Stiglitz. Globalization and Its Discontents 1

Globalization: Stiglitz's Case 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
1.
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.[1]
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.[2]
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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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.
2.
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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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, what happens when people lack the key information that
bears on the decisions they have to make, or when markets for important kinds of
transactions are inadequate or don't exist, or when other institutions that standard
economic thinking takes for granted are absent or flawed.
The implication of each of these absences or flaws is that free markets, left to their
own devices, do not necessarily deliver the positive outcomes claimed for them by
textbook economic reasoning that assumes that people have full information, can
trade in complete and efficient markets, and can depend on satisfactory legal and
other institutions. As Stiglitz nicely puts the point, "Recent advances in economic
theory"—he is in part referring to his own work—"have shown that whenever
information is imperfect and markets incomplete, which is to say always, and
especially in developing countries, then the invisible hand works most imperfectly."
As a result, Stiglitz continues, governments can improve the outcome by well‐chosen
interventions. (Whether any given government will actually choose its interventions
well is another matter.) At the level of national economies, when families and firms
seek to buy too little compared to what the economy can produce, governments can
fight recessions and depressions by using expansionary monetary and fiscal policies
to spur the demand for goods and services. At the microeconomic level,
governments can regulate banks and other financial institutions to keep them
sound. 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. And governments can use a variety of devices,
ranging from job creation to manpower training to welfare assistance, to put
unemployed labor back to work and, at the same time, cushion the human hardship
deriving from what—importantly, according to the theory of incomplete
information, or markets, or institutions—is no one's fault.
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, or for loans from banks and other private‐sector lenders that look to the IMF
to indicate whether a borrower is creditworthy. The organization and its officials, he
argues, have ignored the implications of incomplete information, inadequate
markets, and unworkable institutions—all of which are especially characteristic of
newly developing countries. As a result, Stiglitz argues, 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. 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, in the countries that
have followed them.
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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. The most traditional and perhaps best‐known IMF policy
recommendation is for a country to cut government spending or raise taxes, or both,
to balance its budget and eliminate the need for government borrowing. The usual
underlying presumption is that much government spending is wasteful anyway.
Stiglitz charges that the IMF has reverted to Herbert Hoover's economics in
imposing these policies on countries during deep recessions, when the deficit is
mostly the result of an induced decline in revenues; he argues that cuts in spending
or tax hikes only make the downturn worse. He also emphasizes the social cost of
cutting back on various kinds of government programs—for example, eliminating
food subsidies for the poor, which Indonesia did at the IMF's behest in 1998, only to
be engulfed by food riots.
High interest rates. Many countries come to the IMF because they are having trouble
maintaining the exchange value of their currencies. A standard IMF
recommendation is high interest rates, which make deposits and other assets
denominated in the currency more attractive to hold. Rapidly increasing prices—
sometimes at the hyperinflation level—are also a familiar problem in the developing
world, and tight monetary policy, implemented mostly through high interest rates,
is again the standard corrective. Stiglitz argues that the high interest rates imposed
on many countries by the IMF have worsened their economic downturns. They are
intended to fight inflation that was not a serious problem to begin with; and they
have forced the bankruptcy of countless otherwise productive companies that could
not meet the suddenly increased cost of servicing their debts.
Trade liberalization. Everyone favors free trade—except many of the people who
make things and sell them. Eliminating tariffs, quotas, subsidies, and other barriers
to free trade usually has little to do directly with what has driven a country to seek
an IMF loan; but the IMF usually recommends (in effect, requires) eliminating such
barriers as a condition for receiving credit. The argument is the usual one, 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. Stiglitz points out that today's industrialized countries did not
practice free trade when they were first developing, and that even today they do so
highly imperfectly. (Witness this year's increase in agricultural subsidies and new
barriers to steel imports in the US.) He argues that forcing today's developing
countries to liberalize their trade before they are ready mostly wipes out their
domestic industry, which is not yet ready to compete.
Liberalizing Capital Markets. Many developing countries have weak banking systems
and few opportunities for their citizens to save in other ways. As one of the
conditions for extending a loan, the IMF often requires that the country's financial
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markets be open to participation by foreign‐owned institutions. The rationale is that
foreign banks are sounder, and that they and other foreign investment firms will do
a better job of mobilizing and allocating the country's savings. Stiglitz argues that
the larger and more efficient foreign banks drive the local banks out of business;
that the foreign institutions are much less interested in lending to the country's
domestically owned businesses (except to the very largest of them); and that
mobilizing savings is not a problem because many developing countries have the
highest savings rates in the world anyway.
Privatization. Selling off government‐ owned enterprises—telephone companies,

