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Human Nature Review 2002 Volume 2: 293-296 ( 9 July )
URL of this document http://human-nature.com/nibbs/02/stiglitz.html
Globalization and Its Discontents
By Joseph Stiglitz
W.W. Norton & Co., May 2002. 282pp.
Reviewed by James M. Rossi.
For most of the world's people, globalization has not worked out as advertised. The fall of the Iron Curtain brought great hopes for development of the Third World, but the reality has been far crueler. Poverty has increased. The global distribution of wealth has grown more unequal. War and social upheaval have intensified, infectious disease and famine have persisted, and environmental destruction threatens human welfare on a global scale.
What happened? What's next? Stiglitz addresses globalization as a Nobel Prize-winning economist and Washington insider:
In 1993 I left academia to serve on the Council of Economic Advisers under President Bill Clinton... From there I moved to the World Bank in 1997... I saw firsthand the devastating effect that globalization can have on developing countries, and especially the poor within those countries. I believe that globalization... can be a force for good and that it has the potential to enrich everyone in the world, especially the poor. But I also believe that if this is to be the case, the way globalization has been managed... needs to be radically rethought.
Globalization and its Discontents is a concise, devastating, and relentless indictment of the global economic policies of the International Monetary Fund, World Trade Organization, and World Bank. Stiglitz singles out the IMF for most of the blame: flawed economic theories, lack of transparency and accountability to the public, and the pursuit of special corporate interests.
The theories which guide the IMF's policies are empirically flawed. Free market, neoclassical, and neoliberal are all essentially euphemisms for the disastrous laissez-faire economics of the late 19th century. This approach seeks to minimize the role of government -- arguing that lower wages solve problems of unemployment, and relying upon trickle-down economics to address poverty [the belief that growth and wealth will trickle down to all segments of society]. Stiglitz finds no evidence to support this belief, and considers the 'Washington Consensus' policy of free markets to be a blend of ideology and bad science:
Behind the free market ideology there is a model, often attributed to Adam Smith, which argues that market forces--the profit motive--drive the economy to efficient outcomes as if by an invisible hand. One of the great achievements of modern economics is to show the sense in which, and the conditions under which, Smith's conclusion is correct. It turns out that these conditions are highly restrictive. Indeed, more recent advances in economic theory --ironically occurring precisely during the period of the most relentless pursuit of the Washington Consensus policies--have shown that whenever information is imperfect and markets incomplete, which is to say always, and especially in developing countries, then the invisible hand works most imperfectly. Significantly, there are desirable government interventions which, in principle, can improve upon the efficiency of the market. These restrictions on the conditions under which markets result in efficiency are important--many of the key activities of government can be understood as responses to the resulting market failures.
Stiglitz should know. His 2001 Nobel Prize [shared with two others] was awarded for demonstrating how information affects markets. Without equal access to information between employer and employee, company and consumer, or [in the IMF's case] lender and debtor, there is no chance of "free" markets operating efficiently -- which is to say fairly [this explanation also owes much to the earlier Nobel work of Kenneth Arrow & Gerard Debreu].
The IMF, WTO, and World Bank lack transparency and accountability. Without government oversight, they reach decisions without public debate and resolve trade disputes involving "uncompetitive" or "onerous" environmental, labor, and capital laws in secret tribunals -- without appeal to a nation's courts. Little wonder that thousands of activists -- who agree on little else -- brave barricades, tear gas, and slanted media coverage to protest the World Bank, IMF, and WTO wherever they meet.
In East Asia's financial crisis, Russia's failed conversion to a market economy, failed development in sub-Saharan Africa, and financial meltdown in Argentina, Stiglitz argues that IMF policies contributed to a disaster. Loans came with extensive conditions that subverted the growth of democracy, hampered local economic growth, and enriched multinational corporations.
To evaluate his conclusion, it's instructive to look at those cases where Third World development actually succeeded: South Asia and China are the world's two greatest emerging markets. South Asia repeatedly resisted IMF conditions [especially South Korea and Malaysia] and China declined any IMF money whatsoever.
According to Stiglitz, IMF interventions all followed a similar free market formula. The IMF strongly advocated "shock therapy" in a rush to market economies, without first establishing institutions to protect the public and local commerce. Local social, political, and economic considerations were largely ignored. Privatization without land reform or strong competitive policies resulted in crony capitalism, large businesses run by organized crime, and a feudal social structure without a middle class.
The IMF also foisted premature capital market liberalization [free flow of capital] without institutional regulation of the financial sector. This destabilized entire developing economies by causing massive inflows of 'hot' short-term investment capital; then when inflation rose, the IMF's loan conditions imposed fiscal austerity and dramatically rising interest rates. This led to widespread bankruptcies without legal protection, massive unemployment without a social safety net, and the prompt withdrawal of foreign capital. The few remaining solvent owners, with zero opportunity for business growth, stripped assets for any value they could.
