Globalization and its Discontents
by Joseph E. Stiglitz
W.W. Norton & Company
To Joseph Stiglitz, the 2001 Nobel Prize in Economics was an opportunity to write a best-selling essay which denounces the damage done by globalization to the third world when that process should be beneficial to them. He blames the rich, industrialized nations for this, and poses that they hijacked the public international institutions which were originally created to make globalization fair to everyone, and have turned them into weapons of mass economic destruction.
Any time you try to talk about economic, social or political trends, the word globalization comes on the table, a word which can really mean anything, and covers notions which are undertood differently by different people. However, no-one can deny that this trend has swept over the, er, globe, and is, at least potentially, very dangerous and harmful to it.
The transition of economy from a local scale to a global scale is a normal consequence of human evolution, a phenomenon which has existed since the 14th century (if you want to know more, check out Fernand Braudel's gripping work on the history of trade). Globalization was dramatically increased in scale and speed during the 19th century by the European powers, as a result of the Industrial revolution, colonization and technological progress.
However, because of the second oil crisis of 1979 and the economically liberal (in economics, "liberal" means small government and more power to the business, and not "lefty" like in American politics) policies of people like Ronald Reagan and Margaret Thatcher, the process of globalization picked up a lot of speed, and turned into something it was not originally. As a result of the damage caused by this dogma of laissez-faire capitalism, there has been a lot of protest against "globalization" since the end of the 90's. This new brand of globalization now has its discontents, such as the World Social Forum, meant as the antagonist of the (in)famous World Economic Forum of Davos, the peasant movement of José Bové in France, the failure of the WTO conference in Seattle of 1999, the new slogan of "sustainable development," etc.
This situation is what prompted Stiglitz to write a book to denounce the excesses of this new brand of globalization. Most of the book specifically denounces the "Washington consensus," made up of the IMF, World Bank and US Treasury, so-called because they all have their offices in Washington and are led by people who share the same ideology. He blames them for most of the damage done by globalization to the third world.
Since Stiglitz often goes back on the same issues, I opted against the summary form for this review and I'm going to extract and analyze the main themes from the book, even though they may not be in the same order inside it. Most of the book is an attack against the Washington consensus, so that will be the first and larger part of this review. Then I will go over Stiglitz's analyses of the failure of the communist block's transition and of the Asian crisis, and finally talk about his plan for the future.
Stiglitz first tried to change the Washington consensus from inside, becoming Vice President of the World Bank in 1997. However he was quickly shown the way out in 2000. It's clear throughout the book that it is his attack from outside, and that he hasn't totally digested his (justified) anger. However he is a scientist and his points are always well made and rational.
He is a disciple of economist John Maynard Keynes, it shows throughout the book, and especially when he goes over the history of the international institutions he now denounces, which were created after World War II at Bretton Woods ; even though H.D. White's plan was eventually preferred to the Keynes Plan when building the international monetary system of the post-WW2 world, Keynes had a lot of influence on it.
The IMF was initially based on one fact: markets don't often work well. They can lead to massive unemployment and can fail to provide countries with the funds necessary to sustain their economy. So the IMF was created because it was felt that a collective action on a global level was necessary to maintain economic stability, just like the United Nations were created because it was felt that a collective action on a global level was necessary to maintain political stability. The World Bank was meant to help with structural reforms and long term investment and be independent of the IMF.
When the Gold Exchange Standard (GES) was created in Genova to replace the Universal Gold Standard (UGS), Keynes didn't hesitate to call the gold parities of currencies "barbaric relics" and denounce the conservatism of the leaders of the time, who he thought were incapable to understand the situation (source: J.M. Keynes, Tract on Monetary Reform), and Stiglitz's tone is very close to Keynes' in such works. In the original Keynes Plan, the central part of the international monetary system was the ICU, International Clearing Union, which would not only handle clearing problems between central Banks, handling the recycling of the surplus of some countries for other countries' deficit, reajusting the balance of currencies but also handling an international accounting unit, the Bancor, which could not be a national currency. This ICU would be, according to Keynes, "the pivot of an economical government of the world."