railroads, steel producers, 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. One reason for doing so is the expectation that private management will do a
better job of running these activities. Another is that many of these public
companies should not be running at all, and only the government's desire to provide
welfare disguised as jobs, or worse yet the opportunity for graft, keeps them going.
Especially when countries that come to the IMF have a budget deficit, a standard
recommendation nowadays is to sell public‐sector companies to private investors.
Stiglitz argues that many of these countries do not yet have financial systems
capable of handling such transactions, or regulatory systems capable of preventing
harmful behavior once the firms are privatized, or systems of corporate governance
capable of monitoring the new managements. Especially in Russia and other parts of
the former Soviet Union, he says, the result of premature privatization has been to
give away the nation's assets to what amounts to a new criminal class.
Fear of default. A top priority of IMF policy, from the very beginning, has been to
maintain wherever possible the fiction that countries do not default on their debts.
As a formal matter, the IMF always gets repaid. And when banks can't collect what
they're owed, they typically accept a "voluntary" restructuring of the country's debt.
The problem with all this, Stiglitz argues, is that the new credit that the IMF extends,
in order to avoid the appearance of default, 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. They want, he writes, to be
rescued from the consequences of their own reckless credit policies. 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.
Stiglitz's indictment of the IMF and its policies is more than just an itemized bill of
particulars. His theme is that there is a coherence to this set of individual policies,
that the failings of which he accuses the IMF are not just random mistakes. In his
view these policies—what he labels the "Washington consensus"—add up to
something that is unattractive, if not outright repugnant, in several different ways.
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First, Stiglitz repeatedly claims that the IMF's policies stem not from economic
analysis and observation but from ideology—specifically, an ideological
commitment to free markets and a concomitant antipathy to government. Again and
again he accuses IMF officials of deliberately ignoring the "facts on the ground" in
the countries to which they were offering recommendations. In part his complaint is
that they did not understand, or at least did not take into account, 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.
More specifically, he argues that the IMF ignores the need for proper "sequencing."
Liberalizing a country's trade makes sense when its industries have matured
sufficiently to reach a competitive level, but not before. Privatizing government‐
owned firms makes sense when adequate regulatory systems and corporate
governance laws are in place, but not before. The IMF, he argues, deliberately
ignores such factors, instead adopting a "cookie cutter" approach in which one set of
policies is right for all countries regardless of their individual circumstances. But
importantly, in his eyes, the underlying motivation is ideological: a belief in the
superiority of free markets that he sees as, in effect, a form of religion, impervious to
either counterarguments or counterevidence.
A further implication of this belief in the efficacy of free markets, according to
Stiglitz, 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; instead the IMF recommends policies that result in
steeper downturns and more widespread joblessness. He does not argue, of course,
that the IMF prefers serious recessions or unemployment per se. 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. By extension, he argues,
the IMF also does not act to promote economic growth (which helps to produce full
employment). Again the claim is not that the IMF dislikes growth per se, but that it
believes free markets are all that is needed to make growth happen.
As a further consequence of the misguided policies that follow from this "curious
blend of ideology and bad economics," Stiglitz argues, the IMF itself is responsible
for worsening—in some cases, for actually creating—the problems it claims to be
fighting. By making countries maintain overvalued exchange rates that everyone
knows will have to fall sooner or later, 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, the IMF encourages the contagion of an economic
downturn from one country to its neighbors. By making countries adopt high
interest rates that stifle investment and bankrupt companies, the IMF encourages
low confidence on the part of foreign lenders. At the same time, by repeatedly
coming to these lenders' rescue, the IMF encourages lax credit standards.
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Second, and more darkly, the IMF, in Stiglitz's view, systematically acts in the
interest of creditors, and of rich elites more generally, in preference to that of
workers, peasants, and other poor people. 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.
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. He observes that
IMF officials tend to meet only with finance ministers and central bank governors, as
well as with bankers and investment bankers; they never meet with poor peasants
or unemployed workers. He also notes that many IMF officials come to the Fund
from jobs in the private financial sector, while others, after working at the IMF, go
on to take jobs at banks or other financial firms.
Here again Stiglitz's point is that the IMF's mistakes are not random but the
systematic consequence of its fundamental biases. His argument is as much about
the policies the IMF doesn't recommend as the ones it does:
Stabilization is on the agenda; job creation is off. Taxation, and its adverse effects,
are on the agenda; land reform is off. There is money to bail out banks but not to pay
for improved education and health services, let alone to bail out workers who are
thrown out of their jobs as a result of the IMF's macroeconomic mismanagement.
One specific example, land reform, sharply illustrates what he has in mind. As
Stiglitz points out, in many developing countries a small group of families own much
of the cultivated land. Agriculture is organized according to sharecropping, with
tenant farmers keeping perhaps half, or less, of what they produce. Stiglitz argues,
The sharecropping system weakens incentives—where they share equally with the
landowners, the effects are the same as a 50 percent tax on poor farmers. The IMF
rails against high tax rates that are imposed against the rich, pointing out how they
destroy incentives, but nary a word is spoken about these hidden taxes.... Land
reform represents a fundamental change in the structure of society, one that those
in the elite that populates the finance ministries, those with whom the international
finance institutions interact, do not necessarily like.
Stiglitz considers, and rejects, 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. Stiglitz's view is that in recent
decades the IMF "was not participating in a conspiracy, but it was reflecting the
interests and ideology of the Western financial community."
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Finally, 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, views that said that markets would take care of everything and
government would only make matters worse; it was also a matter of values.... While
misguidedly working to preserve what it saw as the sanctity of the credit contract,
the IMF was willing to tear apart the even more important social contract.
Throughout the book, the sense of moral outrage is evident.
3.
Do Stiglitz's criticisms hold up?
To begin, it is easy enough to accuse Stiglitz of selective memory. From reading
Globalization and Its Discontents, one would never know that the IMF had ever done
anything useful. Or that Stiglitz, and his colleagues first at the Council of Economic
Advisers and then at the World Bank, had ever gotten anything wrong. Or that those
against whom he often argued in the US government—especially at the Treasury,
which he continually portrays as complicit in the IMF's misdeeds, but at the Federal
Reserve System too—had ever gotten a question right. (In the book's sole mention
of Alan Greenspan, 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.)
One can also disagree with Stiglitz over the consequences of what the IMF plainly
did, even including those policies it pursued that most people now agree proved
counterproductive. By 2002 the Asian financial crisis of 1997–1998 is receding into
the past. While some of the affected countries (most obviously Indonesia) still feel
its effects, by now others have made solid recoveries. Stiglitz is right that they have
not regained, and probably will not, the rates of growth they achieved before the
crisis. But those rapid growth rates may well have been unsustainable in any case.
Even in Russia, where per capita income remains well below what it was when the
Soviet Union collapsed, and where the IMF pursued the policies toward which
Stiglitz is the most scathing, the economic situation looks better today than it did
when he was writing his book.
A more fundamental problem, as Stiglitz readily acknowledges, is that we cannot
reliably know whether the consequences of the IMF's policies were worse than
whatever the alternative would have been. Many longtime observers of the
developing world will notice that Stiglitz rarely mentions economic policy mistakes
that poor countries make on their own initiative. 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, where he argues that the privatization program
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pushed by the IMF opened the way for corruption on a historically unprecedented
scale. 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, along with graft in all
its forms, if one is to give a clear picture of why the nondeveloping economies are
not succeeding.
It is surprising too, in light of his emphasis on the absence of adequate regulation
