Globalization and Its Discontents
From Wikipedia, the free encyclopedia
 Globalization and Its Discontents |
|
| Author | Joseph E. Stiglitz |
|---|---|
| Country | United States |
| Language | English |
| Subject(s) | Globalization |
| Publisher | W.W. Norton & Company |
| Released | June 2002 |
| Media type | Print (Paperback) |
| ISBN | ISBN 0-393-05124-2 |
Globalization and Its Discontents is a book written by the 2001 Nobel laureate Joseph E. Stiglitz.
According to James M. Rossi, 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 book draws on Stiglitz's personal experience as chairman of the Council of Economic Advisers under Bill Clinton from 1993 and chief economist at the World Bank from 1997. During this period Stiglitz became disillusioned with the IMF and other international institutions, which he came to believe acted against the interests of impoverished developing countries [1]. Stiglitz argues that the policies pursued by the IMF are based on neoliberal assumptions that are fundamentally unsound:
- 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. [2]
Stiglitz argues that IMF policies contributed to bringing about the East Asian financial crisis, as well as the Argentine economic crisis. Also noted was the failure of Russia's conversion to a market economy and low levels of development in Sub-Saharan Africa. Specific policies criticised by Stiglitz include fiscal austerity, high interest rates, trade liberalization, and the liberalization of capital markets and insistence on the privatization of state assets.
Contents |
[edit] Contents Of The Book
In his book Stiglitz claims that globalization has not brought the promised economic benefits to some of the poorest nations in the world. This can be easily evidenced by the fact that during the last decade of the twentieth century the number of people living in poverty increased by almost 100 million. During this same period world income rose by 2.5%, signaling a growing divide between the rich and the poor (p. 5). The grim reality is that we still have 2.8 billion people living on less than $2 a day (p. 25).
Stiglitz offers many reasons as to why this growing divide exists, and many of these reasons put the blame squarely on the International Monetary Fund, which is a public organization funded by the worlds’ taxpayers with the intent of warding off economic crises. The IMF is supposed to focus on a country’s macroeconomic issues, such as the budget deficit, its monetary policy, its inflation, its trade deficit, or its borrowing from abroad. The World Bank, the IMF’s sister institution in charge of maintaining global economic stability, was to focus its efforts on structural issues. These would include what the country’s government spent its money on, the country’s financial institutions, its labor markets, or its trade policies. The problem was how the structural issues were handled often affected the macroeconomics of the country, so the IMF viewed both issues as being within its sphere of power. The IMF became an incredibly powerful player, influencing any country that faced an economic crisis. Stiglitz asserts that it is this power, and the poor policy decisions that followed that have made matters even worse for the people they were entrusted to help.
One of the IMF policies harshly criticized by Stiglitz is the forcing of developing economies to open up their markets to foreign competition before they are ready to do so. Even the most advanced industrial societies, such as the United States, built up their economies by selectively protecting certain industries deemed unfit to compete with foreign markets. Only when these industries became strong enough were they opened up. The IMF seems to completely ignore this fact when they provide funds contingent upon rapid trade and capital market liberalization. Doing so destroys jobs rather than creating them, especially in agriculture where poor farmers simply can’t compete with highly subsidized goods from Europe and America. There are no safety nets set up in these developing countries to deal with a market economy. They have no minimum wage or working condition standards, and they certainly do not have welfare and unemployment systems. In summary Stiglitz writes, “Small developing countries are like small boats. Rapid capital market liberalization, in the manner pushed by the IMF, amounted to setting them off on a voyage on a rough sea, before the holes in their hulls have been repaired, before the captain has received training, before life vests have been put on board. Even in the best of circumstances, there was a high likelihood that they would be overturned when they were hit broadside by a big wave (p. 17).”
Stiglitz also criticizes the way leaders are selected to head such powerful institutions. They come from industrialized nations, with the head of the IMF always being a European, and the head of the World Bank always an American. No experience working in the developing world is necessary. These leaders are closely aligned with the financial community, with many coming and going to large investment firms like Citigroup or Goldman Sachs. This bias has led Stiglitz to believe that the leaders of these institutions are acting in the best interest of the advanced industrial countries, and not those they are supposed to serve.
Yet another aspect of the IMF that Stiglitz is critical of is the way they research their policy decisions and make recommendations. The IMF has only one resident representative living in the country being assisted, with teams of economists flying in for only three week missions. Rather than getting a true feel for the country, these economists spend their time in five star hotels pouring over financial data. He makes the claim that one must be able to “feel” what their recommendations impose, and that one cannot do so from a luxury hotel.
Stiglitz provides a lengthy example of the poor recommendations the IMF makes when he talks about Ethiopia, one of the poorest countries in the world with a per capita income of just $110. The Prime Minister Meles Zenawi had recently come to power after his guerillas won a seventeen year battle against the former Marxist regime. The IMF had suspended its lending program despite the fact that Ethiopia had no inflation and had output growth, two key indicators of a solid macroeconomic framework. They had cut back on military expenditures, and focused their attention on the poorest of the poor living in the rural sector. The IMF suspended its $127 million in lending because it was worried about the country’s budgetary position. The government only had revenue from taxes and foreign aid, and the budget showed that if foreign aid dried up, Ethiopia would be in trouble. This essentially means that revenue from taxes alone must equal expenditures, which in turn means that any foreign aid received can’t be spent without getting their budget out of whack according to IMF standards. The IMF also contended that foreign aid was too unstable to be relied upon, but in actuality, Stiglitz argues, it was far more stable than the tax revenue of a developing country where the variations in economic conditions can be vast.
