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By Benjamin M. Friedman
Globalization and Its Discontents
Volume 49, Number 13 · August 15, 2002
Globalization: Stiglitz's Case
By Benjamin M. Friedman
Globalization and Its Discontents by Joseph E. Stiglitz
Norton, 282 pp., $24.95
The most pressing economic problem of our time is that so many of what we usually call "developing economies" are, in fact, not developing. It is shocking to most citizens of the industrialized Western democracies to realize that in Uganda, or Ethiopia, or Malawi, neither men nor women can expect to live even to age forty‐ five. Or that in Sierra Leone 28 percent of all children die before reaching their fifth birthday. Or that in India more than half of all children are malnourished. Or that in Bangladesh just half of the adult men, and fewer than one fourth of adult women, can read and write. What is more troubling still, however, is to realize that many if not most of the world's poorest countries, where very low incomes and incompetent governments combine to create such appalling human tragedy, are making no progress—at least not on the economic front. Of the fifty countries where per capita incomes were lowest in 1990 (on average, just $1,450 per annum in today's US dollars, even after we allow for the huge differences in the cost of living in those countries and in the US), twenty‐three had lower average incomes in 1999 than they did in 1990. And of the twenty‐seven that managed to achieve at least some positive growth, the average rate of increase was only 2.7 percent per annum. At that rate it will take them another seventy‐nine years to reach the income level now enjoyed by Greece, the poorest member of the European Union. This sorry situation stands in sharp contrast to the buoyant optimism, both economic and political, of the early postwar period. The economic historian Alexander Gerschenkron's classic essay "Economic Backwardness in Historical Perspective" suggested that countries that were far behind the technological frontier of their day enjoyed a great advantage: they could simply imitate what had already proved successful elsewhere, without having to assume either the costs or the risks of innovating on their own. The economist and demographer Simon Kuznets, who went on to win a Nobel Prize, observed that economic inequalities
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Globalization: Stiglitz's Case
By Benjamin M. Friedman
Globalization and Its Discontents
often widen when a country first begins to industrialize, but argued that they then narrow again as development proceeds. Albert Hirschman, an economist and social thinker, put forward the hypothesis that, for a while, at the beginning of a country's economic development, the tolerance of its citizens for inequality increases, so that the temporary widening that troubled Kuznets need not be an insuperable obstacle. Throughout the countries that had been colonies of the great European empires, the view of the departing powers was that the newly installed democratic institutions and forms they were leaving behind would follow the path of the Western democracies. Political alliances, like the myriad regional pacts established during the Eisenhower‐Dulles era (SEATO, CENTO, and all the others), would help cement these gains in place. Not surprisingly, the contrast between that earlier heady optimism and today's grimmer reality has led to a serious (and increasingly acrimonious) debate over two closely related questions. What, in retrospect, has caused the failure of so many countries to achieve the advances confidently predicted for them a generation ago? And what should they, and those abroad who sympathize with their plight and seek to help, do now? Perhaps not since the worldwide depression of the 1930s have so many thinkers attacked a problem from such different perspectives: Have the non‐developing economies (to call them that) pursued the wrong domestic policies? Or have they been innocent victims of exploitation by the industrialized world? Is it futile to try to foster economic development without an appropriate social and political infrastructure, including what has come to be called the "rule of law" and perhaps also including political democracy as well? Or do these favorable institutional creations follow only after a sustained improvement in material standards of living is already underway? Would more foreign aid help? Or does direct assistance from abroad only create parallels on a national scale to the "welfare dependency" sometimes alleged in the US, dulling the incentive for countries to undertake difficult but needed reforms? How much blame lies with corruption in the nondeveloping countries' governments, often including the outright theft by government officials of a large fraction of whatever aid is received? And then there is the most controversial question of all: Is the "culture" of these countries— specifically in contrast to Western culture—simply not conducive to economic success? One important concrete expression of the optimism with which thinking in the industrialized world addressed the challenge of economic development a generation and more ago, before these painful questions became prominent, was the creation of new multinational institutions to further various aspects of the broader development goal. The United Nations spawned a family of sub‐units to this end, most prominently the UN Development Program and the UN Conference on Trade and Development. The Food and Agriculture Organization (founded in 1945, but
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Globalization: Stiglitz's Case
By Benjamin M. Friedman
Globalization and Its Discontents
separately from the UN) and the World Health Organization (1948) had more specific mandates. The International Bank for Reconstruction and Development (commonly called the World Bank), established in 1944 mostly to help rebuild war‐ torn Europe, soon shifted its attention to the developing world once that task was largely completed. The International Monetary Fund (the IMF, or sometimes just the Fund) was a latecomer to the development field. Established in tandem with the World Bank in 1944, the IMF's original mission was to preserve stability in international financial markets by helping countries both to make economic adjustments when they encountered an imbalance of international payments and to maintain the value of their currency in what everyone assumed would be a permanent regime of fixed exchange rates. By the early 1970s, however, the fixed exchange rate system proved untenable, and floating rates of one kind or another became the norm. Moreover, as the Western European economies gained strength while, at the same time, more and more developing countries entered the international trading and financial economy, it was increasingly the developing countries that ran into balance of payments problems or difficulties over their currencies and therefore turned to the IMF for assistance. As a result, over time the IMF became increasingly involved in the business of economic development. And as development has faltered in many countries—including many in which the IMF has played a significant part—the IMF's policies and actions have increasingly moved to the center of an ongoing, intense debate over who or what to blame for the failures of the past and what to do differently in the future. Joseph E. Stiglitz, in Globalization and Its Discontents, offers his views both of what has gone wrong and of what to do differently. But the main focus of his book is who to blame. According to Stiglitz, the story of failed development does have a villain, and the villain is truly detestable: the villain is the IMF.
Joseph Stiglitz is a Nobel Prize–winning economist, and he deserves to be. Over a long career, he has made incisive and highly valued contributions to the explanation of an astonishingly broad range of economic phenomena, including taxes, interest rates, consumer behavior, corporate finance, and much else. Especially among econ‐ omists who are still of active working age, he ranks as a titan of the field. In recent years Stiglitz has also been an active participant in economic policymaking, first as a member and then as chairman of the US Council of Economic Advisers (in the Clinton administration), and then, from 1997 to 2000, as chief economist of the World Bank. As the numerous examples and personal recollections in this book make clear, his information and his impressions are in many cases firsthand.
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or for loans from banks and other private‐sector lenders that look to the IMF to indicate whether a borrower is creditworthy. inadequate markets. or when other institutions that standard economic thinking takes for granted are absent or flawed. at the same time. Friedman Globalization and Its Discontents In Globalization and Its Discontents Stiglitz bases his argument for different economic policies squarely on the themes that his decades of theoretical work have emphasized: namely. or institutions—is no one's fault. governments can fight recessions and depressions by using expansionary monetary and fiscal policies to spur the demand for goods and services. time and again the IMF has called for policies that conform to textbook economics but do not make sense for the countries to which the IMF is recommending them. "Recent advances in economic theory"—he is in part referring to his own work—"have shown that whenever information is imperfect and markets incomplete.Globalization: Stiglitz's Case By Benjamin M. according to the theory of incomplete information. and unworkable institutions—all of which are especially characteristic of newly developing countries. then the invisible hand works most imperfectly. or markets. in the countries that have followed them." As a result. what happens when people lack the key information that bears on the decisions they have to make. The implication of each of these absences or flaws is that free markets. and especially in developing countries. he argues. or when markets for important kinds of transactions are inadequate or don't exist. have ignored the implications of incomplete information. (Whether any given government will actually choose its interventions well is another matter. Stiglitz argues. when families and firms seek to buy too little compared to what the economy can produce. Stiglitz complains that the IMF has done great damage through the economic policies it has prescribed that countries must follow in order to qualify for IMF loans. As a result. At the microeconomic level. Stiglitz seeks to show that the consequences of these misguided policies have been disastrous. not just according to abstract statistical measures but in real human suffering. governments can improve the outcome by well‐chosen interventions. As Stiglitz nicely puts the point.) At the level of national economies. can trade in complete and efficient markets. to put unemployed labor back to work and. left to their own devices. And governments can use a variety of devices. do not necessarily deliver the positive outcomes claimed for them by textbook economic reasoning that assumes that people have full information. ranging from job creation to manpower training to welfare assistance. cushion the human hardship deriving from what—importantly. Stiglitz continues. The organization and its officials. They can also use tax policy to steer investment into more productive industries and trade policies to allow new industries to mature to the point at which they can survive foreign competition. which is to say always. and can depend on satisfactory legal and other institutions. Page 4 of 14 . governments can regulate banks and other financial institutions to keep them sound.
