The Center for Economic and Policy Research congratulates Joe Stiglitz on being awarded the Nobel Prize in economics for his
research on the effect of asymmetric information on market outcomes. Professor Stiglitz's path-breaking research on this topic showed how markets
may not operate efficiently when the standard assumption-that all actors have full information-is violated.
One implication of Professor Stiglitz's work is that the institutional structure of capital markets may have a significant impact on the course of
development and economic growth. For example, the long-term relationships between banks and firms that have historically existed in nations such as
Germany, Japan, France and South Korea may allocate capital more efficiently than the market-oriented system in the United States. Since asymmetric
information may distort capital markets, Stiglitz has argued that interventions in capital markets, such as taxes on currency or stock trades, could
actually increase their efficiency.
Stiglitz's work also provides an explanation for unemployment that is missing in standard economic models. Since employers don't know exactly how
productive an individual worker will be, they have to devise strategies that will encourage workers to maximize their effort. Such strategies can include
paying workers at above the market-clearing wage-thereby generating unemployment. This leads to an explanation for involuntary unemployment that
is absent from the traditional economic concept of a market, which assumes that both workers and employers have full information.
Stiglitz' more realistic view of how markets function brought him into conflict with economists at the International Monetary Fund, whose "market
fundamentalist" views he opposed. As Chief Economist of the World Bank, he broke with protocol by publicly criticizing the IMF for imposing what he
called a "beggar thyself" policy on countries such as Indonesia during the Asian economic crisis of 1997-98. "Beggar thyself" referred to the IMF's
policy of reducing a country's trade deficit by putting it through a recession (thereby reducing total demand, including imports), often brought about by
extremely high interest rates. Professor Stiglitz criticized these policies as they were implemented in Asia, Russia, and Brazil.
Stiglitz also criticized the IMF and U.S. Treasury for reckless pursuit of the liberalization of international financial flows, which led to the Asian
financial crisis. He noted that the Fund embarked on this project without having even a single economic study showing that financial liberalization would
lead to higher growth. He also pointed out that the Asian countries most impacted (Indonesia, South Korea, Thailand, Malaysia, and the Philippines)
had very high rates of savings and therefore did not need the foreign borrowing, arguing that their opening up was done more for the sake of American
mutual funds seeking investment outlets.
He also pointed out the "fundamental misunderstanding" of Western economists in Russia and the transition economies, and their role in bringing about
the worst economic decline in world history, in the absence of war or natural disaster-nearly half of national income was lost in about 5 years.
According the Financial Times (Nov. 25, 1999 p. 13) and other reports, these criticisms led to Professor Stiglitz being forced out of the World Bank, at
the insistence of then US Treasury Secretary Lawrence Summers.