The IMF also imposed strict financial policies on Ethiopia before assistance would be released. They wanted the country to open up their financial markets to Western competition, and divide its largest bank into several pieces. Local banks simply cannot compete with global giants such as Citibank. Stiglitz declares that these global giants suck up all of the depositors’ money in the area, and ship them off in the form of loans to the West, rather than providing these much needed funds to an economically depleted area. Opening up their markets makes the country worse off. The IMF also demanded that interest rates be freely determined by the market, because that has been a driving force of prosperity in the West. But the United States did not adopt this policy until after 1970 when they had a far more developed market. The IMF was imposing policies on these countries that are common in industrialized societies, but what they fail to realize is that it took time even for these advanced societies to adopt these policies. These things don’t just happen overnight, and doing so before these markets are ready can lead to disastrous results. Ethiopia’s leadership foresaw these results, and fortunately resisted these policies. As a result, IMF lending was suspended, and it took a valiant effort by the World Bank to get this lending restored.
Stiglitz argues a large part of the problem with the IMF is the amount of power they wield. Many of the nations that come to them for help know the policies they will surely recommend are not well suited to their country. They simply have no other place to turn. They must adhere to IMF policies or risk losing much needed funds. Exacerbating this problem is the fact that when IMF money is pulled, World Bank money generally follows, as well as many private investors. This forces them to accept policies from poorly trained economists (with respect to developing economies), that only spend three weeks in the country before giving their recommendations. Such a short time span often leads to a “one-size-fits-all” approach, and that is simply not good enough for the unique and complex situations they often encounter. Stiglitz writes about an occasion where a report was borrowed from one country for another, and the name of the country in the original report wasn’t even changed.
After all of these criticisms Stiglitz mentions that IMF money and time is not always wasted. IMF money has gone to countries with good economic policies in place, and when it has, has made a difference in those countries. He mentions that the IMF is so stringent in its impositions due to experiences where once countries were given funds did nothing to reform their economic framework. Regardless of the reasons, he now feels it is time to grade these institutional powerhouses to see if they are really doing what they set out to do when they were founded. But make no mistake, Stiglitz still feels that globalization can deliver on its original promises. He closes the first chapter by saying, “globalization can be reshaped, and when it is, when it is properly, fairly run, with all countries having a voice in policies affecting them, there is a possibility that it will help create a new global economy in which growth is not only more sustainable and less volatile but the fruits of this growth are more equitably shared (p. 22).”
[edit] Criticism
Although Globalization and Its Discontents has earned praise from some reviewers [3], its methodology and key findings have been criticised by others. Writing in the Journal of Libertarian Studies, Enrico Columbatto claims that Stiglitz, whilst purporting not to challenge market principles and globalization in general, in fact consistently advocates the Keynesian remedies of money printing and deficit spending. Further, he argues that Stiglitz never really defines 'globalization' and fails to develop his thesis within a consistent framework, preferring instead to recount numerous specific examples of bad policy-making in practice. Columbatto contrasts the view he attributes to Stiglitz, that the alternative to mainstream economics is enlightened and expanded governance structures, with Ludwig von Mises' view that the alternative is "freedom to choose and discard".
Daniel T. Grizwald of the Cato Institute labels the book a "score-settling exercise distorted by the author's own political prejudices and personal animus." Grizwald takes issue with Stiglitz's assumption "that protectionism enriches those nations that practice it" and notes that "while he is not questioning free trade, Stiglitz is disparaging the free flow of capital. The book blames the East Asian Financial Crisis almost entirely on one factor: capital account liberalization." Stiglitz demonstrates this belief by "prais[ing] Malaysia for spurring IMF advice ... by imposing capital controls to stem the flight of short term flows." Grizwald also states that Stiglitz provided no evidence to support his belief that Malaysia was rewarded for their efforts. He counters that Malaysia's GDP had fallen much farther than the other countries listed by Stiglitz, down to 6.7% and "recovered less rapidly in 1999 and 2000 even though [others] did not resort to capital controls Stiglitz champions." Grizwald concludes by arguing that Stiglitz "distorts the history of the East Asian Miracle", with Russian privatization he "ignores the fact that Russia's initial reforms were timid and half baked" and that the IMF with its beliefs in bail outs and non-market exchange rates is not the "great symbol of market fundamentalism".[4][5]
[edit] References
- ^ http://www.wwnorton.com/catalog/spring03/032439.htm
- ^ http://human-nature.com/nibbs/02/stiglitz.html
- ^ http://www.wwnorton.com/catalog/spring03/032439.htm
- ^ http://www.ciaonet.org/olj/cato/v22n3/cato_v22n3grd01.pdf
- ^ http://www.cato.org/pubs/journal/cj22n3/cj22n3-12.pdf
[edit] External links
- Discussion led by Joseph Stiglitz at the Carnegie Council
- Review by James M. Rossi
- Review by Enrico Columbatto in the Journal of Libertarian Studies
- Review from a Marxist perspective
- Review by Daniel Grizwald in the Cato Journal