Stiglitz argues that the high interest rates imposed on many countries by the IMF have worsened their economic downturns. which make deposits and other assets denominated in the currency more attractive to hold. but the IMF usually recommends (in effect. that in the long run free trade practiced by everyone benefits everyone: each country will arrive at the mixture of products that it can sell competitively by using its resources and skills efficiently. he argues that cuts in spending or tax hikes only make the downturn worse. and they have forced the bankruptcy of countless otherwise productive companies that could not meet the suddenly increased cost of servicing their debts. As one of the conditions for extending a loan. Eliminating tariffs. The most traditional and perhaps best‐known IMF policy recommendation is for a country to cut government spending or raise taxes. the IMF often requires that the country's financial Page 5 of 14 . which is not yet ready to compete. or both. eliminating food subsidies for the poor. He also emphasizes the social cost of cutting back on various kinds of government programs—for example. Liberalizing Capital Markets. quotas. Everyone favors free trade—except many of the people who make things and sell them. The usual underlying presumption is that much government spending is wasteful anyway. Stiglitz points out that today's industrialized countries did not practice free trade when they were first developing. Many developing countries have weak banking systems and few opportunities for their citizens to save in other ways. and tight monetary policy. when the deficit is mostly the result of an induced decline in revenues.Globalization: Stiglitz's Case By Benjamin M. Friedman Globalization and Its Discontents Most of the specific policies that Stiglitz criticizes will be familiar to anyone who has paid even modest attention to the recent economic turmoil in the developing world (which for this purpose includes the former Soviet Union and the former Soviet satellite countries that are now unwinding their decades of Communist misrule): Fiscal austerity. They are intended to fight inflation that was not a serious problem to begin with. and that even today they do so highly imperfectly.) He argues that forcing today's developing countries to liberalize their trade before they are ready mostly wipes out their domestic industry. Many countries come to the IMF because they are having trouble maintaining the exchange value of their currencies. implemented mostly through high interest rates. is again the standard corrective. only to be engulfed by food riots. High interest rates. subsidies. to balance its budget and eliminate the need for government borrowing. (Witness this year's increase in agricultural subsidies and new barriers to steel imports in the US. and other barriers to free trade usually has little to do directly with what has driven a country to seek an IMF loan. A standard IMF recommendation is high interest rates. Rapidly increasing prices— sometimes at the hyperinflation level—are also a familiar problem in the developing world. requires) eliminating such barriers as a condition for receiving credit. The argument is the usual one. Stiglitz charges that the IMF has reverted to Herbert Hoover's economics in imposing these policies on countries during deep recessions. Trade liberalization. which Indonesia did at the IMF's behest in 1998.
and that they and other foreign investment firms will do a better job of mobilizing and allocating the country's savings. And when banks can't collect what they're owed. and many more—has been a major initiative of the last two decades both in industrialized countries and in some parts of the developing world. a standard recommendation nowadays is to sell public‐sector companies to private investors. Fear of default. Stiglitz argues that the larger and more efficient foreign banks drive the local banks out of business.Globalization: Stiglitz's Case By Benjamin M. from the very beginning. Selling off government‐ owned enterprises—telephone companies. Stiglitz argues that many of these countries do not yet have financial systems capable of handling such transactions. the result of premature privatization has been to give away the nation's assets to what amounts to a new criminal class. Especially in Russia and other parts of the former Soviet Union. or worse yet the opportunity for graft. to be rescued from the consequences of their own reckless credit policies. that the failings of which he accuses the IMF are not just random mistakes. railroads. In his view these policies—what he labels the "Washington consensus"—add up to something that is unattractive. if not outright repugnant. or systems of corporate governance capable of monitoring the new managements. keeps them going. The problem with all this. Stiglitz argues. or regulatory systems capable of preventing harmful behavior once the firms are privatized. he writes. Stiglitz also argues that the end result is to saddle a developing country's taxpayers with the permanent burden of paying interest and principal on the new debts that pay off yesterday's mistakes. His theme is that there is a coherence to this set of individual policies. A top priority of IMF policy. Especially when countries that come to the IMF have a budget deficit. steel producers. in several different ways. Friedman Globalization and Its Discontents markets be open to participation by foreign‐owned institutions. As a formal matter. They want. they typically accept a "voluntary" restructuring of the country's debt. One reason for doing so is the expectation that private management will do a better job of running these activities. Page 6 of 14 . and that mobilizing savings is not a problem because many developing countries have the highest savings rates in the world anyway. The rationale is that foreign banks are sounder. that the foreign institutions are much less interested in lending to the country's domestically owned businesses (except to the very largest of them). he says. Another is that many of these public companies should not be running at all. the IMF always gets repaid. in order to avoid the appearance of default. Stiglitz's indictment of the IMF and its policies is more than just an itemized bill of particulars. has been to maintain wherever possible the fiction that countries do not default on their debts. and only the government's desire to provide welfare disguised as jobs. often serves only to take off the hook the banks and other private lenders that have accepted high risk in exchange for a high return for lending to these countries in the first place. is that the new credit that the IMF extends. Privatization.
Rather it simply acts on the belief—seriously mistaken in his view—that allowing free markets to do their work will automatically take care of such problems. or at least did not take into account. the IMF itself is responsible for worsening—in some cases. Stiglitz repeatedly claims that the IMF's policies stem not from economic analysis and observation but from ideology—specifically. The IMF. Again the claim is not that the IMF dislikes growth per se. an ideological commitment to free markets and a concomitant antipathy to government. of course. By extension. By making countries adopt high interest rates that stifle investment and bankrupt companies. impervious to either counterarguments or counterevidence. he argues." Liberalizing a country's trade makes sense when its industries have matured sufficiently to reach a competitive level. but that it believes free markets are all that is needed to make growth happen. the IMF encourages low confidence on the part of foreign lenders. More specifically. Page 7 of 14 . a form of religion. the IMF gives currency traders a one‐way bet and therefore encourages market speculation. By forcing countries that are in trouble to slash their imports. he argues. A further implication of this belief in the efficacy of free markets. in effect. As a further consequence of the misguided policies that follow from this "curious blend of ideology and bad economics. that the IMF prefers serious recessions or unemployment per se. in his eyes. the underlying motivation is ideological: a belief in the superiority of free markets that he sees as.Globalization: Stiglitz's Case By Benjamin M. but not before. according to Stiglitz. the IMF also does not act to promote economic growth (which helps to produce full employment). Friedman Globalization and Its Discontents First. instead adopting a "cookie cutter" approach in which one set of policies is right for all countries regardless of their individual circumstances. Privatizing government‐ owned firms makes sense when adequate regulatory systems and corporate governance laws are in place. He does not argue. by repeatedly coming to these lenders' rescue. By making countries maintain overvalued exchange rates that everyone knows will have to fall sooner or later. the IMF encourages the contagion of an economic downturn from one country to its neighbors. is that the IMF has abandoned its original Keynesian mission of helping countries to maintain full employment while they make the adjustments they need in their balances of payments. Again and again he accuses IMF officials of deliberately ignoring the "facts on the ground" in the countries to which they were offering recommendations. he argues that the IMF ignores the need for proper "sequencing. for actually creating—the problems it claims to be fighting. But importantly." Stiglitz argues. the IMF encourages lax credit standards. instead the IMF recommends policies that result in steeper downturns and more widespread joblessness. In part his complaint is that they did not understand. but not before. At the same time. deliberately ignores such factors. his and other economists' theoretical work showing that unfettered markets do not necessarily deliver positive results when information or market structures or institutional infrastructure are incomplete.
