Globalization and Its Discontents

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Globalization and Its Discontents  
Author(s) Joseph E. Stiglitz
Country United States
Language English
Subject(s) Globalization
Publisher W.W. Norton & Company
Publication date June 2002
Media type Print (Paperback)
ISBN 0-393-05124-2
OCLC Number 49226144
Dewey Decimal 337 21
LC Classification HF1418.5 .S75 2002

Globalization and Its Discontents is a book published in 2002 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. 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

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 (the belief that growth and wealth will trickle down to all segments of society) to address poverty. 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.

Stiglitz was awarded the 2001 Nobel Prize in Economic Sciences (shared with George Akerlof and Michael Spence) 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.

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 is 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 benefited foreigners and government officials, he argues it is 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.

[edit] Criticism

Globalization and Its Discontents has earned praises from many reviewers.[1] Noted investor, George Soros describes the book as "Penetrating, insightful.... A seminal work that must be read.".[3]

The book has received criticisms from various camps. Writing in Public Choice D. W. MacKenzie claims that Stiglitz mischaracterizes government failures as market failures.[4] Most of Stiglitz's examples refer to government intervention that benefited special interests. Such examples are collective action failures of government through rent seeking.

Kenneth Rogoff, IMF Director of research, called Stiglitz's analysis "snake oil" and stated that "The Stiglitzian prescription [for third world nations in a debt crisis] is to raise the profile of fiscal deficits, that is, to issue more debt and to print more money. You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government's debt, all that needs to be done is to increase the supply and it will sell like hot cakes." [5]

Daniel T. Griswold of the Cato Institute labels the book a "score-settling exercise distorted by the author's own political prejudices and personal animus." Griswold takes issue with what he claims is 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 spurning IMF advice ... by imposing capital controls to stem the flight of short term flows." Griswold also states that Stiglitz provided no evidence to support his belief that Malaysia was rewarded for their efforts. He counters that Malaysia's GDP growth rate 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." Griswold concludes by arguing that Stiglitz "distorts the history of the East Asian Miracle", while 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".[6][7]

He has been accused of 'bad economics' by many libertarian organizations.[8]

By so often characterizing globalization's economic policies as mistakes, Stiglitz fails to acknowledge that these policies are largely deliberate and instituted for the purpose of enriching the non-productive capitalist class. This mischaracterization of purposeful actions as "errors and mistakes" often placates the opponents of globalization by creating a belief that the present economic leaders and institutions should be left in power so that they will see the error of their policies and correct them. [9] [10] [11]

[edit] Literature

[edit] References

  1. ^ a b Globalization and Its Discontents (Main Page)
  2. ^ James Rossi reviews Globalization and Its Discontents by Joseph Stiglitz
  3. ^ Joseph Stiglitz, Globalization and its Discontents, Back Cover.
  4. ^ . “Globalization and its Discontents” Public Choice 2004 V120 234-239
  5. ^ Open Letter
  6. ^ http://www.ciaonet.org/olj/cato/v22n3/cato_v22n3grd01.pdf
  7. ^ http://www.cato.org/pubs/journal/cj22n3/cj22n3-12.pdf
  8. ^ http://web.econ.unito.it/colombatto/Stiglitz.pdf
  9. ^ http://www.scottlondon.com/interviews/mander1.html
  10. ^ http://caravan.squat.net/ICC-en/Krrs-en/ghandi-econ-en.htm
  11. ^ http://www.getnewvisions.com/globalization/Mander_globalization.html

[edit] External links

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