Outlook: The empire strikes back, and it is not just Stiglitz feeling it

Hewitt's reforms Â

Internal links

Economists at war: how a difference of opinion over globalisation turned personal

Hewitt seeks to bar executives from appointing auditors

Joseph Stiglitz, Nobel laureate and former chief economist at the World Bank, is by common agreement a brilliant man. He is also eccentric and arrogant. Many years ago he was offered a posting at Oxford University in return for 10 hours of lectures. He delivered by giving one lecture of 10 hours duration. It was characteristic of a man who has since become one of the International Monetary Fund's greatest critics.

Even while he was at the World Bank, which is essentially an offshoot of the IMF, Professor Stiglitz found it hard to hold his tongue, and since leaving he has become more outspoken. His latest book, Globalisation and Its Discontents, contains a detailed critique of the fund and all its works. For many, Professor Stiglitz's views will strike a chord. His central thesis is hardly new, but it is well articulated. He accuses the IMF of imposing policy prescriptions on the developing and Third World in response to financial and economic crises which are the reverse of what would be done in Western economies, and in so doing compounding the economic and social misery.

In the developed West when there is an economic downturn or a serious shock to the system, we cut taxes and interest rates, we flood the system with liquidity, and we do everything possible to maintain consumer and business confidence. When the IMF rides to the rescue, by contrast, the payback seems invariably to be extreme fiscal austerity, soaring interest rates, penal levels of taxation and pain all round.

For some, Professor Stiglitz seems to have become little more than a cheerleader for the anti-globalisation movement, someone who has dangerously given its central ideas and purpose economic respectability. But in fact Professor Stiglitz is no bleeding heart Third Worlder. There's plenty in his argument that even the ultra-free market US Treasury Secretary, Paul O'Neill, might find himself in agreement with. For instance, he thinks the most appropriate way of addressing the problem of debt default is through bankruptcy, not an IMF-financed bailout of creditors.

In any case, the latest book was plainly a publication too far for the IMF, and in an open letter worthy of the angriest parliamentary exchanges (for the full glorious text, see views and commentary on the IMF's official website), the IMF's economic counsellor and director of research, Kenneth Rogoff, has accused Professor Stiglitz of economic illiteracy, slander, false inferences and innuendo, and much else. At one point he even ventures the suggestion that perhaps Professor Stiglitz comes from another planet: "The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better." It's splendid stuff, and most un-IMF like.

These are not just the vain exchanges of conceited egos. Beneath the bickering, there are important issues at stake. Professor Stiglitz exaggerates to make his point, but he is right to argue that the IMF's role should be in crisis prevention, not resolution, where its record has been poor. Likewise, Mr Rogoff is right to feel aggrieved at the vitriol of Prof Stiglitz's attack. Since the emerging market crises of Asia and Russia, where mistakes were made, the IMF has moved a long way in reforming its approach. It's still not perfect, but we don't yet live in a Utopian world where the US and the IMF's other sponsors are prepared to give out billions and expect nothing in return.

The only reason we in the West can afford to fight the present economic downturn with very low interest rates, higher public spending or deep tax cuts is because we have earned the ability to do this through the long years of prosperity by applying proper rules of fiscal and monetary discipline. As Mr Rogoff remarks: "We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace, but especially the indigent."

Hewitt's reforms

Shutting and locking the gate after the horse has bolted is a thankless task but someone's got to do it, and it is hard to argue with most of the suggestions for clamping down on sloppy auditing aired yesterday by Patricia Hewitt, the Secretary of State for Trade and Industry ­ not least because we've the case for many of them ourselves.

The Confederation of British Industry has grave doubts, particularly about the compulsory rotation of auditors, which it reckons would be both costly and potentially risky. Regular rotation would increase the chances of audit failure, the CBI argues, because of the new firm's lack of experience and knowledge of the business. Maybe, but the point can equally be argued the other way. New brooms tend to be extra vigilant and recognise things that the old hands have overlooked.

Digby Jones, the CBI's director-general, is proving himself a master of the soundbite and in harking back to the Dangerous Dogs Act, he makes some valid points. It is completely wrong, he argues, to muzzle every labrador in the land just to get at one bad rottweiler. Well again, maybe, but if public trust has been undermined, firm action is required to restore it, and if the object of the exercise is to re-establish the principles of the independent audit, then audit procedures have to be ring-fenced from the possibility of management interference.

The trouble with the big audit practices is that they have lost sight of their original public interest purpose as gatekeepers and regulators, and instead swapped it for the altogether more lucrative and enjoyable pursuit of business consultancy work. In extreme cases, the audit is little more than a loss leader for the other corporate work it secures. It would be impractical and oppressive to ban the big accounting practices from undertaking all such work, but separation, so that they cannot do both for the same company, seems reasonable. Cross subsidisation is always unhealthy, and it is particularly unhealthy when the poacher is subsidising the gamekeeper.

The CBI smugly believes the situation is much better in Britain than in the US. We had our corporate and accounting scandals in the early 1990s and improved our game accordingly. As a result, there isn't the same urgent need for regulatory reform. In any case, warns the CBI, if standards, rules and regulations are going to be tightened, it has to be done on an internationally agreed basis, so that Britain does not put itself at a competitive disadvantage to others. Unfortunately, if we wait for international agreement we'll be sitting around until judgement day. So long as the major developed economies are moving broadly in step, that should be sufficient. There may even be some advantage in leading from the front.

Perhaps surprisingly, both SEC and Congressional proposals for structural reform of audit practices in the US fall well short of the sort of thing Ms Hewitt suggested yesterday. Instead, the US seems happy to rely on the preventative therapy of Andersen's nemesis and the likelihood of long jail sentences for those connected with its giant accounting scandals. It's not a bad approach, but nor is there anything necessarily anti-enterprise in quite draconian levels of regulation in circumstances such as these. Where something wrong has occurred, the law must be tightened to stop it happening again. The time for affording the accountancy lobby a sympathetic ear is long past.

jeremy.warner@independent.co.uk