There is money to bail out banks but not to pay for improved education and health services. do not necessarily like.. the IMF. but it was reflecting the interests and ideology of the Western financial community. The IMF rails against high tax rates that are imposed against the rich." Page 8 of 14 . of what they produce. after working at the IMF.. are on the agenda. the effects are the same as a 50 percent tax on poor farmers. As Stiglitz points out. Here again Stiglitz's point is that the IMF's mistakes are not random but the systematic consequence of its fundamental biases. Taxation.Globalization: Stiglitz's Case By Benjamin M. those with whom the international finance institutions interact. land reform is off. Stiglitz's view is that in recent decades the IMF "was not participating in a conspiracy. in many developing countries a small group of families own much of the cultivated land. let alone to bail out workers who are thrown out of their jobs as a result of the IMF's macroeconomic mismanagement. Friedman Globalization and Its Discontents Second. One specific example. in preference to that of workers. and its adverse effects. pointing out how they destroy incentives. as well as with bankers and investment bankers. in Stiglitz's view. peasants. Stiglitz considers. He sees it as no accident that the IMF regularly provides money that goes to pay off loans made by banks and bondholders who are eager to accept the high interest rates that go along with assuming risk— while preaching the virtues of free markets as they do so—although they are equally eager to be rescued by governments and the IMF when risk turns into reality. the view that these and other choices are the result of a conspiracy between the IMF and powerful interests in the richer countries—a view that is increasingly popular among the anti‐globalization protesters who now appear at the IMF's (and the World Bank's) meetings. He also notes that many IMF officials come to the Fund from jobs in the private financial sector. He observes that IMF officials tend to meet only with finance ministers and central bank governors. systematically acts in the interest of creditors. one that those in the elite that populates the finance ministries. Land reform represents a fundamental change in the structure of society. The sharecropping system weakens incentives—where they share equally with the landowners. and more darkly. job creation is off. and of rich elites more generally. with tenant farmers keeping perhaps half. and other poor people. but nary a word is spoken about these hidden taxes. while others. and rejects. go on to take jobs at banks or other financial firms. Agriculture is organized according to sharecropping. they never meet with poor peasants or unemployed workers. land reform. Stiglitz also thinks it is no coincidence that food subsidies and other ways of cushioning the hardships suffered by the poor are among the first programs that the IMF tells countries to cut when they need to balance their budgets. Stiglitz argues. sharply illustrates what he has in mind. His argument is as much about the policies the IMF doesn't recommend as the ones it does: Stabilization is on the agenda. or less..
Globalization: Stiglitz's Case By Benjamin M. where he argues that the privatization program Page 9 of 14 . Many longtime observers of the developing world will notice that Stiglitz rarely mentions economic policy mistakes that poor countries make on their own initiative. Stiglitz is right that they have not regained. is that we cannot reliably know whether the consequences of the IMF's policies were worse than whatever the alternative would have been. 3. and probably will not. and where the IMF pursued the policies toward which Stiglitz is the most scathing. Stiglitz accuses him of being excessively concerned with inflation to the exclusion of a vigorous expansion that could have otherwise taken place in the US during the Clinton years. While some of the affected countries (most obviously Indonesia) still feel its effects.. it is easy enough to accuse Stiglitz of selective memory. the IMF was willing to tear apart the even more important social contract. But those rapid growth rates may well have been unsustainable in any case. even including those policies it pursued that most people now agree proved counterproductive. but at the Federal Reserve System too—had ever gotten a question right. which he continually portrays as complicit in the IMF's misdeeds. and his colleagues first at the Council of Economic Advisers and then at the World Bank. Friedman Globalization and Its Discontents Finally. had ever gotten anything wrong. as Stiglitz readily acknowledges. the economic situation looks better today than it did when he was writing his book. Or that Stiglitz. While misguidedly working to preserve what it saw as the sanctity of the credit contract. (In the book's sole mention of Alan Greenspan. Throughout the book. From reading Globalization and Its Discontents. Or that those against whom he often argued in the US government—especially at the Treasury. Do Stiglitz's criticisms hold up? To begin. it was also a matter of values. By 2002 the Asian financial crisis of 1997–1998 is receding into the past. by now others have made solid recoveries. Even in Russia. Nor does he pay much attention to the large‐scale corruption that is endemic in many developing economies—except in the case of corruption in Russia. Stiglitz sees the IMF's systematic biases as a reflection of a deeper moral failing: The lack of concern about the poor was not just a matter of views of markets and government... the rates of growth they achieved before the crisis. one would never know that the IMF had ever done anything useful. views that said that markets would take care of everything and government would only make matters worse. the sense of moral outrage is evident.) One can also disagree with Stiglitz over the consequences of what the IMF plainly did. A more fundamental problem. where per capita income remains well below what it was when the Soviet Union collapsed.
It is surprising too. Sala‐i‐Martin's point is that for purposes of assessing whether someone is economically well off or miserable. in light of his emphasis on the absence of adequate regulation and supervision of financial institutions in the developing world. By contrast. has recently published a study arguing just the opposite. whether poverty is increasing or decreasing. to be argued on a case‐by‐case basis. his own colleague in the Columbia Economics Department. Stiglitz echoes the standard view that the number of people around the world living on less than $1 per day. if one is to give a clear picture of why the nondeveloping economies are not succeeding. or $2 per day. and markets incomplete. for example. what is more important. along with graft in all its forms. But they would presumably argue that events would have turned out even worse on some alternative course. Because the currency values established in foreign exchange markets (and also the values that governments set officially for currencies for which there is no market) often do not accurately reflect purchasing power. what matters is not how many US dollars the person's income could buy in the foreign exchange market but what standard of living that income can support in the place where he or she lives. But surely much of the fault lay with Korea's own businessmen and bankers. And once they had built their house of cards. is just what different set of actions might therefore have proved more beneficial. For example. the average person's income in rupees in 2000 translated into just $460 per year at the prevailing market exchange rate of 44 rupees per dollar. The issue.Globalization: Stiglitz's Case By Benjamin M. He also never points out that the typical developing country spends far more on its military forces (to fight whom?) than it receives in foreign aid. yet it would seem necessary to take account of such wasteful expenditures. how much damage would its inevitable collapse have caused if the IMF had simply stayed away? Defenders of the IMF cannot claim that all went well after countries implemented the Fund's recommendations. Page 10 of 14 . and that the country's banks had financed these loans by borrowing in US dollars and relending in Korean won. that Stiglitz does not make more of the mistakes made by private‐sector businesses. in the countries that came to the IMF for assistance. Interestingly. there is also disagreement today over just how prevalent dire poverty is in the developing world—and. True. In India. banks abroad that were lending in dollars to the Korean banks may have become excessively confident that the IMF would bail them out if anything went wrong. They would also presumably argue that of course they knew that information was imperfect. and institutions absent. has been increasing in recent years. what made Korea vulnerable to the 1997–1998 Asian turmoil was that the country's business conglomerates (the "chaebols") had borrowed too heavily. Friedman Globalization and Its Discontents pushed by the IMF opened the way for corruption on a historically unprecedented scale. Xavier Sala‐i‐Martin. the difference between the two measures of income is sometimes large.