and supervision of financial institutions in the developing world, that Stiglitz does
not make more of the mistakes made by private‐sector businesses. For example,
what made Korea vulnerable to the 1997–1998 Asian turmoil was that the country's
business conglomerates (the "chaebols") had borrowed too heavily, and that the
country's banks had financed these loans by borrowing in US dollars and relending
in Korean won. True, 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. But surely much of the fault lay with Korea's own businessmen and
bankers. And once they had built their house of cards, 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. But they would presumably argue that events would
have turned out even worse on some alternative course. They would also
presumably argue that of course they knew that information was imperfect, and
markets incomplete, and institutions absent, in the countries that came to the IMF
for assistance. The issue, to be argued on a case‐by‐case basis, is just what different
set of actions might therefore have proved more beneficial.
Interestingly, there is also disagreement today over just how prevalent dire poverty
is in the developing world—and, what is more important, whether poverty is
increasing or decreasing. Stiglitz echoes the standard view that the number of
people around the world living on less than $1 per day, or $2 per day, has been
increasing in recent years. By contrast, his own colleague in the Columbia
Economics Department, Xavier Sala‐i‐Martin, has recently published a study arguing
just the opposite.[3] Sala‐i‐Martin's point is that for purposes of assessing whether
someone is economically well off or miserable, 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.
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, the difference between the two
measures of income is sometimes large.
In India, 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.
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But because food, clothing, housing, and other consumer necessities are so much
cheaper in India than in the US, the same amount of rupees was equivalent to an
American income of nearly $2,400. Similarly, the average Chinese income in 2000
was $840 at the official yuan–dollar market exchange rate, but more than $3,900 if
measured on a purchasing power equivalent basis.[4]
Even if we allow for these differences in the cost of living, the number of people in
the world who live on the equivalent of $1 per day, or $2 per day, is still
depressingly large: according to Sala‐i‐Martin's estimate, nearly 300 million, and not
quite 1 billion, respectively. But this is far below the 1.2 billion and 2.8 billion
figures that have become familiar in public discussion and are used by Stiglitz. More
important, Stiglitz follows the more familiar view in saying that these totals are
increasing, but Sala‐i‐Martin estimates that they are declining despite the rapid
growth in world population. As a result, he finds, 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, while the $2‐per‐day poverty rate has
fallen from 44 percent to 19 percent.
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. But it is worth pointing out that the major
source of the decline in poverty over the last quarter‐century, according to Sala‐i‐
Martin's calculation, is the dramatic reduction in poverty in China, the world's most
populous country—and Stiglitz, too, praises China's performance as one of the
developing world's great recent economic success stories. (In keeping with his
central theme, 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, and instead followed the gradualist approach, adapted to its own situation,
which he favors.) To be sure, the plight of many developing countries, especially in
sub‐Saharan Africa, remains dire, as Sala‐i‐Martin also points out, and it may well be
deteriorating. But if attention is centered on people rather than countries, the great
advances made in China, 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.
Stiglitz's attack on the IMF raises not just factual (and counterfactual) questions but
substantive issues as well, particularly his argument that the IMF acts on behalf of
banks and bondholders, and rich countries more generally, and therefore against
the interests of the poor. To what extent is the IMF supposed to act as lending
institutions ordinarily act? Stiglitz complains at length, and with many specific cases
to cite, 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
don't responsible lenders normally impose such conditions on borrowers? Stiglitz
never acknowledges that today the IMF faces serious criticism from many
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economists and politicians in the West on the ground that it makes loans with too
few conditions, so that the borrowing countries often simply end up wasting the
money.[5]
Or should the IMF think of itself not as a lending institution, acting as responsible
lenders normally do, but instead as an institution charged solely with promoting the
welfare of the borrowing countries, 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.
To be sure, 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), 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. But in fact there is no such
agreement. The foreign aid that most rich countries give is shrinking compared to
their GDP, and the efficacy of such aid is increasingly being challenged anyway.
Even within countries with firmly established democratic governments, there is
always debate about how generous such assistance should be and what form it
should take. 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. The earnest
desire in some quarters for a more formal approach to international burden‐
sharing, together with the equally sincere resistance to the idea among others, is
nothing new. But it is worth recognizing explicitly that it is central to the question of
inequality.
Moreover, the matter at issue is deeper than simply whether there should or should
not be functioning institutions empowered to act, in effect, as a world government.
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. Is it morally legitimate for US citizens to pay taxes to
provide fellow Americans with a minimum standard of health care under Medicaid,
or a minimum standard of nutrition through food stamps, that is far above what the
average Angolan receives—and not at the same time be willing to pay the costs of
bringing Angola, and the rest of the world's low‐income countries, up to that
standard? Most Americans will readily answer yes. But as philosophers like John
Rawls and Thomas Pogge have argued, wholly apart from the practical benefits that
we might gain from alleviating human misery abroad, 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, in the end, extremely difficult.
Page 12 of 14
Many of the more practical economic elements of Stiglitz's argument are also issues
of long standing. He makes a strong case for policies that favor gradualism over
"shock therapy"; that put the emphasis not on what developing countries have in
common but on how each is different; that place the concerns of the poor above
those of creditors; that give maintaining full employment a higher priority than
reducing inflation (at least when inflation is less than 20 percent a year); and that
fight poverty and promote economic growth directly, rather than merely establish
conditions under which economies will be likely to grow, and poverty to decline, on
their own. There is serious debate over each element in this program. Stiglitz
provides a powerful logical case, together with much by way of both broad‐based
evidence and firsthand specifics, to support his side on each of these issues. But his
objective is not to give a balanced assessment of the debate.
Stiglitz has presented, as effectively as it is possible to imagine anyone making it, his
side of the argument, 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. His book stands as a challenge. It is now important that
someone else—if possible, someone who thinks and writes as clearly as Stiglitz
does, and who understands the underlying economic theory as well as he does, 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. 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.
Who might write such a book? The most obvious candidate is the former MIT
economist Stanley Fischer, who throughout the years that Stiglitz's analysis covers
was the IMF's first deputy managing director—that is, the Fund's second‐highest
ranking official, but for most observers, the person who, far more than anyone else,
actually set the direction of the organization's policies. Another is my Harvard
colleague (now president of the university) Lawrence Summers, who served as the
US deputy treasury secretary, and then secretary, during these years. Supporters of
the IMF in the academic world, like MIT's Rudiger Dornbusch, may lack the firsthand
"who said what to whom" knowledge that comes from high‐level public service, but
they are clear‐thinking economists and powerful advocates nonetheless. In the
absence of such an answer, however, Stiglitz's book will surely claim a large place on
the public stage. It certainly stands as the most forceful argument that has yet been
made against the IMF and its policies.
Notes
[1] Data from the 1999/2000 World Development Report, Table 2.
Page 13 of 14
[2]
These are my calculations based on data in the 2001 World Development
Indicators; 1999 is the latest year for which full data are available. Some countries
that are presumably poor enough to be in the "lowest‐income fifty"—for example,
Afghanistan—are excluded because per capita income data are not available for
them.
[3] "The Disturbing 'Rise' of Global Income Inequality," National Bureau of Economic
Research Working Paper No. w8904, April 2002.
[4] Data from the 2002 World Development Report, Table 1.
[5] Surprisingly, Stiglitz is not consistent in his own treatment of the question of
what conditions are appropriate for loans. He repeatedly castigates the IMF for
imposing its officials' views over those of government officials in debtor countries.
But he boasts about how the World Bank, where he worked, forced Russia to accept
stringent conditions in order to receive a loan.

