largest expansion ever." This is actually not true, since the '60s expansion was
considerably larger (although shorter), but more importantly it is irrelevant. Stock prices
depend on future corporate profits, not the overall health of the economy. Even if the economy
continues to grow at a healthy pace, it will have little positive effect on stock prices if profits
don't also grow rapidly. 

The second article refers to the price/earnings ratio of stocks as "one conventional measure of
valuation." The price to earnings ratio is the standard measure of stock values. There is no
economic theory that justifies holding stock unless the shares ultimately generate profit. 

As the article points out, the current price to earnings ratio for broad market indexes such as
the S&P 5000 is more than 30 to 1. This is more than twice the historic average. The
Congressional Budget Office projects that corporate profits, after adjusting for inflation, will
decline by approximately 4.0 percent over the next ten years. This implies that stocks are
over-valued by close to 50 percent. 

"Stock Market's Loss May Be Economy's Gain" 
John M. Berry 
Washington Post, April 17, 2000, page A1 

This article presents the argument that the fall in the stock market may be good for the
economy, since it will slow growth. Since Federal Reserve Board chair Alan Greenspan was
raising interest rates to slow growth, if the falling stock market brings about this effect, then he
may not raise interest rates as much. 

At one point it presents the view of Michael Levy, the chief economist for BankAmerica Corp,
that the size of the wealth effect associated with stocks is quite limited. The article notes that the
wealth effect is usually estimated at about 4 percent, meaning that an additional dollar of stock
wealth leads to 4 cents of additional consumption. It then calculates that a loss of $2 trillion in
stock wealth will lead to a drop of $80 billion in consumption. 

While this arithmetic is correct, most economists who have analyzed the stock market in
relation to future projections of profit and economic growth, such as MIT Professor Peter
Diamond and Yale Professor Robert Shiller, estimate that it was over-valued by between $8
trillion-$10 trillion. The size of the wealth effect associated with a correction of this magnitude is
a decline in annual consumption spending of between $320-400 billion. A reduction in
consumption of this magnitude would lead to a drop in GDP of 4-5 percent. 

"Stay With Stocks, Market Experts Say" 
Albert B. Crenshaw 
Washington Post, April 18, 2000, page E2 

This article reports the advice of investment advisors that people investing for the long-term
should keep most of their money in stock. The article does not present the views of any market
analysts who argue that the stock market is hugely over-valued. This position has been argued
by many distinguished economists, most recently by Yale University Professor Robert Shiller in
his new book, Irrational Exuberance (Princeton University Press, 2000). It is surprising,
particularly in light of recent events, that this article could completely exclude such views. 

[Top] 


INFLATION

"Inflation Index Jumped in March" 
John M. Berry 
Washington Post, April 15, 2000, page E1 

"A Report on Inflation Ignites a Sell-Off -- Technology Rout" 
Jonathan Fuerbringer and Alex Berenson 
New York Times, April 15, 2000, page A1 

"Ice for a Hot Economy?" 
Floyd Norris 
New York Times, April 15, 2000, page A1 

These articles all discuss the rise in the consumer price index (CPI) in March. All three refer to
the 0.4 percent rise in the core rate of inflation (excluding food and energy) in March as a
surprise to analysts. 

It is not clear why this price rise should have been a surprise. The core rate of inflation had
been 0.2 percent the prior two months, but there were anomalous factors, such as large
declines in apparel, car and hotel prices, which had temporarily depressed the inflation rate in
this period. It should have been apparent to a careful analyst of this data that these anomalies
would be reversed in later months, leading to the more rapid rate of inflation shown in the
March data. (See, e.g., Price Bytes, 2/18/00, and 3/17/00, http://www.cepr.net/Bytes.html ). 

[Top] 


OUTSTANDING STORIES OF THE WEEK

"IRS More Likely to Audit the Poor and Not the Rich" 
David Cay Johnston 
New York Times, April 16, 2000, Section 1 page1 

This article reports the finding of a new study, that poor people face a greater likelihood of
being audited by the IRS than wealthy people. 

"Janitors Struggle at the Edge of Silicon Valley" 
Steven Greenhouse 
New York Times, April 18, 2000, page A1 

This article reports on the plight of janitors who work in major Silicon Valley firms. The article
points out these janitors typically earn about $8 per hour in an area where even a small
apartment generally rents for over $1000 per month. Such rents force many families to share
trailers, garages or other substandard living arrangements. 

[Top] 


Dean Baker is an economist and the co-director of the Center for Economics and Policy
Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The
Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR. 

ERR is edited by Jim Naureckas.