and therefore against the interests of the poor. More important. remains dire. while the $2‐per‐day poverty rate has fallen from 44 percent to 19 percent. the plight of many developing countries. To what extent is the IMF supposed to act as lending institutions ordinarily act? Stiglitz complains at length. and not quite 1 billion. Much empirical research will have to be done and much analytical debate will have to take place before anyone can confidently decide which of these contrasting measurements is the more accurate. the average Chinese income in 2000 was $840 at the official yuan–dollar market exchange rate. (In keeping with his central theme. which he favors. or $2 per day. But it is worth pointing out that the major source of the decline in poverty over the last quarter‐century. Stiglitz's attack on the IMF raises not just factual (and counterfactual) questions but substantive issues as well. according to Sala‐i‐ Martin's calculation. nearly 300 million. and instead followed the gradualist approach. especially in sub‐Saharan Africa.8 billion figures that have become familiar in public discussion and are used by Stiglitz. is still depressingly large: according to Sala‐i‐Martin's estimate. the same amount of rupees was equivalent to an American income of nearly $2. and rich countries more generally. But don't responsible lenders normally impose such conditions on borrowers? Stiglitz never acknowledges that today the IMF faces serious criticism from many Page 11 of 14 . but more than $3. respectively. As a result. praises China's performance as one of the developing world's great recent economic success stories.900 if measured on a purchasing power equivalent basis. the world's most populous country—and Stiglitz. But this is far below the 1. the number of people in the world who live on the equivalent of $1 per day. he argues that China succeeded in reforming its economy and reducing its poverty because it ignored the IMF's advice to liberalize and privatize abruptly. the proportion of people living on what amounts to $1 per day has fallen from 20 percent of the world's population a quarter‐century ago to just 5 percent today. too. the great advances made in China. that the IMF violates countries' economic sovereignty when it requires them to carry out its policy recommendations as a condition for its granting credit. But if attention is centered on people rather than countries. and it may well be deteriorating. he finds. and other consumer necessities are so much cheaper in India than in the US. but Sala‐i‐Martin estimates that they are declining despite the rapid growth in world population.Globalization: Stiglitz's Case By Benjamin M. Similarly. and to a lesser extent in India—which together account for nearly 38 percent of the world's population—necessarily represent a very significant improvement. Even if we allow for these differences in the cost of living. is the dramatic reduction in poverty in China. particularly his argument that the IMF acts on behalf of banks and bondholders. as Sala‐i‐Martin also points out. Stiglitz follows the more familiar view in saying that these totals are increasing. housing.400. and with many specific cases to cite.) To be sure. clothing.2 billion and 2. Friedman Globalization and Its Discontents But because food. adapted to its own situation.
but instead as an institution charged solely with promoting the welfare of the borrowing countries. wholly apart from the practical benefits that we might gain from alleviating human misery abroad. Moreover. or a minimum standard of nutrition through food stamps. either out of a sense of moral obligation or in recognition that raising the incomes of poor countries would create benefits spilling over to the industrialized world as well. is nothing new. extremely difficult. as a world government. justifying in moral terms why we owe more to strangers who are close at hand than we owe to strangers who are far away turns out to be complicated and. The foreign aid that most rich countries give is shrinking compared to their GDP. together with the equally sincere resistance to the idea among others. But it is worth recognizing explicitly that it is central to the question of inequality. with waste of some credits to be expected? Some parts of Stiglitz's complaint are not so much about the IMF per se as about the absence of some form of international authority capable of imposing on citizens who are already relatively well off the burden of assisting their less fortunate fellow human beings elsewhere. The earnest desire in some quarters for a more formal approach to international burden‐ sharing. Even within countries with firmly established democratic governments. in the end. and the rest of the world's low‐income countries. acting as responsible lenders normally do. up to that standard? Most Americans will readily answer yes. Is it morally legitimate for US citizens to pay taxes to provide fellow Americans with a minimum standard of health care under Medicaid.Globalization: Stiglitz's Case By Benjamin M. But as philosophers like John Rawls and Thomas Pogge have argued. Page 12 of 14 . so that the borrowing countries often simply end up wasting the money. To be sure. Or should the IMF think of itself not as a lending institution. But a large part of what troubles Stiglitz and many others who share his views of inequality among countries is that there is not only no such agreement but also no effective mechanism—what he calls "systems of global governance"—for even choosing a policy in this important area and then making it stick. Friedman Globalization and Its Discontents economists and politicians in the West on the ground that it makes loans with too few conditions. in effect. But in fact there is no such agreement. the matter at issue is deeper than simply whether there should or should not be functioning institutions empowered to act. that is far above what the average Angolan receives—and not at the same time be willing to pay the costs of bringing Angola. What obligations the citizens of one country owe to citizens of another is a question that goes to the heart of what is involved in being a nation‐state and in acting as a responsible human being. and the efficacy of such aid is increasingly being challenged anyway. the world's rich countries could simply agree among themselves to devote a much greater share of their own incomes to foreign aid (a frequently suggested standard is 1 percent of GDP). there is always debate about how generous such assistance should be and what form it should take.
His book stands as a challenge. There is serious debate over each element in this program. It is now important that someone else—if possible. on their own. Table 2. who throughout the years that Stiglitz's analysis covers was the IMF's first deputy managing director—that is. however. that put the emphasis not on what developing countries have in common but on how each is different. his side of the argument. and poverty to decline. that place the concerns of the poor above those of creditors. In the absence of such an answer. during these years. Page 13 of 14 .Globalization: Stiglitz's Case By Benjamin M. and who has a firsthand command of the facts of recent experience comparable to his— take up this challenge by writing the best possible book laying out the other sides of the argument. that give maintaining full employment a higher priority than reducing inflation (at least when inflation is less than 20 percent a year). But his objective is not to give a balanced assessment of the debate. and that fight poverty and promote economic growth directly. What is needed is not just an attempt to answer Stiglitz's specific criticisms of the IMF but a book setting out the substantive case both for the specific policies and also for the general policy approach that the IMF has advocated. as effectively as it is possible to imagine anyone making it. the Fund's second‐highest ranking official. He makes a strong case for policies that favor gradualism over "shock therapy". but they are clear‐thinking economists and powerful advocates nonetheless. rather than merely establish conditions under which economies will be likely to grow. Stiglitz has presented. who served as the US deputy treasury secretary. but for most observers. together with much by way of both broad‐based evidence and firsthand specifics. Another is my Harvard colleague (now president of the university) Lawrence Summers. Stiglitz's book will surely claim a large place on the public stage. Stiglitz provides a powerful logical case. including the substantive case for the kind of economic development policies he favors as well as his more specific indictment of what the IMF has done and why. and then secretary. Supporters of the IMF in the academic world. to support his side on each of these issues. the person who. like MIT's Rudiger Dornbusch. may lack the firsthand "who said what to whom" knowledge that comes from high‐level public service. someone who thinks and writes as clearly as Stiglitz does. actually set the direction of the organization's policies. and who understands the underlying economic theory as well as he does. It certainly stands as the most forceful argument that has yet been made against the IMF and its policies. far more than anyone else. Friedman Globalization and Its Discontents Many of the more practical economic elements of Stiglitz's argument are also issues of long standing. Notes  Data from the 1999/2000 World Development Report. Who might write such a book? The most obvious candidate is the former MIT economist Stanley Fischer.
Letters November 21. Stiglitz is not consistent in his own treatment of the question of what conditions are appropriate for loans. Pogge. But he boasts about how the World Bank.  Data from the 2002 World Development Report. Afghanistan—are excluded because per capita income data are not available for them. He repeatedly castigates the IMF for imposing its officials' views over those of government officials in debtor countries." National Bureau of Economic Research Working Paper No. What Is Poverty? Page 14 of 14 .  Surprisingly. where he worked. Friedman Globalization and Its Discontents These are my calculations based on data in the 2001 World Development Indicators. 1999 is the latest year for which full data are available. forced Russia to accept stringent conditions in order to receive a loan. Table 1. Some countries that are presumably poor enough to be in the "lowest‐income fifty"—for example. w8904. April 2002.  "The Disturbing 'Rise' of Global Income Inequality.Globalization: Stiglitz's Case  By Benjamin M. 2002: Thomas W.