Letters
November 21, 2002: Thomas W. Pogge, What Is Poverty?
Page 14 of 14
252 Book reviews
Review of Joseph E. Stiglitz’s Globalization and its Discontents

(W.W. Norton, New York and London)
Joe Stiglitz has written an important book. It should be read by anyone interested in
economic development, public policy in an era of globalization, and the political economy
of decision making in international organizations. It is part memoir, part manifest, and part
criticism of the International Monetary Fund (IMF). As a memoir, it is entertaining and
informative. It tells the story of how Professor Stiglitz went to Washington, and did not
like it there. He found out that politics was the main sport played inside the beltway, and
that ideology was often more important than rigorous intellectual debate. Worse yet, he got
little respect. People in high places did not always want to listen to him, and when they
did, they often ignored his advice.
As a manifest, the book is powerful. One does not have to agree with everything
Stiglitz has to say, 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, some policies
that have become readily accepted in Washington are likely to be revised in the
future.
The book is at its weakest when it comes to the criticism of the IMF. And this is not
only because of what Stiglitz has to say; it is mostly because of how he says it. The
tone is overly hostile and aggressive, and he misses no opportunity to insult the IMF
staff. According to Stiglitz, ‘‘intellectual consistency has never been the hall-mark of
the IMF,’’ and the staff systematically practices ‘‘bad economics.’’ His characterizations
of IMF economists and policies are unfair and, in many cases, self-serving. I believe
that the book would have been more effective had Stiglitz chosen a more temperate
style.
1. The main argument
The main tenet of the book is simple, and goes something like this: pro-global-
ization policies have the potential of doing a lot of good, if undertaken properly and if
Book reviews 253
they incorporate the characteristics of each individual country. Countries should