However, with the dominance of Thatcher and Reagan's doctrines since the end of the 70's, the failures of the left wing governments in western Europe, the new turn of the economy in China that was initiated by Deng Xiaoping after the death of Chairman Mao, and the failure of the transition of Russia and Eastern Europe to a capitalist economy, these international institutions have become largely dominated by the larger developed coutnries, especially the members of the G7, and especially the USA. Furthermore, the end of colonialism and communism has considerably broadened these institutions' horizons. When they were created, they could only have a limited influence. Now, with the power of the developed countries behind them, they can bully the rest of the world into doing what they want. And they do.
Stiglitz repeats throughout this book that not only have these institutions betrayed their original mandate, doing the exact opposite of what they were meant to do, they never stop to make ridiculous, catastrophic mistakes.
The IMF was created to exert international pressure on governments and bring them to have expantionist economic policies (high government spending, lower taxes or interests to stimulate the economy), today it only helps governments which have strict policies (lowering deficits, higher taxes or interests). According to Stiglitz, the IMF has screwed up in every field in which it intervened: development, handling crises and the transition from communism to capitalism.
The leaders of the IMF were often incompetent about the measures they took and imposed in matters of exchange rates stability and deficit. Even though the governments of the developing countries were largely incompetent, their western counselors (who not only know nothing about the countries they are sent to but also often know very little about economic policy) very often were just as incompetent. In itself, globalization is neither good or bad. It can do an enormous amount of good but in a lot of countries, and largely because of the Washington consensus, it turned into an absolute disaster. To Stiglitz these practices are no different than the Opium Wars.
If some countries have deficits, other have benefits. And (this is an entirely keynesian point of view) he claims that if the IMF and the industrialized countries, especially those with benefits don't help the countries that are in deficit because of a crisis (East Asia) or transition (Eastern Europe) to kickstart demand, there is a "contagion." By mis-advising these countries, the IMF forced them into grave recession.
While almost all of the IMF and the World Bank's activities (and all of their loans) are in the developing world, these institutions are headed by representatives of the industrialized world, who are often connected with their major corporations: the policies of the international economic institutions are too often strictly aligned with the commercial and financiary interests of those corporations within the industrialized countries. To see American workers, even during the expansion of the 90's, be so worried over the threat that the liberalization of commerce put on their jobs should help to better understand the agonizing situation of the workers in developing countries, who barely survive, and in an economy with at least 20% of unemployment. The West demanded freedom of sale for the products it exports but simultaneously keeps protecting its sectors that competition from the developing countries could threaten.
The American part
Stiglitz fiercely denounces his own country who, as first world power, should show responsability, are imperialistic, neo-colonialist, and are subservient to big business even with a Democrat administration.
Even though the US claim to be the champion of free trade, making other countries open their borders they are also the first to exert protectionist policies when it fits them. All too often when a poor country comes up with a product they can export to the US, protectionist interests in America rise up and use all sorts of trade legislation against them. So much so that these laws, oficially called "fair trade laws" have, outside the US, been baptized "the unfair fair trade laws." See for instance the infamous Section 301 of the Trade Act of 1974.
An example of that are the "anti-dumping rights." Dumping is the act of trying to dump products on a foreign markets by selling them for less than their production costs, and by selling them a lot cheaper abroad than at home, forcing the home consumers to finance all or part of the loss abroad. The American government often determines the costs of prodcts without asking for a lot of evidence and using pretty inane methods thanks to which countries can be accused of dumping even when they don't do it according to the economic definition fo the term. The US estimate production costs using a specific methodology which, if it was applied to American corporations, would probably show most of them to dump. The Department of Commerce, which is accuser, judge and jury in the matter, estimates costs on what it calls BIA (Best Information Available) and, in general, this BIA is what is given to it by the same American corporations which are trying to stop foreign competition.
An example of that is the aluminium controversy where Paul O'Neill, CEO of Alcoa, the world's number one producer of aluminum, got the US to create a world cartel of aluminium by accusing Russia of dumping. This cartel lowered production to get higher prices from 1994 to 1998. Paul O'Neil went on to become George W. Bush's Secretary of Treasure. See also Bush's recent protectionist measures on European steel.
Stiglitz spends one chapter ("Who Lost Russia?") analyzing the failure of the transition of Eastern Europe and the former Soviet Union from a planified socialist economy to a free market capitalist economy after the fall of the Berlin wall.
In Russia the future is bleak. The middle class is virtually non-existant, and a capitalism of buddies and mobsters was created. Even though the Russians have a very heavy resopnsibility in what happened, the western advisers, especially those of the United States and the IMF, who ran in so fast to preach the free market gospel, are hardly without reproach.