People in high places did not always want to listen to him. it is mostly because of how he says it. According to Stiglitz. Worse yet. and that ideology was often more important than rigorous intellectual debate. Stiglitz’s Globalization and its Discontents (W. As a memoir. in many cases. self-serving. He found out that politics was the main sport played inside the beltway. to recognize that many of his ideas are important and deserve to be discussed seriously. As a result of the debate generated by the book. and did not like it there. the book is powerful. ‘‘intellectual consistency has never been the hall-mark of the IMF. they often ignored his advice. it is entertaining and informative. It should be read by anyone interested in economic development. One does not have to agree with everything Stiglitz has to say. and when they did. The book is at its weakest when it comes to the criticism of the IMF. The main argument The main tenet of the book is simple.’’ His characterizations of IMF economists and policies are unfair and. It is part memoir. part manifest. and part criticism of the International Monetary Fund (IMF). public policy in an era of globalization. As a manifest. and goes something like this: pro-globalization policies have the potential of doing a lot of good. I believe that the book would have been more effective had Stiglitz chosen a more temperate style. he got little respect. And this is not only because of what Stiglitz has to say.252 Book reviews Review of Joseph E. New York and London) Joe Stiglitz has written an important book. and the political economy of decision making in international organizations. It tells the story of how Professor Stiglitz went to Washington. The tone is overly hostile and aggressive. and he misses no opportunity to insult the IMF staff. 1.’’ and the staff systematically practices ‘‘bad economics.W. if undertaken properly and if . some policies that have become readily accepted in Washington are likely to be revised in the future. Norton.
and I had to ask myself if he was being serious. The culprits are the IMF and its ‘‘market fundamentalists. including increases in destitution and social conflict. reduce growth. If anything. culture. and it was highly skeptical of Mexico’s trade-opening strategy during the mid-1980s. However. given his theoretical writings during the last 35 years. crucial aspects of the sequencing and pace of reform were ignored. is overly simplistic and ignores the evolution of reform thinking during the last two decades. Stiglitz frames his criticism around the insights of the theory of asymmetric information. taking into account their own history. And (3). if poorly designed—or if a cookie-cutter approach is followed—pro-globalization policies are likely to be costly. or fairly. it opposed Argentina’s currency board. when I read—in pp. and traditions. At times. At other times. In the 1980s and early 1990s. is that globalization has not been pushed carefully. and often using inadequate—or plainly wrong—economic analysis. and increase poverty. however. Stiglitz believes that in the early 1990s.Book reviews 253 they incorporate the characteristics of each individual country. liberalization policies have been implemented too fast. that the IMF was initially critical of Chile’s social security reform.’’ the ‘‘Washington Consensus. and generalized frustration. the IMF response to crises—and in particular to the East Asian crisis—was a disaster that made things worse rather than better. the reforms were the result of a ‘‘national consensus’’ that was more imaginative. (2) Advocating (and imposing) capital account liberalization was a huge mistake. however. On the contrary. In Argentina.’’ This view. They will increase instability. the World Bank and the US Treasury launched a conspiracy of sorts to run worldwide economic reform—this is the infamous ‘‘Washington Consensus.’’ and the US Treasury. It is well known. (1) In designing reform packages during the 1990s. The problem. I had trouble believing what I was reading. reform was implemented too fast—Stiglitz prefers gradualism—and in the wrong order. In particular. Chile. for example. make countries more vulnerable to external shocks. policy makers in many developing nations were moving faster than the multilaterals or the Treasury. the original emphasis on how to undertake economic reform came from a group of developing countries’ economists—many of them from Latin America—and not from the ranks of the multilaterals. according to Stiglitz. Not surprisingly. for example. the IMF. Stiglitz claims that if things had been done differently. and Mexico. for example. Countries should embrace globalization on their own terms. I found his arguments to be persuasive. This was the case. As a consequence. daring and far-reaching than anything bureaucrats in Washington were willing to accept at that time. As a result. Three interrelated policy issues are at the center of Stiglitz’s criticism of globalization. in many countries. 129 and 231—that the 2002 Argentine crisis could have been avoided by following a more expansive fiscal policy! . that is. if they had been done his way. imposing fiscal austerity and raising interest rates were terrible mistakes that cost the East Asian countries several points in terms of growth. we now face terrible results. he argues. the outcome in terms of social conditions would have been significantly better. in the wrong order.
In 1992. Moreover. he simply said. Many argued that politically. Adam Smith. who was to become the IMF’s Economic Counselor. argued in a mid-1980s article in the IMF Staff Papers that the capital account should. I remember being introduced to this view by an economist turned politician. argued in The Wealth of Nations that determining the appropriate sequencing was a difficult issue that involved. and only once the economy has been able to expand successfully its export sector. a consensus of sorts developed on the sequencing and speed of reform. Increasingly. it is essential that reform be implemented at the right speed and in the right sequence (see.’’ When I asked him what were the bases of his recommendation. The sequencing and pace of reform and capital account liberalization Stiglitz repeatedly argues that for economic liberalization to succeed. for example. since the beginning of the economics profession. Part III. This emphasis on speed and sequencing is not new in policy discussions. In particular. For example.’’ In the book. fiscal imbalances should be dealt with very early on in the reform process. Of course. be opened towards the end of the reform process. and in response to what was perceived as US pressure to lift controls on international capital movements. ‘‘politics. people at the IMF did not object to these general principles. We should do as much as we can. but most people did. but his criticism fails to address the political economy concerns that at the time worried Klaus and other pioneer reformers in Central and Eastern Europe. political considerations (see the Cannan Edition. and (5). he said: ‘‘Oh. As a result of the discussion surrounding this work. The most important elements of this consensus included: (1) trade liberalization should be gradual and buttressed with substantial foreign aid. (3) in countries with very high inflation. conferences were organized. In fact. indeed. Chapter VII. Smith supported gradualism—just as Stiglitz does—on the grounds that cold-turkey liberalization would result in a significant increase in unemployment. not everyone agreed with all of these recommendations.254 Book reviews 2. . Most participants agreed that following an . you are the ‘sequencing’ professor. primarily. and different country experiences were explored. pp. Yung Chul Park from Korea University organized a conference on capital account liberalization. p. Sometime during the early 1990s. as fast as we can. Stiglitz is critical of Klaus’s ‘‘rapid and simultaneous’’ reform strategy. . Jacob Frenkel. Papers were commissioned. ‘‘you got it all wrong. (2) an effort should be made to minimize the unemployment consequences of reform. people in Washington began to call for simultaneous and very fast reforms. When I met him in Prague in 1991. for example. this was the only way to move forward. . reform opponents would successfully block liberalization efforts.’’ and then he added. the argument went. Book IV. this received wisdom on sequencing and speed began to be challenged. This is a very important principle. Vaclav Klaus. however. I believe that Stiglitz is particularly on target when he argues that opening the capital account too soon is likely to generate serious dislocations. it has been dealt with over and over again. In the early 1980s. . 73– 78). 121). the World Bank became particularly interested in understanding issues related to sequencing and speed of reform. the capital account should be liberalized at the very end of the process. There is not such a thing as an optimal sequence. Otherwise. politics. and Stiglitz is right in emphasizing it. (4) financial reform requires the creation of modern supervisory and regulatory agencies.
In doing this.[A] strong case can be made in support of rapid and decisive liberalization in capital transactions’’ (pp. there is some evidence suggesting that price-based and transparent mechanisms. Even if the liabilities are entirely in private hands. But agreeing that sequencing is important is not the same as saying that capital controls should never be lifted.). and carefully listened to the counter counter-arguments. however. However. work relatively well as a transitional device. even Chile-style . 20). at the same time. and yet others—such as Chile—used market-based mechanisms to slow down the rate at which capital was flowing into the economy. provided counter-arguments.without any offset in future output with which to service the loans. Edwards (Ed. There was also broad support for the idea that a premature opening of the capital account could entail serious danger for the country in question (see S. It allows for some capital mobility and discourages short-term speculative monies. they tended to follow different strategies and paths.there are some negative externalities [of an early capital account liberalization]. however. which preceded the events discussed in this book. permitting the capital-importing country to live beyond its means. as I have argued elsewhere. one of the few dissenters was the late Manuel Guitian. the government may feel compelled to transform the unrepayable debt into sovereign debt rather than allow execution of mortgages or other collateral’’ (p. He listened to others’ arguments. . One is that the borrowing goes into consumption rather than into investment. and have strong institutions and domestic capital markets. In a paper presented at this conference. Also. . . such as the flexible tax on short-term inflows used by Chile during much of the 1990s. it avoids arbitrary decisions by bureaucrats. Many countries. I believe that Guitian’s paper—suggestively titled ‘‘Capital Account Liberalization: Bringing Policy in Line with Reality’’—is one of the first written pieces that documents the IMF’s change in views regarding sequencing and capital account convertibility. The following quote is illustrative: ‘‘unfortunately.Book reviews 255 appropriate sequencing was vital for the success of liberalization. Yet. Robert Mundell captured succinctly the views of most participants. Capital Controls. others only allowed long-term capital movements. did not need any prodding from the IMF or the US to open their capital account. Cambridge University Press. 1995). . Recent research that uses new and improved measures on the degree of capital mobility suggests that a freer capital account has a positive effect on long run growth in countries that have surpassed a certain stage in the development process. . While some countries only relaxed bank lending. there was no dogma or arrogance in Guitian’s position. more and more countries began to relax their controls on capital mobility. 85 –86). After discussing the evolution of international financial markets. Guitian summarized his views as follows: ‘‘There does not seem to be an a priori reason why the two accounts [current and capital] could not be opened up simultaneously. and never had any intention of following a different policy. Starting in 1995. At the 1992 Seoul conference on capital liberalization. who argued in favor of moving quickly towards capital account convertibility. then a senior official at the IMF. . Indonesia and Mexico—just to mention two important cases—had a long tradition of free capital mobility. A difficult and important policy issue—and one that Stiglitz does not really tackle in this book—is how and when to remove impediments to capital flows. in stark contrast to Stiglitz’s characterization of the IMF leadership. and expressing reservations about the ‘‘capital-account-last’’ sequencing recommendation. Exchange Rates and Monetary Policy in the World Economy.