embrace globalization on their own terms, taking into account their own history,
culture, and traditions. However, if poorly designed—or if a cookie-cutter approach is
followed—pro-globalization policies are likely to be costly. They will increase
instability, make countries more vulnerable to external shocks, reduce growth, and
increase poverty.
The problem, according to Stiglitz, is that globalization has not been pushed
carefully, or fairly. On the contrary, liberalization policies have been implemented too
fast, in the wrong order, and often using inadequate—or plainly wrong—economic
analysis. As a consequence, he argues, we now face terrible results, including
increases in destitution and social conflict, and generalized frustration. The culprits
are the IMF and its ‘‘market fundamentalists,’’ the ‘‘Washington Consensus,’’ and the
US Treasury.
Stiglitz believes that in the early 1990s, the IMF, the World Bank and the US
Treasury launched a conspiracy of sorts to run worldwide economic reform—this is the
infamous ‘‘Washington Consensus.’’ This view, however, is overly simplistic and
ignores the evolution of reform thinking during the last two decades. In the 1980s
and early 1990s, policy makers in many developing nations were moving faster than
the multilaterals or the Treasury. In Argentina, Chile, and Mexico, for example, the
reforms were the result of a ‘‘national consensus’’ that was more imaginative, daring
and far-reaching than anything bureaucrats in Washington were willing to accept at that
time. It is well known, for example, that the IMF was initially critical of Chile’s social
security reform, it opposed Argentina’s currency board, and it was highly skeptical of
Mexico’s trade-opening strategy during the mid-1980s. If anything, 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.
Three interrelated policy issues are at the center of Stiglitz’s criticism of global-
ization. (1) In designing reform packages during the 1990s, crucial aspects of the
sequencing and pace of reform were ignored. As a result, in many countries, reform
was implemented too fast—Stiglitz prefers gradualism—and in the wrong order. (2)
Advocating (and imposing) capital account liberalization was a huge mistake. And (3),
the IMF response to crises—and in particular to the East Asian crisis—was a disaster
that made things worse rather than better. In particular, imposing fiscal austerity and
raising interest rates were terrible mistakes that cost the East Asian countries several
points in terms of growth. Not surprisingly, given his theoretical writings during the last
35 years, Stiglitz frames his criticism around the insights of the theory of asymmetric
information.
Stiglitz claims that if things had been done differently, that is, if they had been
done his way, the outcome in terms of social conditions would have been significantly
better. At times, I found his arguments to be persuasive. At other times, however, I
had trouble believing what I was reading, and I had to ask myself if he was being
serious. This was the case, for example, when I read—in pp. 129 and 231—that the
2002 Argentine crisis could have been avoided by following a more expansive fiscal
policy!
254 Book reviews
2. The sequencing and pace of reform and capital account liberalization
Stiglitz repeatedly argues that for economic liberalization to succeed, it is essential that
reform be implemented at the right speed and in the right sequence (see, for example, pp.
73– 78). This is a very important principle, and Stiglitz is right in emphasizing it. I believe
that Stiglitz is particularly on target when he argues that opening the capital account too
soon is likely to generate serious dislocations.
This emphasis on speed and sequencing is not new in policy discussions, however. In
fact, since the beginning of the economics profession, it has been dealt with over and over
again. Adam Smith, for example, argued in The Wealth of Nations that determining the
appropriate sequencing was a difficult issue that involved, primarily, political consider-
ations (see the Cannan Edition, Book IV, Chapter VII, Part III, p. 121). Moreover, Smith
supported gradualism—just as Stiglitz does—on the grounds that cold-turkey liberaliza-
tion would result in a significant increase in unemployment.
In the early 1980s, the World Bank became particularly interested in understanding
issues related to sequencing and speed of reform. Papers were commissioned, conferences
were organized, and different country experiences were explored. As a result of the
discussion surrounding this work, a consensus of sorts developed on the sequencing and
speed of reform. The most important elements of this consensus included: (1) trade
liberalization should be gradual and buttressed with substantial foreign aid; (2) an effort
should be made to minimize the unemployment consequences of reform; (3) in countries
with very high inflation, fiscal imbalances should be dealt with very early on in the reform
process; (4) financial reform requires the creation of modern supervisory and regulatory
agencies; and (5), the capital account should be liberalized at the very end of the process,
and only once the economy has been able to expand successfully its export sector. Of
course, not everyone agreed with all of these recommendations, but most people did. In
particular, people at the IMF did not object to these general principles. For example, Jacob
Frenkel, 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, indeed, be opened towards
the end of the reform process.
Sometime during the early 1990s, this received wisdom on sequencing and speed began
to be challenged. Increasingly, people in Washington began to call for simultaneous and
very fast reforms. Many argued that politically, this was the only way to move forward.
Otherwise, the argument went; reform opponents would successfully block liberalization
efforts. I remember being introduced to this view by an economist turned politician,
Vaclav Klaus. When I met him in Prague in 1991, he said: ‘‘Oh, you are the ‘sequencing’
professor. . .’’ and then he added, ‘‘you got it all wrong. There is not such a thing as an
optimal sequence. We should do as much as we can, as fast as we can.’’ When I asked him
what were the bases of his recommendation, he simply said, ‘‘politics, politics. . .’’ In the
book, Stiglitz is critical of Klaus’s ‘‘rapid and simultaneous’’ reform strategy, 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.
In 1992, and in response to what was perceived as US pressure to lift controls on
international capital movements, Yung Chul Park from Korea University organized a
conference on capital account liberalization. Most participants agreed that following an
Book reviews 255
appropriate sequencing was vital for the success of liberalization. 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. Edwards (Ed.). Capital Controls, Exchange
Rates and Monetary Policy in the World Economy, Cambridge University Press, 1995). In
a paper presented at this conference, Robert Mundell captured succinctly the views of most
participants. The following quote is illustrative: ‘‘unfortunately. . .there are some negative
externalities [of an early capital account liberalization]. One is that the borrowing goes into
consumption rather than into investment, permitting the capital-importing country to live
beyond its means. . .without any offset in future output with which to service the loans.
Even if the liabilities are entirely in private hands, the government may feel compelled to
transform the unrepayable debt into sovereign debt rather than allow execution of
mortgages or other collateral’’ (p. 20).
At the 1992 Seoul conference on capital liberalization, one of the few dissenters was the
late Manuel Guitian, then a senior official at the IMF, who argued in favor of moving quickly
towards capital account convertibility. Yet, in stark contrast to Stiglitz’s characterization of
the IMF leadership, there was no dogma or arrogance in Guitian’s position. He listened to
others’ arguments, provided counter-arguments, and carefully listened to the counter
counter-arguments. 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 convert-
ibility. After discussing the evolution of international financial markets, and expressing
reservations about the ‘‘capital-account-last’’ sequencing recommendation, Guitian sum-
marized 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. . .[A] strong case can
be made in support of rapid and decisive liberalization in capital transactions’’ (pp. 85 –86).
Starting in 1995, more and more countries began to relax their controls on capital
mobility. In doing this, however, they tended to follow different strategies and paths.
While some countries only relaxed bank lending, others only allowed long-term capital
movements, and yet others—such as Chile—used market-based mechanisms to slow down
the rate at which capital was flowing into the economy. Many countries, however, did not
need any prodding from the IMF or the US to open their capital account. Indonesia and
Mexico—just to mention two important cases—had a long tradition of free capital
mobility, which preceded the events discussed in this book, and never had any intention
of following a different policy.
But agreeing that sequencing is important is not the same as saying that capital controls
should never be lifted. 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.
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, and have strong institutions
and domestic capital markets. Also, there is some evidence suggesting that price-based and
transparent mechanisms, such as the flexible tax on short-term inflows used by Chile
during much of the 1990s, work relatively well as a transitional device. It allows for some
capital mobility and discourages short-term speculative monies; at the same time, it avoids
arbitrary decisions by bureaucrats. However, as I have argued elsewhere, even Chile-style
256 Book reviews
capital controls have costs, and they did not spare Chile from contagion or macro
instability during the second half of the 1990s.
3. Crisis management in East Asia
Stiglitz is particularly critical of the way in which the IMF handled the East Asian
crisis. In his view, major mistakes included (1) closing down, in the middle of a financial
panic, a number of banks in Indonesia; (2) bailing out private and mostly foreign creditors;
(3) not allowing the imposition of capital controls on outflows; and (4) imposing tight
fiscal policies and high interest rates. He claims that the experiences of China and India,
two countries that did not suffer a crisis, and of Malaysia—which did not follow the IMF’s
advice, and recovered quickly—support his views. This argument is highly unpersuasive,
however. Anyone mildly informed knows that there are many reasons why India and
China have not faced a crisis, and attributing this to the presence of capital controls is
overly simplistic, if not plainly wrong. The case of Malaysia is a bit more complicated. 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. What is clear, however, is that
Malaysia surprised many observers by tightening controls only temporarily; after approx-
imately a year, and once the economy had stabilized, the controls were lifted just as Dr.
Mahatir had originally announced.
What makes Malaysia’s case particularly interesting is that historically the temporary
use of controls is quite unique. The historical norm is closer to what happened in Latin
America during the 1980s debt crisis, when what was supposed to be a temporary
tightening of controls, became a long-term feature of the regional economies. Moreover, in
Latin America, the stricter controls on capital outflows did not encourage the restructuring
of the domestic economies, nor did they result in orderly reforms. The opposite, in fact,
happened. In country after country politicians experimented with populist policies that at
the end of the road deepened the crisis.
Two of Stiglitz’s criticisms are right on target: closing banks in the midst of a panic is a
major mistake. Also, massive bailouts are costly and ineffective. A number of people have
long recognized this, and the recent proposal by Anne Krueger, the IMF’s First Deputy
Managing Director, is a positive development in an effort to implement an effective
standstills framework.
Stiglitz’ most severe criticism refers to the IMF’s fiscal and interest rate policies. He
argues that the East Asian crisis called for expansionary and not, as the IMF insisted,
contractionary fiscal policies. In his view, by imposing fiscal retrenchment, the IMF made
a serious recession even deeper. Worse yet, the IMF-mandated increases in interest rates
generated a string of bankruptcies that deepened the confidence crisis and further
contributed to the slowdown. Stiglitz’s position, however, does not have—at least, not
yet—much empirical support, and fails to recognize how severe the situation had become
by late 1997. These were not, as he argues, ‘‘severe downturns’’ that required textbook-
type counter-cyclical fiscal policies; these were major currency crises. And a key feature
of currency crises is that the public drastically reduces its demand for government
securities and domestic money, turning to safer assets, especially foreign exchange. This
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. Moreover, if the decline in
the demand for domestic money is not brought to an end, the price of foreign exchange
will jump drastically—greatly overshooting its equilibrium level—and inflation will
increase significantly. 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.
The first order of business in a major currency crisis is to re-establish confidence. While
massive and recurrent bankruptcies do not contribute towards achieving this goal, neither
do large deficits translated into money printing, or rapidly depreciating exchange rates. At
the end of the road, the issue is one of trade-offs, and the key question is by how much to
let the exchange rate depreciate, and by how much—and for how long—to increase
interest rates. The answer depends in part on the government’s objectives. 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. Under most circum-
stances, pumping in liquidity when the demand for money is shrinking, and issuing
government debt when government securities are being dumped, is unlikely to restore
confidence or avoid an inflationary explosion.
4. Concluding remarks
I finish where I began: This is an important book that deserves to be read and discussed
widely. At the end of the road, however, I was left with a sense of emptiness. I have no doubt
that Stiglitz is sincere, and that he is truly pained by what he believes are major problems
with globalization. However, he is also rather naı̈ve. And it is this naivete, and not the
stridency of the delivery, what at the end makes this book fail. Stiglitz has too much
confidence on the ability of governments to do the right thing, and he exaggerates greatly the
extent of market failures. The agenda should be to improve institutions and incentives; to
promote competition and efficiency; to implement policies that raise productivity; to truly
help the poor and the destitute; to put an end to corruption and abuse; and to make sure that
globalization becomes a fair process, where the industrial countries also dismantle their
protective barriers. The agenda should not be to bring back bureaucrats, xenophobic auto-
crats, and corrupt politicians to run the economy. We have been there, and it does not work.
Sebastian Edwards
University of California,
Los Angeles, CA, USA
National Bureau of Economic Research, Cambridge, USA
E-mail address: sedwards@anderson.ucla.edu
9 September 2002
PII: S 0 3 0 4 - 3 8 7 8 ( 0 2 ) 0 0 0 9 7 - 4
Journal of Libertarian Studies
Volume 18, no. 1 (Winter 2004), pp. 89–98
2004 Ludwig von Mises Institute
www.mises.org
BOOK REVIEWS
Edited by N. Stephan Kinsella*
JOSEPH E. STIGLITZ. GLOBALIZATION AND ITS DISCONTENTS.