With loans defaulted and entire nations thrown into economic and social chaos, the IMF rushed bailouts directed mainly to foreign creditors. This fueled speculative runs on currency, and most of the bailout money soon wound up in Swiss and Caribbean bank accounts. As a result, Third World citizens carried much of the costs and few of the benefits of IMF loans, and a moral hazard ensued among the financial community: foreign creditors made bad loans, knowing that if the debtors defaulted, the IMF would pick up the tab [see Long Term Capital Management, whose overexposure in Southeast Asia might have brought down international financial markets without a massive bailout]. Meanwhile, the IMF urged cash-strapped countries to further privatize -- in effect selling their assets at a fraction of their value to raise cash. Foreign corporations then bought up the assets at rock-bottom prices.
Predictably, great resentment resulted from the IMF's agenda:
Stabilization is on the agenda; job creation is not. Taxation, and its adverse effects, are on the agenda; land reform is off. There is money to bail out banks but not to pay for improved education and health services, let alone to bail out workers who are thrown out of their jobs as a result of the IMF's macroeconomic mismanagement... Ordinary people as well as many government officials and business people continue to refer to the economic and social storm that hit their nations simply as 'the IMF' -- the way one would say 'the plague' or 'the Great Depression' [80-81, 97].
John Maynard Keynes helped conceive of the IMF as a fund to help developing countries grow at full employment. So why the consistent and disastrous failure to live up to this mandate?
The IMF is pursuing not just the objectives set out in its original mandate, of enhancing global stability and ensuring that there are funds for countries facing a threat of recession to pursue expansionary policies. It is also pursuing the interests of the financial community. This means that the IMF has objectives that are often in conflict with each other [206-7].
The global financial community apparently didn't see the IMF's track record as one of conflicted interests or consistent failure: IMF managing director Stanley Fischer and Treasury Secretary Robert Rubin both left for multimillion dollar jobs at Citigroup.
Stiglitz believes the IMF and World Bank should be reformed, not dismantled -- with a growing population, malaria and AIDS pandemics, and global environmental challenges, Keynes' mandate for equitable growth is more urgent now than ever. He advocates a gradual, sequential, and selective approach to institutional development, land reform and privatization, capital market liberalization, competition policies, worker safety nets, health infrastructure, and education. Different countries will need to follow different paths. Selective policies would direct funds to programs and governments which had success in the past.
Debt forgiveness should be extended, building on the success of the Jubilee Movement. Since the IMF loans primarily benefitted foreigners and government officials, he argues it's unjust and onerous that citizens of developing nations be heavily taxed to pay them off.
Not coincidentally, Stiglitz believes that promoting local and international democracy is fundamental to reforming global economic policy. Democracy aids social stability, empowers the free flow of information, and promotes a decentralized economy upon which efficient and equitable economies rely. Extending IMF and WTO voting rights to developing countries, along with public accountability, would be a good start. For Stiglitz, promoting democracy comes before promoting business.
While Stiglitz clearly feels there is plenty of blame to go around, he goes relatively easy on both the World Bank and the domestic American economy. Is the World Bank really better than the IMF and WTO, or is Stiglitz merely taking the high road with his former colleagues? As for the American economy, is it really such a good model? Although macroeconomic indicators are generally good in the US, several trends of globalization -- increasing income inequality, poverty, corporate malfeasance, environmental destruction, and vulnerability to capital flight -- differ only in magnitude, not in kind, from the emerging world. And that is a big warning sign about globalization.
And like most economists, he may put too much stock in Gross Domestic Product [GDP] as an index of development. GDP measures gross output without accounting for costs -- especially environmental, social, and health costs, which may be hard to quantify but critically significant. So any pursuit of environmental or economic sustainability needs to consider the net effects of economic activity.
Reading Globalization and its Discontents forced me to ask one profound question about globalization: how far should markets go? Markets generally deal very efficiently with private goods and services, but underprovide public goods like knowledge, drinking water, and clean air. The WTO has advocated the commodification [privatization] of drinking water, clean air, and some living ecosystems -- ostensibly to provide better access, but clearly also to generate profit. Are fresh water, clean air, and biodiversity part of a global commons -- a fundamental human right? Or are they commodities, to be exchanged for capital? If they are privatized, what will be the fate of the one billion-plus humans with no access to capital, who live near starvation, with less access to food and water than they did a decade ago?
In essence, Stiglitz argues that people should govern markets; markets should not govern people. Globalization, then, has led us to a crossroads.
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© James M. Rossi.
Jim Rossi is a writer, researcher, and naturalist. He can be reached at firstname.lastname@example.org.
Rossi, J. M. (2002). Review of Globalization and Its Discontents by Joseph Stiglitz. Human Nature Review. 2: 293-296.