STABILITY WITH GROWTH THE INITATIVE FOR POLICY DIALOGUE SERIES The Initiative for Policy Dialogue (IPD) brings together the top voices in development to address some of the most pressing and controversial debates in economic policy today. The IPD book series approaches topics such as capital market liberalization, macroeconomics, environmental economics, and trade policy from a balanced perspective, presenting alternatives and analyzing their consequences on the basis of the best available research. Written in a language accessible to policymakers and civil society, this series will rekindle the debate on economic policy and facilitate a more democratic discussion of development around the world. OTHER TITLES PUBLISHED BY OXFORD UNIVERSITY PRESS IN THIS SERIES Fair Trade for All Joseph E. Stiglitz and Andrew Charlton Stability with Growth Joseph E. Stiglitz, José Antonio Ocampo, Shari Spiegel, Ricardo Ffrench-Davis, and Deepak Nayyar Economic Development and Environmental Sustainability Ramón López and Michael A. Toman Stability with Growth Macroeconomics, Liberalization, and Development Joseph E. Stiglitz, José Antonio Ocampo, Shari Spiegel, Ricardo Ffrench-Davis, and Deepak Nayyar 1 1 Great Clarendon Street, Oxford OX2 6DP Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide in Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries Published in the United States by Oxford University Press Inc., New York © Oxford University Press, 2006 The moral rights of the authors have been asserted Database right Oxford University Press (maker) First published 2006 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer British Library Cataloguing in Publication Data Data available Library of Congress Cataloging in Publication Data Data available Typeset by Newgen Imaging Systems (P) Ltd., Chennai, India Printed in Great Britain on acid-free paper by Biddles Ltd., King’s Lynn, Norfolk ISBN 0–19–928813–5 978–0–19–928813–7 ISBN 0–19–928814–3 978–0–19–928814–4 (Pbk.) 10987654321 Acknowledgements This book is based on the work of the Initiative for Policy Dialogue (IPD) Macroeconomics and Capital Market Liberalization task forces. IPD is a network of some two hundred economists, development researchers, and practitioners throughout the developed and developing world, who are committed to furthering the understanding of the development process. The Macroeonomics and Capital Market Liberalization task forces each include 12 additional members from top universities, international insti- tutions, governments, and NGOs, covering 11 countries across 4 conti- nents. In many ways this book is an overview of the task force findings, though not everyone on the task forces will agree with everything we’ve written. We’d like to thank all the task force members for their contribu- tions to this book. (for a full list of the IPD Macroeconomics and CML task force members, see the IPD website: www.policydialogue.org). We’d like to thank everyone at the Initiative for Policy Dialogue who helped manage the project, edit, and comment on this book. Special thanks go to Shana Hofstetter and Lauren Anderson. Additional thanks go to Kira Brunner, Siddhartha Gupta, Laura Limonic, Akbar Noman, Maria Papadakis, Ariel Schwartz, and Sylvia Wu. We’d also like to thank Anya Schiffrin for her support. Joanne Barkan edited an early version of the book, and Siddhartha Gupta helped edit the final version. We would also like to thank several of Joseph Stiglitz’s research assistants for input, including Francesco Brindisi, Anton Korinek, Stephan Litschig, and Hamid Rashid for their work on this project. IPD interns and Columbia University students Raymond Koytcheff, Shruti Kumar, Niglmoro Okuk, Chhandasi Pandya, Santitarn Sathirathai, Man Tat Sun, and Ann Warner helped format and correct the text. We are indebted to Sarah Caro and Jennifer Wilkinson at Oxford University Press, and to the anonymous reviewers who provided useful comments on the manuscript. We’d also like to acknowledge the financial support of the Ford Foundation, the John D. and Catherine T. MacArthur Foundation, the v Acknowledgements Charles Stewart Mott Foundation, Rockefeller Brothers Fund, the Canadian International Development Agency (CIDA), and the Swedish International Development Cooperation Agency (SIDA) for their financial support of IPD. Finally, Shari Spiegel would like to thank Eli Berliner (who arrived in the middle of this project) for his inspiration. vi Preface Alternative Perspectives on Macroeconomics and Capital Market Liberalization for Developing Countries By mid-2000, the debate on globalization had already begun. Protests in Seattle had brought the most recent round of World Trade Organization (WTO) trade negotiations to a temporary halt. The negotiators wouldn’t resume their work until November 2001, until after the advanced indus- trial countries had made a commitment that the next round, called the ‘Development Round’, would rectify some of the inequities of the past. Just a few months earlier, protestors had also demonstrated against the spring meetings of the International Monetary Fund (IMF) and World Bank to call attention to what they viewed as serious problems at both institu- tions, including the limited participation in economic decision-making for developing countries and the narrow range of perspectives and policies that were often recommended. For over two decades, these Washington- based institutions had imposed a set of policies that had come to be called ‘the Washington consensus’. Although many of the policies had more subtlety and texture than are sometimes acknowledged, the Washington consensus reflected conventional wisdom that emphasized low inflation, fiscal stringency, privatization, and liberalization. This so-called consensus, however, mainly included policy-makers located between 15th Street and 19th Street in Washington, site of the US Treasury and IMF headquarters, respectively. The consensus did not include many other people in Washington, academia, or the developing world. In response to the debate, a group of economists and other social scien- tists met in Washington, DC in mid-2000 to launch a new initiative. Participants at the meeting agreed there was a pressing need to broaden the policy dialogue in developing countries, and the Initiative for Policy Dialogue (IPD) was born. Initially headquartered at the Carnegie Endowment for International Peace and at Stanford University, after one year IPD moved to Columbia University where it is now housed. The Initiative receives core vii Preface financial support from the Ford and MacArthur Foundations, and also receives funding from the Mott Foundation, the Open Society Institute, the Swedish and Canadian Development Agencies, and the United Nations Development Program. Since its inception, IPD has grown into a network of nearly 250 top economists, political scientists, policy-makers, and civil society representatives who voice a wide range of views. The Initiative has committed itself to giving all perspectives due attention. As its first order of business, IPD organized a group of task forces to look at specific policy debates. The goal of these task forces is not to arrive at a consensus about the best set of policies, but rather to make sure that major alternative perspectives are given full voice. Each task force has at least two co-chairs—one from a developed and one from a developing country. While most task force members come from academia, practitioners and representatives from international economic institutions, think-tanks, non- governmental organizations (NGOs), and governments also participate. At that first meeting many participants from developing countries argued that excessive fiscal restraint had stifled growth; others worried that capital market liberalization had contributed to economic instability. Macroeconomic policy and capital market liberalization (CML) became the focus of two of the first task forces. Several participants pointed out that capital market liberalization had made macroeconomic management all the more difficult. It soon became clear that the two issues were intri- cately interconnected in some regions of the world, and that the two task forces should work in conjunction with each other. The capital markets liberalization task force began work with an online dialogue, and the two task forces met in New York in 2002, and then in Barcelona in 2003.1 The meetings established that the task forces would consider macroeconomics and capital market liberalization