NEW YORK: W.W. NORTON, 2002. PP. xxii + 282.
Globalization and its Discontents is an enjoyable and thought-
provoking book. It is probably the most readable, well-argued, and
subtle attack against globalization in the past few years. Although the
author fights, in a rather dogmatic style with some shades of arrogance,
against what he believes to be devious free-market attitudes, his prose
is simple and accessible to a wide audience. But it is also deceptive.
While the author emphasizes time and again that he is not leveling
an attack against market principles and globalization in general, he
advocates Keynesian policymaking (money printing and deficit spend-
ing) on virtually every page.
It is an enjoyable book for the reader in search of the perfect world,
and it suits the well-meaning anti-globalist who believes that since
individuals make mistakes, it is wiser to give other individuals the
right to interfere. Put differently, Stiglitz strongly believes that bad
policymaking can be reduced by enlightened policymaking, both na-
tionally and on a global scale. And that when international economic
agencies do not behave properly, they must be reformed, made more
transparent and accountable, and less dependent on special interests.
The author believes that national leaders, by and large, pursue the
well-being of their peoples. He also believes that international agencies,
like the IMF and the World Bank, must ensure that global phenomena
maintain a “human face,” and that national politicians be supported by
somebody in charge when something goes wrong. Indeed, it is hard
to see much economics in these conclusions (see in particular the final
*
General Counsel, Applied Optoelectronics, Inc. To submit reviews for this
section, visit www.stephankinsella.com/jls.
89
Journal of Libertarian Studies 18, no. 1 (Winter 2004)
chapter of the book). Some readers might also question its logic. As
the following pages will explain, these doubts are justified.
The foreword to the book sets the pace. While taking good care to
inform the possibly unaware reader about his fundamental contribu-
tions to economic science, Professor Stiglitz, the 2001 Nobel Laureate,
reveals that he became interested in real-world matters in 1993 when
he joined the Clinton administration. He later continued his career at
the World Bank where he was chief economist and senior vice presi-
dent. The author claims that this book is the result of those eye-opening
experiences, during which he found out that decision-making processes
are often influenced by politics and ideology. He further realized that
globalization without governance often leads to devastating results,
especially on Less Developed Countries (LDCs).
Surprisingly, however, the core argument of the book is not the
analysis of the causal link between ideology, politics, and economic
performance in a globalized world. Rather, the author keeps concen-
trating on bad policymaking carried out both by Western national
governments and by international organizations. He posits a direct
causal link between globalization and bad policymaking, and con-
cludes by suggesting suitable rules for global economic management.
According to Stiglitz, these rules should be fairness and consensus,
and they should be designed through a democratic process so as to
guarantee social justice and meet the needs of everybody.
His thesis is not developed in a theoretically consistent framework.
Instead, the author offers a list of case studies in bad economics and
policymaking by the IMF and the U.S. Treasury. The next paragraphs
will therefore reconsider the main issues raised by Stiglitz, highlight
his most important arguments, and underscore some factual and meth-
odological puzzles, these being in fact equivalent to a number of
implicit assumptions.
POLITICALLY CORRECT MISCONCEPTIONS

ABOUT FREE MARKET ECONOMICS
Although much of the text (for instance, the first chapter) focuses
on poverty and globalization, Stiglitz does not state explicitly that pov-
erty is the consequence of globalization. On the contrary, in chapter
nine, he states clearly that the origin of all problems is the way global-
ization has been managed, rather than globalization per se. In particu-
lar, he feels that since mainstream economists became the managers
of the globalization process, people have been betrayed, especially in
90
Book Reviews
LDCs. He adds that globalization policies and institutions—including

the IMF and U.S. government—provoked a number of shocks that led
entire countries to major crises and disasters. Thus, Western global-
izers should take the blame for such failures, since they made empty
promises and forced many LDCs to undertake suicidal steps toward
liberalization.
As a matter of fact, Stiglitz never really defines what he means
by the term “globalization.” From a free-market perspective, glob-
alization refers to the freedom to choose among opportunities avail-
able on a global scale: Buyers are free to maximize their purchasing
power, and sellers are free to compete in order to satisfy consumers’
needs and remunerate the scarce resources they use. In other words,
globalization stands for a world of opportunities opened to buyers and
the end of privileges for sellers. It is, therefore, manifest that global-
ization is an improvement for those who are allowed to choose, and
for those who can successfully satisfy buyers’ needs. But it is irrele-
vant for those who cannot choose—where more-or-less altruistic poli-
cymakers decide on their behalf—and it is even harmful for those who
enjoy normative privileges.
However, none of the above characterizes Stiglitz’s thought. One
can guess that from his standpoint, globalization is little more than a
promise generated by free-market fundamentalists—this being a syn-
onym for neoclassical scholars, experts, and selected bureaucrats. Con-
sistent with this view, whenever a country failed to grow after its rul-
ers were exposed to neoclassical advisors, globalization is assumed
to have been aborted. Once this rather bizarre definition of globaliza-
tion is accepted, 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. His account of the Russian crisis
(chapter five) is a good example.
However, the argument runs into trouble when the author suggests
that the solution to neoclassical policymaking is some kind of paternal-
istic Third Way managed by caring and altruistic politicians devoted
to achieving full employment. In particular, he ignores the possibility
of having made a mistake by equating globalization with neoclassical
thinking. And he seems to be totally unaware of the fact that the al-
ternative to mainstream economics is not enlightened and expanded
governance structures, but rather, to echo Mises’s wording, freedom
to choose and discard. These oversights characterize both the author’s
interpretations of the crises and his view about what could have been
done instead.
91
These decisive misunderstandings are apparent from the very

