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Wednesday, 10 October, 2001, 15:26 GMT 16:26 UK
IMF critic wins Nobel economics prize
A leading critic of the IMF, former World Bank chief economist Joseph Stiglitz, now at Columbia University, has shared the Nobel Prize in economics.
He shares the prize with Americans George Akerlof of the University of California, Berkeley, and Michael Spence emeritus professor at Stanford University, for their work on "asymmetric information and markets".
Their research sought to explain how markets can be distorted when one side knows more than the other - implicitly suggesting that intervention might be necessary to restore fairness.
The prestigious $1m prize is awarded by the Swedish central bank, and the winners will attend an award ceremony in Stockholm on 10 December.
Mr Stiglitz applied that criticism to policy when he worked for the World Bank, attacking the "Washington consensus" that recommended that all developing countries should liberalise their markets and embrace free trade.
He was particularly critical of the advice of the International Monetary Fund during the Asian economic crisis of 1997-98.
Mr Stiglitz told BBC News Online in an interview last year that it was clear that the IMF's advice - to cut budgets and raise interest rates - had made the situation worse in countries that had followed its advice.
He argued that temporary controls on capital flows might have been more effective for many countries.
Mr Stiglitz faced criticism for his outspoken stance from US officials, and left the World Bank job before his term of office had finished.
The market for used cars
"During the 1970s, this year's laureates laid the foundation for a general theory of markets with asymmetric information," the Royal Swedish Academy of Sciences said in its citation.
"The laureates' contributions form the core of modern information economics," with implications ranging from traditional agriculture to the operation of sophisticated financial markets, it said.
In a key paper, Professor Akerlof analysed the market for "lemons", or poor quality used cars, showing that because buyers lacked reliable information about their condition, they were vulnerable to exploitation by sellers, creating "adverse selection" when lemons were more likely to be sold.
One consequence has been the development of dealer networks with guarantees about quality.
In another paper, Professor Spence pointed out that order to overcome this problem, market actors must engage in "signalling" - using methods like branding and advertising, paying higher dividends than necessary to signal their profitability, and individuals obtaining higher educational qualifications than formally necessary for a job to prove their reliability.
Adverse selection can also affect sectors such as insurance, where people who are more likely to have potential claims are more likely to sign up for insurance policies.
In response, insurance companies may exclude whole classes of people, for example the elderly - a market failure that led to the introduction of government health insurance, even in the United States.
And credit markets can also be affected, for example with interest rates charged to poor farmers are much higher than elsewhere because lenders lack information about their creditworthiness.
Professor Stiglitz was one of the leaders in applying the theory of asymmetric information to developing countries and to public sector regulation.
One of his earliest papers explained why sharecropping, where landlords and tenants divide up the crops harvested, is a solution to the problem of unequal information about harvest conditions.
And he has also pointed out that if a market is completely informationally efficient, i.e. if all relevant information were reflected in prices, then no single agent would have sufficient incentive to acquire the information on which prices were based (the "Grossman-Stiglitz paradox").
From theory to practice
Professor Stiglitz, who moved from academic life to become an economic advisor to President Clinton, has been a strong sceptic of the efficiency of free markets.
In his policy role, he has been particularly critical of financial markets, whom he says respond irrationally in a crisis because they lack critical information.
His insights have underpinned some of the key recommendations for international financial reform, including greater transparency and improved flow of information from developing countries.
It is the second time in three years that the Nobel economics prize has gone to a free market critic concerned with poverty in developing countries.
In 1998, the Nobel economics prize was awarded to Professor Amartya Sen of Cambridge University, a pioneer of welfare economics who analysed the causes of famines.
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