became a long-term feature of the regional economies. and once the economy had stabilized. does not have—at least. He claims that the experiences of China and India. And a key feature of currency crises is that the public drastically reduces its demand for government securities and domestic money. Worse yet. happened. the IMF made a serious recession even deeper. and recovered quickly—support his views. A number of people have long recognized this. Anyone mildly informed knows that there are many reasons why India and China have not faced a crisis. turning to safer assets. and the recent proposal by Anne Krueger. In country after country politicians experimented with populist policies that at the end of the road deepened the crisis. is a positive development in an effort to implement an effective standstills framework. This . when what was supposed to be a temporary tightening of controls. is that Malaysia surprised many observers by tightening controls only temporarily. The case of Malaysia is a bit more complicated. the controls were lifted just as Dr. nor did they result in orderly reforms. These were not. (3) not allowing the imposition of capital controls on outflows.256 Book reviews capital controls have costs. Also. after approximately a year. the stricter controls on capital outflows did not encourage the restructuring of the domestic economies. This argument is highly unpersuasive. not yet—much empirical support. The historical norm is closer to what happened in Latin America during the 1980s debt crisis. Two of Stiglitz’s criticisms are right on target: closing banks in the midst of a panic is a major mistake. and fails to recognize how severe the situation had become by late 1997. (2) bailing out private and mostly foreign creditors. Moreover. contractionary fiscal policies. and of Malaysia—which did not follow the IMF’s advice. however. these were major currency crises. in fact. especially foreign exchange. What is clear. massive bailouts are costly and ineffective. if not plainly wrong. major mistakes included (1) closing down. as the IMF insisted. a number of banks in Indonesia. The opposite. Mahatir had originally announced. as he argues. and they did not spare Chile from contagion or macro instability during the second half of the 1990s. and (4) imposing tight fiscal policies and high interest rates. the IMF’s First Deputy Managing Director. in the middle of a financial panic. It has recovered fast—although not as fast as South Korea—but it is not clear if this recovery has been the result of the imposition of capital controls. He argues that the East Asian crisis called for expansionary and not. the IMF-mandated increases in interest rates generated a string of bankruptcies that deepened the confidence crisis and further contributed to the slowdown. in Latin America. two countries that did not suffer a crisis. In his view. What makes Malaysia’s case particularly interesting is that historically the temporary use of controls is quite unique. In his view. ‘‘severe downturns’’ that required textbooktype counter-cyclical fiscal policies. however. however. Crisis management in East Asia Stiglitz is particularly critical of the way in which the IMF handled the East Asian crisis. 3. Stiglitz’ most severe criticism refers to the IMF’s fiscal and interest rate policies. by imposing fiscal retrenchment. and attributing this to the presence of capital controls is overly simplistic. Stiglitz’s position.
USA E-mail address: sedwards@anderson. Under most circumstances. and that he is truly pained by what he believes are major problems with globalization. The agenda should be to improve institutions and incentives. and he exaggerates greatly the extent of market failures. We have been there. I was left with a sense of emptiness. pumping in liquidity when the demand for money is shrinking. The answer depends in part on the government’s objectives. However. The agenda should not be to bring back bureaucrats. to put an end to corruption and abuse. Sebastian Edwards University of California. I have no doubt that Stiglitz is sincere. however. At the end of the road. if the decline in the demand for domestic money is not brought to an end.3 8 7 8 ( 0 2 ) 0 0 0 9 7 . to implement policies that raise productivity. 4. Cambridge. Los Angeles. Stiglitz has too much confidence on the ability of governments to do the right thing. he is also rather naıve. If foreign currency denominated debt is high—as was the case in a number of the East Asian countries—the weakening of the currency will result in a significantly higher debt burden and further bankruptcies.ucla. and to make sure that globalization becomes a fair process.4 . and it does not work. and the key question is by how much to let the exchange rate depreciate. neither do large deficits translated into money printing. CA. and by how much—and for how long—to increase interest rates. and issuing government debt when government securities are being dumped. If the authorities want to avoid default and runaway inflation—clear key objectives of every East Asian government—letting the exchange rate run amok is highly risky. Moreover. what at the end makes this book fail.edu 9 September 2002 PII: S 0 3 0 4 . And it is this naivete. or rapidly depreciating exchange rates. the price of foreign exchange will jump drastically—greatly overshooting its equilibrium level—and inflation will increase significantly. While massive and recurrent bankruptcies do not contribute towards achieving this goal. to promote competition and efficiency. USA National Bureau of Economic Research. Concluding remarks I finish where I began: This is an important book that deserves to be read and discussed widely. to truly help the poor and the destitute. the issue is one of trade-offs. At the end of the road. is unlikely to restore confidence or avoid an inflationary explosion.Book reviews 257 constrains what governments in crisis countries can do: with a declining demand for government securities—by both local and foreign investors—it is very difficult to run a more expansionary fiscal policy unless the deficit is monetized. xenophobic autocrats. where the industrial countries also dismantle their protective barriers. and corrupt politicians to run the economy. and not the ¨ stridency of the delivery. The first order of business in a major currency crisis is to re-establish confidence.
org BOOK REVIEWS Edited by N. NORTON. To submit reviews for this section. * 89 . he advocates Keynesian policymaking (money printing and deficit spending) on virtually every page.Journal of Libertarian Studies Volume 18. 1 (Winter 2004). STIGLITZ. Indeed. made more transparent and accountable.” and that national politicians be supported by somebody in charge when something goes wrong. it is wiser to give other individuals the right to interfere. Stephan Kinsella* JOSEPH E.stephankinsella. While the author emphasizes time and again that he is not leveling an attack against market principles and globalization in general. by and large. no. and subtle attack against globalization in the past few years. Stiglitz strongly believes that bad policymaking can be reduced by enlightened policymaking. and it suits the well-meaning anti-globalist who believes that since individuals make mistakes. NEW YORK: W. Inc.mises.W. He also believes that international agencies. Put differently. It is an enjoyable book for the reader in search of the perfect world. against what he believes to be devious free-market attitudes. 89–98 ©2004 Ludwig von Mises Institute www.com/jls. and less dependent on special interests. GLOBALIZATION AND ITS DISCONTENTS. like the IMF and the World Bank. And that when international economic agencies do not behave properly. pursue the well-being of their peoples. in a rather dogmatic style with some shades of arrogance. The author believes that national leaders. they must be reformed. xxii + 282. well-argued. must ensure that global phenomena maintain a “human face. But it is also deceptive. 2002. it is hard to see much economics in these conclusions (see in particular the final General Counsel. Applied Optoelectronics. It is probably the most readable. PP. pp. both nationally and on a global scale. Although the author fights. Globalization and its Discontents is an enjoyable and thoughtprovoking book. his prose is simple and accessible to a wide audience. visit www.