first pages. While acknowledging that free capital movements and
free trade have enhanced living standards in vast areas of the world,
Stiglitz remarks that during the age of globalization, the poverty gap
has not been reduced. He forgets to tell the reader that most LDCs,
where living standards are stagnating and people keep dying because
of poverty and civil wars, have hardly been touched by globalization
or, more generally, by economic freedom. Accusing globalization
for aborted economic growth in Africa since the end of colonialism
is not only trite and inaccurate, it is ridiculous.
As for destabilization, Stiglitz seems to be the victim of his own
understanding of the free-market process. One does not need a doctor-
ate to know that free-market economics is about preventing policy-
makers from interfering in peaceful activities voluntarily undertaken
by individuals. And it does not take much to see that if market forces
are set free, but policymakers do not withdraw and privileges do not
disappear, the system sooner or later breaks down. Still, the book
ignores these basics, and actually eliminates the whole question by
assuming with apparent casualness that there are many different forms
of free markets (chapter nine).
Finally, 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. For instance, in Stiglitz’s view, Western
globalizers forced LDCs to reduce their trade barriers and de facto
created huge trade deficits while destroying fragile production struc-
tures. That is not just a terminological question or a somersault in
logic; it is bad economics. One wonders what happened to exchange
rates. Free trade (and globalization) is a game whereby you cannot
have losers, such as import-competing industries, without also having
winners, such as exporters. Put differently, you can’t have imports
unless you have exports to pay for them. Maybe exchange rates did
not depreciate enough because they were fixed and the local currency
was not convertible, or perhaps because foreign aid made sure that
cheap imports could flow in.
Whatever the correct answer is, globalization has nothing to do
with fixed exchange rates and inconvertible currencies. And if the West
is guilty of providing too much aid to the leaders of poor countries, as
is probably true, Stiglitz should say so. But he doesn’t. Indeed, when
he mentions the evils of fixed exchange rates, the author attributes them
to the inconsistencies of the globalizers. Surely, Western protectionism
92
Book Reviews
hasn’t made life easy for third world countries, but protectionism is
the opposite of globalization. It is wrong to claim that the best pol-
icy against protectionism is central planning with a human face or
enlightened governance.
CASE STUDIES
After having suggested that globalization is the result of bad
policymaking enforced by the IMF and, to a lesser extent, by the
World Bank and the WTO (chapter one), the rest of the book is, by
and large, a sequence of anecdotes and case studies. On one side,
Stiglitz describes the blind bureaucrats from the IMF, the repented
but weak employees of the World Bank, and the greedy American
establishment that fought communism but forgot about democracy.
On the other side, we meet the author himself, who modestly explains
how he abandoned the academic world in order to solve America’s
economic problems and, having done that, decided to move on to
solve world poverty. As the reader soon finds out, the author faced
disappointment, but fought hard and almost single-handedly to stop
IMF colonialism.
Stiglitz’s cases are persuasive, but somewhat irrelevant and decep-
tive. They are beside the point, since it is a gross mistake to consider
neoclassical constructivism as a synonym for globalization. They are
deceptive, for although it is undeniable that advocating capital-markets
liberalization in, say, Ethiopia, may harm domestic banks if they are
unable to offer good enough credit conditions to borrowers, it is wrong
to conclude that farmers suffer as a result. Unfortunately, this rhe-
torical strategy is a recurrent feature of the book.
Stiglitz offers various counterexamples to the development strate-
gies recommended by the IMF. In particular, his implicit thesis is
that countries that turned down IMF advice did well. One case is
Botswana (chapter two) which, incidentally, ranks relatively high (and
higher than Ethiopia) in the Index of Economic Freedom. Another
case is China (chapter three). It would be hard to deny that Botswana
was right in rejecting IMF policymaking and constraints, or that the
political power of China was no match for any IMF bureaucrat. But
the Botswana case does not demonstrate that the country’s successes
were due to socialist planning, enhanced regulation, protectionism, or
expansion in the bureaucracy. Nor would one claim that the Chinese
leaders succeeded because they introduced further regulation and cen-
tralized planning in the past two decades.
93
Indeed, Stiglitz does not do it, either. As mentioned earlier, he

never says that globalization per se is bad. He simply states that open-
ing up may be beneficial if some preliminary conditions are met, and
that good governments can do desirable things. He hastily concludes
that whenever free-market blueprints failed, the explanations lie with
Western economic and political interference, starting with the IMF
and U.S. Government, which forced good politicians to open up too
quickly. As a result, civil servants became corrupt, jobs were destroyed,
and easy imports, foreign bankers, and high interest rates choked de-
velopment. Finally, social tensions erupted, in some cases leading to
civil wars.
POLICIES
The economics of IMF policymaking occupies most of the book,
since the author frequently deals with privatization, liberalization, for-
eign direct investment, social tensions, and poverty. A review is not
the right place to discuss in detail the fragility of neoclassical econom-
ics in these areas, which is the main goal of the author throughout
the book. It may be enough to underscore Stiglitz’s main ponts. First,
he argues, although too much government intervention is bad, there
are plenty of good things a government can do if properly enlightened
and informed, presumably by reformed international agencies. Second,
the market does not yield perfect results, so free-market economics
is wrong unless proper institutions are in place, fairness enforced, and
full employment guaranteed. Third, the IMF was originally created
to get things right by following Keynesian guidelines, but was soon
seduced by the dream of the invisible hand. Rather than accomplish-
ing its original and true mission, it ended up colluding with Western
financial capitalism and pressure groups.
Once again, the reader is offered various examples:
• free trade, where imports are paid through foreign aid and
exchange rates are irrelevant;
• free capital markets, which would undermine much-needed
subsidies and expose debtors to the consequences of bad rep-
utations or bad borrowing decisions; and
• price liberalization, which would be unfair to inefficient or
badly located producers.
The argument is further developed in chapters four to seven, in
which the Southeast Asian and the Russian crises are explored in detail,
94
Book Reviews
and where the virtues of gradual Keynesian transitions are opposed