Once again Stiglitz denounces the grave mistakes of the industrialized countries and the IMF in helping the East in such a serious, historic time. Unlike in China, the idea of "shock therapy," to which the US and Washington consensus were partial, won over in most former Soviet countries. They disregarded the experience of capitalist economies where regulations and laws were made for a century and a half to cope with the problems which a totally free market capitalist economy causes. The Eastern countries, and especially Russia, tried to get to capitalism through a shortcut, creating a market economy without the institutions it's based on, and the institutions without the institutional infrastructure they require.
Stiglitz analyses the chain of errors, starting with the responsibility of the US and the IMF:
- the liberalization of the prices in 1992, all of a sudden,
- strong inflation (two figures every month), which killed savings and made macrostability the number one problem,
- fierce struggle against inflation with hardening of the economic policy and higher interest rates,
- an open invitation to exploit the government's mistakes,
- the capitals flee abroad, a flight made easy by the liberalization of the economy, and especially the financial markets; and an overrated Ruble,
- economic depression and even "devastation": the GNP's drop was even higher to that of Russia during WW2. From 1940 to 1946 industrial production had dropped by 24%. From 1990 to 1999, industrial production dropped by 60%, more than the GNP (54%)
It was the Washington consensus's "stabilization-liberalization-privatization" programme that led to utter disaster, Stiglitz concludes. In 1989 only 2% of the inhabitants of Russia lived in poverty. At the end of 1998, this percentage had risen to 23.8% if 2$ per day is the threshold. Over 40% of the population lived with less than 4$ per day. Russia has a level of inequality on par with the worst in the world: the latin american societies based on semi-feudal heritage. The 1998 crisis with high interest rates and a sharp drop of oil prices (Russia's main export), which was connected to the Asian crisis, made the situation worse.
Stiglitz concludes by asking, in a police-inquiry, who had to gain from this tragedy, of which nobody can still predict all the long-term consqeuences? The Russian oligarques profited of course, but also the business bankers of Wall Street and other western stock exchanges, who had been the most vocal in asking for a rescue operation, and knew it wouldn't last. They took advantage of the short lapse it insured to grab everything they could and leave Russia with dozens, maybe hundreds of billions of dollars in their pockets.
The Asian crisis was very unexpected, and hard to understand at first. Like western Europe, the USA and Japan, in the past, the government's role was vital in performing what was called the "Asian miracle" up until the crisis. Even the World Bank acknowledges this in one of its reports. These countries haven't succeeded so well in spite of having gone against the Washington consensus's edicts, but because they went against them, Stiglitz concludes. I agree with him but find he glosses over the weaknesses and specificities of the Asian region, which he laudes a little too much. It's true that compared with the other developing countries, Eastern Europe included, the region is brilliant and even deserving of the expression "Asian miracle," but it does have its shortcomings.
The crisis began as a financiary crisis due to speculation on real estate and later on currencies. This kind of crisis is classic, patterned after the 1929 crisis. Once again, let me use a little list to break down the events:
- banking laissez-faire,
- real estate and/or stock exchange speculation,
- financial bubble and irrational indebtting,
- the financial world is disconnected with the real economy (i.e. the value of the stocks, too high, has nothing to do with the reality of the corporations that have gone into debt to emmit them),
- once people become aware of this disconnection the bubble bursts,
- massive sale of assets and a catastrophic drop of the indexes, according to a cumulative process,
- problem of the banks whose clients become insolvent,
- slowdown and stop of credit to corporations and withdrawal of the funds these banks have abroad,
- cascading bankruptcy of corportions, increase of unemployment, less imports with protectionism kicking in,
- the crisis spreads to other nations.
Were the Asian countries doomed to this kind of crisis? Stiglitz's answer is no. Because these countries did follow the Japanese model and always managed not only to save funds but use them to invest very wisely, including in education and training of the workforce. They decided for the strategy known as the "flight of the wild geese" (sic.), becoming workshop countries and focusing their efforts on promoting exports.
Even though their development strategy is opposite to what the Washington consensus not only recommends to but imposes on developing countries that need international funds from them, the East Asian economy is worthy of. The increase of revenue and fall of poverty in East Asia in the past 30 years is unprecedented. Strong saving, public investment in education, government-led industrial policy: this winning combination turned the region into an economic power. The benefits of the growth have been largely shared. Even though the development of the Asian economies was not without problems, on the whole these governments had picked a strategy which worked, and only had one thing in common with the strategy of the Washington consensus: macro-stability.