He further realized that globalization without governance often leads to devastating results. the first chapter) focuses on poverty and globalization.S. the author keeps concentrating on bad policymaking carried out both by Western national governments and by international organizations. On the contrary. the 2001 Nobel Laureate. these rules should be fairness and consensus. the core argument of the book is not the analysis of the causal link between ideology. POLITICALLY CORRECT MISCONCEPTIONS ABOUT FREE MARKET ECONOMICS Although much of the text (for instance. however. rather than globalization per se. He later continued his career at the World Bank where he was chief economist and senior vice president. during which he found out that decision-making processes are often influenced by politics and ideology. Rather. politics. Some readers might also question its logic. The foreword to the book sets the pace. In particular. Treasury. The next paragraphs will therefore reconsider the main issues raised by Stiglitz. 1 (Winter 2004) chapter of the book). According to Stiglitz. His thesis is not developed in a theoretically consistent framework. especially on Less Developed Countries (LDCs). he states clearly that the origin of all problems is the way globalization has been managed. these doubts are justified. Stiglitz does not state explicitly that poverty is the consequence of globalization. The author claims that this book is the result of those eye-opening experiences. While taking good care to inform the possibly unaware reader about his fundamental contributions to economic science. As the following pages will explain. and underscore some factual and methodological puzzles. and concludes by suggesting suitable rules for global economic management. people have been betrayed. Instead. in chapter nine. especially in 90 . Surprisingly. no. Professor Stiglitz. highlight his most important arguments. He posits a direct causal link between globalization and bad policymaking.Journal of Libertarian Studies 18. he feels that since mainstream economists became the managers of the globalization process. and they should be designed through a democratic process so as to guarantee social justice and meet the needs of everybody. reveals that he became interested in real-world matters in 1993 when he joined the Clinton administration. the author offers a list of case studies in bad economics and policymaking by the IMF and the U. these being in fact equivalent to a number of implicit assumptions. and economic performance in a globalized world.
manifest that globalization is an improvement for those who are allowed to choose. It is. experts. But it is irrelevant for those who cannot choose—where more-or-less altruistic policymakers decide on their behalf—and it is even harmful for those who enjoy normative privileges. therefore. globalization refers to the freedom to choose among opportunities available on a global scale: Buyers are free to maximize their purchasing power. He adds that globalization policies and institutions—including the IMF and U. globalization is assumed to have been aborted. globalization is little more than a promise generated by free-market fundamentalists—this being a synonym for neoclassical scholars.Book Reviews LDCs. Stiglitz never really defines what he means by the term “globalization. his book can be perceived as an instructive guide to the misdeeds of neoclassical scholarship and the alibis it has provided to widespread criminal behavior. but rather. Consistent with this view. and for those who can successfully satisfy buyers’ needs. In particular. One can guess that from his standpoint. globalization stands for a world of opportunities opened to buyers and the end of privileges for sellers. 91 . As a matter of fact. the argument runs into trouble when the author suggests that the solution to neoclassical policymaking is some kind of paternalistic Third Way managed by caring and altruistic politicians devoted to achieving full employment. and sellers are free to compete in order to satisfy consumers’ needs and remunerate the scarce resources they use. Thus.S. none of the above characterizes Stiglitz’s thought. These oversights characterize both the author’s interpretations of the crises and his view about what could have been done instead. and selected bureaucrats. And he seems to be totally unaware of the fact that the alternative to mainstream economics is not enlightened and expanded governance structures. government—provoked a number of shocks that led entire countries to major crises and disasters. Western globalizers should take the blame for such failures. Once this rather bizarre definition of globalization is accepted. However. However. In other words. His account of the Russian crisis (chapter five) is a good example. he ignores the possibility of having made a mistake by equating globalization with neoclassical thinking. to echo Mises’s wording. freedom to choose and discard. whenever a country failed to grow after its rulers were exposed to neoclassical advisors.” From a free-market perspective. since they made empty promises and forced many LDCs to undertake suicidal steps toward liberalization.
the poverty gap has not been reduced. the book falls in line with the well-known mantra whereby all the evils of the developing world are the consequence of present or past Western behavior. globalization has nothing to do with fixed exchange rates and inconvertible currencies. such as import-competing industries. One wonders what happened to exchange rates. As for destabilization. without also having winners. and actually eliminates the whole question by assuming with apparent casualness that there are many different forms of free markets (chapter nine). as is probably true. Put differently. Stiglitz remarks that during the age of globalization. Surely. Stiglitz seems to be the victim of his own understanding of the free-market process. And it does not take much to see that if market forces are set free. Whatever the correct answer is. by economic freedom. But he doesn’t. when he mentions the evils of fixed exchange rates. Stiglitz should say so. have hardly been touched by globalization or. the author attributes them to the inconsistencies of the globalizers. the book ignores these basics. but policymakers do not withdraw and privileges do not disappear. One does not need a doctorate to know that free-market economics is about preventing policymakers from interfering in peaceful activities voluntarily undertaken by individuals.Journal of Libertarian Studies 18. Still. Maybe exchange rates did not depreciate enough because they were fixed and the local currency was not convertible. it is ridiculous. you can’t have imports unless you have exports to pay for them. such as exporters. While acknowledging that free capital movements and free trade have enhanced living standards in vast areas of the world. Finally. Accusing globalization for aborted economic growth in Africa since the end of colonialism is not only trite and inaccurate. Western globalizers forced LDCs to reduce their trade barriers and de facto created huge trade deficits while destroying fragile production structures. no. Western protectionism 92 . where living standards are stagnating and people keep dying because of poverty and civil wars. the system sooner or later breaks down. For instance. 1 (Winter 2004) These decisive misunderstandings are apparent from the very first pages. And if the West is guilty of providing too much aid to the leaders of poor countries. in Stiglitz’s view. Indeed. more generally. it is bad economics. or perhaps because foreign aid made sure that cheap imports could flow in. He forgets to tell the reader that most LDCs. That is not just a terminological question or a somersault in logic. Free trade (and globalization) is a game whereby you cannot have losers.
may harm domestic banks if they are unable to offer good enough credit conditions to borrowers. Ethiopia. As the reader soon finds out. since it is a gross mistake to consider neoclassical constructivism as a synonym for globalization. who modestly explains how he abandoned the academic world in order to solve America’s economic problems and. having done that. They are deceptive. It would be hard to deny that Botswana was right in rejecting IMF policymaking and constraints. In particular. 93 . by the World Bank and the WTO (chapter one). They are beside the point. Stiglitz describes the blind bureaucrats from the IMF. Unfortunately. But the Botswana case does not demonstrate that the country’s successes were due to socialist planning. the repented but weak employees of the World Bank. his implicit thesis is that countries that turned down IMF advice did well. or expansion in the bureaucracy. this rhetorical strategy is a recurrent feature of the book. CASE STUDIES After having suggested that globalization is the result of bad policymaking enforced by the IMF and. protectionism. It is wrong to claim that the best policy against protectionism is central planning with a human face or enlightened governance. the rest of the book is. On the other side. enhanced regulation. decided to move on to solve world poverty. On one side. but somewhat irrelevant and deceptive. and the greedy American establishment that fought communism but forgot about democracy. to a lesser extent. Another case is China (chapter three).Book Reviews hasn’t made life easy for third world countries. One case is Botswana (chapter two) which. ranks relatively high (and higher than Ethiopia) in the Index of Economic Freedom. we meet the author himself. but fought hard and almost single-handedly to stop IMF colonialism. but protectionism is the opposite of globalization. for although it is undeniable that advocating capital-markets liberalization in. Stiglitz offers various counterexamples to the development strategies recommended by the IMF. it is wrong to conclude that farmers suffer as a result. by and large. or that the political power of China was no match for any IMF bureaucrat. Nor would one claim that the Chinese leaders succeeded because they introduced further regulation and centralized planning in the past two decades. a sequence of anecdotes and case studies. say. Stiglitz’s cases are persuasive. the author faced disappointment. incidentally.