to the evils of IMF-style shock therapies. At this stage, Stiglitz’s ap-
proach should no longer surprise the reader. Let us consider the Asian
case. In his view, Southeast Asia’s economies were doing fine until the
West forced them to open up their capital markets, destroy the miracle,
and cause what the author defines as the most dramatic economic
crisis since the Great Depression.
However, some caution is in order. Although Stiglitz singles out
Indonesia, Korea, and Thailand to illustrate the catastrophe, the well-
informed reader cannot help remembering that in 2002, five years
after the 1997 crisis blew up, real GDP in those three countries was
respectively 99%, 124%, and 105% of its pre-crisis level. As for the
alleged domino effect, real GDP in developing Asia in 2002 was 33%
higher than just before the crisis.1
Never mind the figures. Stiglitz is quite right in saying that the IMF
should have kept out of the whole story, but he is wrong in saying that
those countries were in good shape prior to IMF intervention, and that
the IMF precipitated the crisis. Indeed, 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 dis-
tortions and malfunctions, but the IMF delayed the moment when
the distortions were exposed. The redistributive patchwork advo-
cated by Stiglitz may appear to help temporarily, but they are mere
window dressing, and can hardly fix a sick system, as the Asian crisis
demonstrates. It is deplorable that the IMF played the window-dressing
game first, and then provided funds to bail out selected lenders.
Instead, the author accuses the IMF of having served Western
financial interests and having disregarded fairness, although the reader
will look in vain for a clear definition of fairness. He will find just a
hint in chapters three and seven, where Stiglitz refers to fairness as
one of the key elements of the social contract—the other being full
employment. The author does not bother to explain by whom and
where this contract was signed, nor does he clarify what was written in
it. Nonetheless, it is clear to him that governments broke the contract
by not pursuing fairness, so violent attitudes by the residents were al-
most legitimized. Put differently, he is persuaded that income transfers
are one of the fundamental human rights, rather than being an abuse
1
International Monetary Fund, World Economic Outlook (Sept. 2003), sta-
tistical appendix: “Output.”
95
by some at the expense of others. The IMF and the Washington con-
sensus are therefore guilty, since they forced national governments to
renege upon the social contracts.
GENERAL ISSUES
As a matter of fact, if the reader forgets about the author’s flights
into morality, the main problem with the book appears to be its title,
which should have been related to the economics and politics of inter-
national agencies (the IMF in particular) and of the U.S. government,
rather than to globalization. Once again, Stiglitz says very little about
globalization, and what he says rests on questionable foundations.
Globalization is about deregulation and low taxation. These are not
quite the same thing as active central banking, fixed exchange rates,
and high taxation, which are the core components of many IMF poli-
cies and macro-rescue plans in the past three decades.
As has been argued above, the author neglects the distinction, and
develops three main theses. First, international agencies have done a
poor job by trying to enforce neoclassical recipes. They have aggra-
vated the economic conditions in many LDCs, and raised bad feelings
against anything coming from the West, and from the U.S. in particu-
lar. Second, despite their past misdeeds, international agencies per se
are not a bad idea. Their primary goal should, however, be restricted
to the provision of sound information and unconditional aid. Third,
opening up (globalization) should not be rejected in principle, but
decisions about its timing, depth, and features should be a matter for
each national government to decide, especially when politicians are of
good quality, and they demonstrate an ability to preserve consensus.
From a policymaking viewpoint, Stiglitz does not consistently ad-
vocate a worldwide governance scheme for globalization. Global gov-
ernance by enlightened and compassionate international bodies is
desirable, in his opinion, but each government should also be free to
act as it judges appropriate. As for the meaning of the expression “good
government,” he recommends fairness as the primary criterion to be
taken into account for any development policy (chapter three). Nev-
ertheless, one is left wondering about who decides what is fair, and
whether Stiglitz would be willing to accept the notion of fairness that
many national governments have enforced in the past decades, irre-
spective of IMF intervention.
Consistent with his assumption about fairness, Stiglitz considers
privatization and liberalization attractive, but only if they guarantee
96
Book Reviews
extra jobs at fair conditions. Hence, his thesis in favour of conditional

globalization and of policies aimed at spreading the costs if anything
undesirable happens—including bad lending and investment. There-
fore, bad entrepreneurs should not be allowed to fail, but should be
rescued through money printing. After all, he argues, a little inflation
is preferable to widespread poverty and civil war. It is not a new the-
sis, and we leave it to the reader to evaluate the extent to which money
printing can solve the problems of faulty management and bad govern-
ment, and whether it can provide suitable incentives for entrepreneu-
rial activities or fairness to those layers of the population who cannot
protect themselves against inflation.
ONE CONCLUDING REMARK

This book illustrates and contributes significantly to one gross
misconception about globalization: Globalization does not identify
policies, neither from neoclassical nor from Keynesian quarters. We
do not know how people want to behave, what kind of safeguards they
prefer to have, or how much they are willing to pay for them. Free-
market globalizers have nothing to say about that, and believe that
nobody has. This justifies Professor Stiglitz when he correctly criticizes
IMF policymaking and inconsistencies (chapter eight), and it also
explains why he is in trouble when he suggests recipes that go beyond
generic, but nevertheless treacherous, notions such as fairness and
social consensus, almost bordering on demagoguery. See for instance
chapter eight, where he confronts the legitimacy of property rights
with that of the social contract.
Instead, globalization is about the freedom to opt out of the pro-
posed policies. As the Russian case demonstrates, a market system
rests on widely accepted behavioral rules. Stiglitz deserves credit for
pointing out that Western consultants have contributed to suffocating
or destroying those rules. 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 policy-
maker continued to be the winning strategy (chapter seven). Of course,
it is hardly surprising that under such conditions, alternative systems
have not come to the surface, but it is puzzling to see that the author
believes this to be the essence or the consequence of globalization.
On the contrary, globalization in Russia and in some other countries
of the Soviet Empire was never the name of the game. Put differently,
Stiglitz succeeds in showing the game and excels in describing it (see
97
chapters six and seven), but equally frequently fails to call it by its
proper name: neoclassical constructivism.
ENRICO COLOMBATTO
University of Turin
enrico.colombatto@unito.it
98

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Globalization: Stiglitz's Case By Benjamin M.

Privatization. Selling off government‐ owned enterprises—telephone companies,

Review of Joseph E. Stiglitz’s Globalization and its Discontents

1. The main argument

they incorporate the characteristics of each individual country. Countries should

2. The sequencing and pace of reform and capital account liberalization

3. Crisis management in East Asia

JOSEPH E. STIGLITZ. GLOBALIZATION AND ITS DISCONTENTS.

POLITICALLY CORRECT MISCONCEPTIONS

LDCs. He adds that globalization policies and institutions—including

These decisive misunderstandings are apparent from the very

Indeed, Stiglitz does not do it, either. As mentioned earlier, he

and where the virtues of gradual Keynesian transitions are opposed

extra jobs at fair conditions. Hence, his thesis in favour of conditional

ONE CONCLUDING REMARK

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