But, obsessed by their liberal ideology and submitted to pressure from the big western corporations, the IMF and the World Bank tried everything they could to impose the liberalization of financial markets to the governments of East Asia, and this liberalization, which sped up through the end of the 80's and the early 90's which was the most aggravating factor in the origins of the crisis, because the Asian countries had no need for additional capital since their saving rates were very high, but that liberalization was imposed nonetheless.
The inflow of international capitals (including the American pension funds), seeking strong and fast revenue and attracted by the Asian countries' economic performance which contrasted with the sluggishness of the great industrialized countries, constituted a grave danger of destabilization of the economies which got those capitals while penalizing the other developing countries with less performance but a crucial need of capital. Nothing like the Washington consensus's idea of "optimal allocation of resources."
After mentioning the debacle of American savings bank during the 80's after Reagan's deregulation policy, Stiglitz shows the absurdity and danger of the forced liberalization of the financial markets that the IMF and US Treasury forced on the Asian countries, which was only good to Wall Street's private interests. He mentions Keynes' perspicacity about the logic of capital flow, gigantic and often unexplicable changes, which he called "the animal spirits" and is surprised by the blindness and naiveté of the Washington consensus: it is hard to believe they never saw that the capital flows are pro-cyclical: they get out of a country during recession, precisely when they need them the most, and come back in during expansion when they strengthen inflationist pressure.
This capital flow towards the East Asian countries encouraged speculation (especially in real estate, with the trend of building empty office buildings), developped short term credit which is very dangerous to corporations. He doesn't really analyze the multiple causes of the crisis, which first hit Thailand which had to devalue the Bath in July of 97, so he doesn't mention the strong increase of the value of the dollar starting from 1995 (+25.5% from 95 to 98) with the quick revival of the American economy (4.13%/yr in 96-98 vs. 2.3%/yr from 90 to 95) which brought up the East Asian's currencies which are largely hooked to the dollar and challenging the economy of these countries against the rise of mainland China and even Viet Nam which has very cheap labor force. Stiglitz puts emphasis on the responsibility of the large industrialized country and the IMF in forcing a reckless liberalization of the financial markets of these countries.
He's not wrong, ecause barely 3 years after the awful crisis (in 1998 Indonesia's GNP dropped by 13.1%, Korea's by 6.7% and Thailand's by 10.8%) these economies have gotten back on their feet pretty well, with the help of the IMF, World Bank and large developed countries, but it's still a great performance. Especially given the conditions imposed by the IMF: a strict policy a la Hoover, an anomaly in the modern world which, according to Stiglitz,worsened and broadened the crisis. The Asian economies which were in crisis were clearly on the verge of grave recession and needed to be stimulated. The IMF advised exactly the opposite and the consequence was exactly what to expect. This contagion is even more understandable because the Asian countries' part in international exchange has never stopped growing
I took the liberty of fetching some enlightening figures which are not in the book:
Population growth 1975-2000 Pop 2000 2000-2015
(avg yearly rate) (millions)
East Asia & Pacific 1.5% 1,859 .8%
South Asia 2.1% 1,502 1.5%
Subsaharian Africa 2.8% 606 2.4%
Arabian countries 2.7% 246 2 %
Latin America & Carribean 1.9% 513 1.3%
Eastern Europe & CIS .5% 397 - .2%
OECD .8% 1,129 .5%
GNP growth 1975-2000 1990-2000 GNP/hab ($)
(avg yearly rate) 1999
East Asia & Pacific 5.9% 5.7% 1,235.2
South Asia 2.4% 3.3% 494.6
Subsaharian Africa - .9% - .3% 507.6
Arabian countries .3% .7% 2,453.2
Latin America & Carribean .7% 1.7% 3,823
Eastern Europe & CIS ? -2.4% 1,881.1
OECD 2 % 1.7% 22,637.9
(Source: United Nations Programme for Development, World report on development 2002)
1980 | 1999
S/GNP | I/GNP | X/GNP | S/GNP | I/GNP | X/GNP
East Asia & Pacific 35% | 35% | 26% | 37% | 33% | 39%
Southern Asia 19% | 23% | 9% | 19% | 22% | 12%
Subsaharian Africa 16% | 15% | 27% | 14% | 17% | 27%
Middle-East & North Africa 22% | 24% | 33% | 19% | 22% | 25%
Latin America & Carribean 22% | 19% | 14% | 20% | 21% | 16%
Eastern Europe & Ctrl Asia 26% | 28% | 23% | 23% | 20% | 38%
OECD 23% | 23% | 19% | 22% | 21% | 22%
(Source: World Bank, Report on development 2000-2001)
What Stiglitz thinks is most needed, and it's hard not to agree with him, is a reform of the minds, rather than a reform of the institutions. Close to (my) home, the majority of French philosophers have already tackled this problem, like François Cheng, who believes we must "throw the net very low" in order to bring the core of human finesse up from the rubble of civilization under which it was buried.
