When a Nobel prize winner speaks, we listen. Actually we have been listening to him for some time now – first as a theoretician, then as chief economic adviser (CEA) to the most advanced country, the USA, and then as CEA at the World Bank. Given that the US economy is mostly on automatic pilot, the World Bank job was the ideal place for indulging in the power of policy making - and this is why Stiglitz’s latest book, Globalization and its Discontents, should be mandatory reading for all economists and policy makers in the developing world.

Proper respect demands that we take him seriously, and if we praise or denounce him, we should do so with facts, not ideology. With most people, not excluding Stiglitz, ideology is always what explains the actions of those one disagrees with. In his case, this other fall guy is the IMF. Stiglitz's own ideology can be questioned on another occasion; today, it is important to take his recommendations at face value and ask: is Stiglitz the pied piper that developing countries should follow?

On almost all development issues, Stiglitz claims to have seen the light. Trade and capital market liberalization have either been bad per se or not worked: e.g. "when trade liberalization…is done in the right way and at the right place, so that new jobs are created as inefficient jobs are destroyed" (p.53, emphasis added); "sometimes there are lose-lose policies….. for many countries, capital market liberalization is one such example"; (p.82).

Globalization inspired economic growth has not been beneficial to the poor: " to many in the developing world, globalization has not brought the promised economic benefits…despite repeated promises of poverty reduction, the number of people living in poverty has actually increased by almost 100 million. This occurred at the same time that world income actually increased by an average of 2.5 percent annually" (p.5). "We saw earlier that the trickle-down-plus strategies have not worked" (p.82).

What is the logical and empirical basis behind the Stiglitz conclusions? First, on capital account convertibility and the "bad" IMF policies that led to the crisis in East Asia. Consider four simple facts - the East Asian governments wanted an undervalued exchange rate; they wanted foreign capital; they offered a few percentage points higher interest rates on these dollar deposits; and they implicitly guaranteed the value of the exchange rate. When investors decided to call the bluff to this Ponzi scheme by exiting, there was a financial crisis in 1997. Stiglitz does not attribute the crisis to bad government policy, especially the policy concerning the managed, fixed, exchange rate. Think about it as follows: if exchange rates were floating and allowed to change according to the laws of supply and demand (not unlike onions), then how, or why, would there be an exchange rate crisis? But Stiglitz wants more management of the exchange rates, presumably by the same guys (government rather than the market) who managed to bring you the crisis in the first place! In 1998, India had an onion price crisis; a domestic shortage caused prices to shoot up. Why? Because onion imports were not liberalized; indeed, such imports were controlled to be zero i.e. banned. Now is the correct policy that which yields better enforcement (Stiglitz) or is it one which yields more onions (by freeing up the imports, which is the new Indian policy)?

The reason for the East Asian crisis can also be understood by examining the parallel nature of various non-market and (hopefully) non-IMF financial sector policies prevailing in the developing countries. A classic example is that of the mutual fund schemes of the government owned Unit Trust of India. What did the Indian government do: - it invited investors to invest in the stock market, offered juicy returns and implicitly guaranteed the return on these investments. The government was too late to recognize that the party was over, that the guaranteed returns were considerably higher than what the market would deliver. The smart investors (domestic corporates in India parallel to the domestic and foreign corporates operating in East Asia) fled. No prizes for guessing why. But definite awards for seeing the light with the East Asian fixed exchange rate scheme.

Both Ponzi schemes ended in a crisis; both schemes had bad politics, and very bad economics. Then what is the logical, and unique, non-ideological basis for attributing the East Asian crisis to capital account liberalization rather than to very bad government policy pertaining to the explosive mixture of fixed exchange rate and high interest rates (both set by the good government rather than the bad market and its speculators)?

The same logical inconsistencies plague Stiglitz's rants against globalization. He attributes Peter's income to Paul's poverty, and then deduces that not all is right with globalization! The income growth of Peter is that obtained from national accounts; the poverty rates are those obtained from household surveys. The world growth of 2.5 percent per annum mentioned by Stiglitz translates into a decadal growth of 28 percent; poverty rates declined by only 7 percentage points, from 62 to 55 percent, according to World Bank figures on the $2 dollar a day poverty line. Sounds pretty bad for globalization, doesn't it? Growth, growth everywhere, and not much drop in poverty. . But household survey incomes (the one from which Stiglitz derives his conclusions about low poverty decline) grew by only 11 percent. Growth of 28 percent, and a decline in poverty of only 7 percentage points is bad, but growth of 11 percent and decline of 7 percentage points is good. So what is so bad about globalization? The problem just might be the fact that Stiglitz's ideology demands that poverty have not declined, and therefore a mix-up of data, and logic, is indulged in.

If you are from the developing countries, then Stiglitz's book is not a happy read. The poor countries have suffered for 50 years with what he is recommending today. Stiglitz looks like a very junior Steven Spielberg, in love with his just acquired camera, and all that he is able to capture in the "undiscovered" tropics. These lands are poor, and he has heartfelt suggestions, mostly of the "let the good guys in the government help the unwashed masses" kind; translated, a greater role for the government. He does not realize that the poor countries have seen this movie before (central planning), and several sequels e.g. import substitution as a short-cut to development, capital controls, "in the name of the poor" policies that benefit only the rich, etc. The central problem with Stiglitz's diagnoses, and solutions, is a disconnect between his perceptions of what works in the developing world (the government), and the reality and force of what actually does work - the market.