Stiglitz does not do it. presumably by reformed international agencies. social tensions. since the author frequently deals with privatization. civil servants became corrupt. foreign direct investment. Finally. 94 . the explanations lie with Western economic and political interference. social tensions erupted. the market does not yield perfect results. no. where imports are paid through foreign aid and exchange rates are irrelevant. which is the main goal of the author throughout the book. which forced good politicians to open up too quickly. • The argument is further developed in chapters four to seven. but was soon seduced by the dream of the invisible hand. jobs were destroyed. there are plenty of good things a government can do if properly enlightened and informed. foreign bankers. the IMF was originally created to get things right by following Keynesian guidelines. fairness enforced. although too much government intervention is bad. he argues. Government. and that good governments can do desirable things. It may be enough to underscore Stiglitz’s main ponts. As mentioned earlier. free capital markets.S. Rather than accomplishing its original and true mission. so free-market economics is wrong unless proper institutions are in place. 1 (Winter 2004) Indeed. POLICIES The economics of IMF policymaking occupies most of the book. either. Third. He simply states that opening up may be beneficial if some preliminary conditions are met. he never says that globalization per se is bad. it ended up colluding with Western financial capitalism and pressure groups. As a result. in which the Southeast Asian and the Russian crises are explored in detail. the reader is offered various examples: • • free trade. and poverty. and high interest rates choked development. and price liberalization. starting with the IMF and U. A review is not the right place to discuss in detail the fragility of neoclassical economics in these areas. and easy imports. in some cases leading to civil wars. First. Once again. which would be unfair to inefficient or badly located producers. He hastily concludes that whenever free-market blueprints failed. and full employment guaranteed.Journal of Libertarian Studies 18. Second. which would undermine much-needed subsidies and expose debtors to the consequences of bad reputations or bad borrowing decisions. liberalization.
Put differently. and Thailand to illustrate the catastrophe. Korea. 2003). As for the alleged domino effect. destroy the miracle. Stiglitz’s approach should no longer surprise the reader. where Stiglitz refers to fairness as one of the key elements of the social contract—the other being full employment. and 105% of its pre-crisis level. It is deplorable that the IMF played the window-dressing game first. Although Stiglitz singles out Indonesia. nor does he clarify what was written in it. but they are mere window dressing. rather than being an abuse 1 International Monetary Fund. World Economic Outlook (Sept. but the IMF delayed the moment when the distortions were exposed. the wellinformed reader cannot help remembering that in 2002.” 95 . he is persuaded that income transfers are one of the fundamental human rights. it is clear to him that governments broke the contract by not pursuing fairness. why would speculators attack these countries if they were in such healthy conditions to begin with? The truth of the matter is that globalization exposed economic distortions and malfunctions. real GDP in those three countries was respectively 99%. so violent attitudes by the residents were almost legitimized. although the reader will look in vain for a clear definition of fairness. In his view. statistical appendix: “Output. some caution is in order. 124%. and cause what the author defines as the most dramatic economic crisis since the Great Depression. Stiglitz is quite right in saying that the IMF should have kept out of the whole story.1 Never mind the figures. five years after the 1997 crisis blew up. and then provided funds to bail out selected lenders. At this stage. The redistributive patchwork advocated by Stiglitz may appear to help temporarily. and that the IMF precipitated the crisis. The author does not bother to explain by whom and where this contract was signed. Let us consider the Asian case. real GDP in developing Asia in 2002 was 33% higher than just before the crisis. Nonetheless. However. Indeed. Southeast Asia’s economies were doing fine until the West forced them to open up their capital markets. He will find just a hint in chapters three and seven. but he is wrong in saying that those countries were in good shape prior to IMF intervention. Instead. as the Asian crisis demonstrates. and can hardly fix a sick system.Book Reviews and where the virtues of gradual Keynesian transitions are opposed to the evils of IMF-style shock therapies. the author accuses the IMF of having served Western financial interests and having disregarded fairness.
the main problem with the book appears to be its title. especially when politicians are of good quality. 1 (Winter 2004) by some at the expense of others. the author neglects the distinction. GENERAL ISSUES As a matter of fact. be restricted to the provision of sound information and unconditional aid. Globalization is about deregulation and low taxation. First. Global governance by enlightened and compassionate international bodies is desirable. They have aggravated the economic conditions in many LDCs. The IMF and the Washington consensus are therefore guilty. and from the U. rather than to globalization. opening up (globalization) should not be rejected in principle. As for the meaning of the expression “good government. and raised bad feelings against anything coming from the West. irrespective of IMF intervention. since they forced national governments to renege upon the social contracts.S. but decisions about its timing. despite their past misdeeds. but only if they guarantee 96 . one is left wondering about who decides what is fair.S. Stiglitz does not consistently advocate a worldwide governance scheme for globalization. Third. Stiglitz says very little about globalization. and features should be a matter for each national government to decide. if the reader forgets about the author’s flights into morality. government. which are the core components of many IMF policies and macro-rescue plans in the past three decades. As has been argued above. Stiglitz considers privatization and liberalization attractive. From a policymaking viewpoint. Second. and whether Stiglitz would be willing to accept the notion of fairness that many national governments have enforced in the past decades.” he recommends fairness as the primary criterion to be taken into account for any development policy (chapter three). however. international agencies have done a poor job by trying to enforce neoclassical recipes. and develops three main theses. depth. Nevertheless. in his opinion. international agencies per se are not a bad idea. and what he says rests on questionable foundations. no. but each government should also be free to act as it judges appropriate. fixed exchange rates. These are not quite the same thing as active central banking.Journal of Libertarian Studies 18. in particular. which should have been related to the economics and politics of international agencies (the IMF in particular) and of the U. Once again. and high taxation. and they demonstrate an ability to preserve consensus. Consistent with his assumption about fairness. Their primary goal should.
and whether it can provide suitable incentives for entrepreneurial activities or fairness to those layers of the population who cannot protect themselves against inflation. He also deserves credit for hinting that those consultants also helped centralized policy-making retain its coercive power so that rent-seeking and collusion with the policymaker continued to be the winning strategy (chapter seven). and we leave it to the reader to evaluate the extent to which money printing can solve the problems of faulty management and bad government. bad entrepreneurs should not be allowed to fail. It is not a new thesis. alternative systems have not come to the surface. Put differently. it is hardly surprising that under such conditions. a little inflation is preferable to widespread poverty and civil war. globalization is about the freedom to opt out of the proposed policies. neither from neoclassical nor from Keynesian quarters. he argues. Stiglitz succeeds in showing the game and excels in describing it (see 97 . notions such as fairness and social consensus. but nevertheless treacherous. After all.Book Reviews extra jobs at fair conditions. Hence. almost bordering on demagoguery. Stiglitz deserves credit for pointing out that Western consultants have contributed to suffocating or destroying those rules. This justifies Professor Stiglitz when he correctly criticizes IMF policymaking and inconsistencies (chapter eight). We do not know how people want to behave. ONE CONCLUDING REMARK This book illustrates and contributes significantly to one gross misconception about globalization: Globalization does not identify policies. Freemarket globalizers have nothing to say about that. Of course. and it also explains why he is in trouble when he suggests recipes that go beyond generic. and believe that nobody has. where he confronts the legitimacy of property rights with that of the social contract. but it is puzzling to see that the author believes this to be the essence or the consequence of globalization. globalization in Russia and in some other countries of the Soviet Empire was never the name of the game. On the contrary. Instead. his thesis in favour of conditional globalization and of policies aimed at spreading the costs if anything undesirable happens—including bad lending and investment. Therefore. but should be rescued through money printing. or how much they are willing to pay for them. a market system rests on widely accepted behavioral rules. As the Russian case demonstrates. what kind of safeguards they prefer to have. See for instance chapter eight.
colombatto@unito. ENRICO COLOMBATTO University of Turin enrico. no.it 98 . but equally frequently fails to call it by its proper name: neoclassical constructivism. 1 (Winter 2004) chapters six and seven).Journal of Libertarian Studies 18.
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