In his last chapter ("The Way Ahead") and his conclusion, Stiglitz emphasizes the success of Poland and China, who refused to follow the IMF's lessons on "shock therapy." He repeated the obvious necessity to have a market economy "disciplined by the governments" (like western democracies have had for centuries, and especially since the 30's). He warned about the danger to mix up ends and means: macro-stability (fighting inflation, public deficit, etc.) is only a means at the service of employment, social stability and well-being, not an end of itself. And he renews his ardent criticism of the IMF and the West in general, and the US in particular.
The environment must be looked after, poor countries need to have a say in decisions that affect them, democracy and fair commerce must be promoted, etc. This is necessary to achieve the potential goods of globalization. The problem is that institutions reflect the minds of those they answer to. Obviously a system is only worth the spirit that moves it, and especially that of its leaders, and spirit is the result of a people's culture, and their educational and cultural environment, and this is what is most important.
His most ardent fear is the urbanisation that will be caused by the economic expansion that comes with globalization. What will ensue is that the basis of the traditional rural cultures will be attacked, and the cultural damage might be unprecedented and irreversible.
Stiglitz also has a few practical suggestions :
- reinforce or multiply public international institutions that can stick to their original mandate,
- change the government of international institutions, especially the IMF and the World Bank, who are too dominated by a handful of industrialized countries,
- increase transparency with an increased role of free press, which would analyze every shortcoming, every contravention, something which Stiglitz feels is very important with public institutions whose leaders are not directly elected,
- for the IMF, they must acknowledge the dangers of liberalizing markets and capitals, reform bankrupts and not hesitate to freeze capitals (ironically, Ann Krueger, Stiglitz's replacement at the World Bank, recently agreed with this), rely on salvage operations less, improve safety nets, and improve response to crises, with the IMF going back to its initial mandate,
- for the World Bank, assistance should have less conditions, with selectivity and accompaniment as the focus, debts must be cancelled, there must be withdrawals on the revenues of the planet's economic resource to finance global public goods, and a moral responsibility in loaning to questionable regimes (like Mobutu's in Zaire),
- for the WTO, Stiglitz denounces the hypocrisy of the industiralized countries, the scandals of creating false needs in poor countries, the lack of AIDS medicine for poor countries (which have 90% of the victims of this plague), "biopiracy" with international pharmaceutical corporations patenting poor countries' traditional remedies and then choking the corporations in those countries making these remedies (many other crafts which have been pillaged that way, which Stiglitz fails to mention).
Globalization and its Discontents is a really good essay, well written, and which makes convincing arguments. Stiglitz doesn't rant, but he does go over his pet peeves quite a few times, and you can feel this is a man who hasn't digested all of his resentment yet. Books like this one are probably a much better introduction to economics than most textbooks, because it is a talented economist's take on a current, relevant situation, which is always better than a dry text on economic concepts -- but the book is still based on these economic concepts.
However, as you may have noticed, the book is heavily biased for Stiglitz's keynesian (i.e. left wing) point of view. It's very refreshing to see an Economics Nobel Prize winner from America (and a lot of them are) who isn't one of the Chicago boys, followers of Milton Friedman's monetarism, advocates supply side economics as opposed to Keynes' demand side economics, but, as in all things, it's best to use a healthy dose of criticism while reading this book. This ain't a Wikipedia article.
The good thing is that unlike a lot, he's not shy about his opinions, and in matters of intellect it's always best to hear from both sides rather than rely on a so-called balanced point of view. Therefore, I cannot help but wholeheartedly recommend this book, as long as you keep this little warning in mind.
Nobody cares if it was originally for a quest.