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The World Economic Crisis in Stiglitz’s View Case Study


The arguments by Joseph Stiglitz on the approaches the IMF took to solve the financial crisis in East Asia are substantial since countries have different political, economic, and social systems that guide their market operations. As such, one solution to a given country cannot be applied directly to another. Notably, market liberalization had occurred in the financial and capital aspects of Thailand due to pressure from the US Treasury Department. Such moves by the US had set-up the stage for a financial crisis in East Asian nations, as they resulted in unsustainable real estate booms. In analyzing the US intervention in the East Asian financial meltdown, it is ironic given that it had initiated the process that led such countries into their economic recessions. In addition, Stiglitz’s criticisms of IMF’s approaches are sensible given that Thailand’s economy had been practicing the balanced budget program, as opposed to countries in Latin America in 1980 when they faced the same crisis.

Therefore, applying the same approaches in two different nations could not solve the same problem in Thailand. Clearly, the problem in Latin America was due to actions by imprudent governments, while in East Asia, the problem was due to gambling from the private sector. Further, I agree with the article’s argument on balancing budgets during the recession time in East Asia since these nations already had budget surpluses. For instance, key sectors like infrastructure and education had less funding, implying that applying budget cuts could further worsen the situation. From this perspective, the move to apply austerity policy could not solve the problem.

In developing countries, economic recession coupled with the aspects of globalization and economic liberalization increased their vulnerability to any shift in investor sentiments. With the existence of information asymmetry and economic liberalism, the US had an upper hand in enacting policies that favored its ideologies. For instance, increasing interest rates do not necessarily balance the supply and demand for credit and money. As evident from the approaches by the IMF, the recession continued to spread to other countries in East Asia, like Korea and Indonesia. Moreover, the poverty level, as well as the unemployment rate in Thailand moved to higher levels. Deregulation of capital flows for developing economies allows for the movement of funds outside a crisis-stricken nation, as it diminishes a country’s growth prospects. Therefore, in such scenarios, the IMF ought to have initiated a restrictive policy that barred non-residents and residents from taking funds out of the country and withdrawing funds from financial institutions. Malaysia is a case example of a country that successfully applied the controls in 1998.

Evidence on Mexico’s exports to the US, as well as less historical ethnic strife, made the country recover from the 1980’s financial crisis even though it had a weak financial system even after the crisis. This proves the position by Stiglitz that acts by the IMF to strengthen the financial system failed, yet the economy recovered. The steps by the IMF to salvage the economy of East Asia simply worsened the situation, as evident in the manner in which the crisis continued to spread to other nations like Russia, Korea, and Indonesia. In mitigating the financial crisis in the Asian market, the IMF had a strong influence from the US given different political ideologies dating back to the cold war. These enforced policies had little understanding of the entire economy of the affected nations, and the assumption to treat all economies as comparable was wrong in attempting to help the East Asian nations come out of the situation. In this aspect, such international economic policies were not implemented democratically, as IMF claims. Stiglitz’s critique is right in his explanations that bring out the need for the IMF to involve ideas of all citizens in policy implementation. Again, policymakers have to understand the economic structures of different nations in order to apply approaches that can solve their economic problems.

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IvyPanda. (2020, July 17). The World Economic Crisis in Stiglitz's View. Retrieved from https://ivypanda.com/essays/the-world-economic-crisis-in-stiglitzs-view/

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"The World Economic Crisis in Stiglitz's View." IvyPanda, 17 July 2020, ivypanda.com/essays/the-world-economic-crisis-in-stiglitzs-view/.

1. IvyPanda. "The World Economic Crisis in Stiglitz's View." July 17, 2020. https://ivypanda.com/essays/the-world-economic-crisis-in-stiglitzs-view/.


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IvyPanda. "The World Economic Crisis in Stiglitz's View." July 17, 2020. https://ivypanda.com/essays/the-world-economic-crisis-in-stiglitzs-view/.

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IvyPanda. 2020. "The World Economic Crisis in Stiglitz's View." July 17, 2020. https://ivypanda.com/essays/the-world-economic-crisis-in-stiglitzs-view/.

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IvyPanda. (2020) 'The World Economic Crisis in Stiglitz's View'. 17 July.

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