BOOKS: by Colin TeeseNews Weekly
Globalization and its Discontents, by Joseph Stiglitz
, April 19, 2003
Joseph Stiglitz is a distinguished American economist who made the transition into politics and policy making in the Clinton Administration in 1993. He served four years on the President's Council of Economic Advisors, first as a Member and later as Chairman.
In 1997 he left politics to become an international civil servant. He served three years at the World Bank, first as the Bank's Chief Economist and later as a Senior Vice President.
Full of disillusion, he left the Bank after three years.
His time at the Bank included the vitally important years of the Asian financial crisis in 1997. Globalisation and Its Discontents*
was written during his time at the World Bank.
While in Washington, Stiglitz records that his views on economic globalisation underwent fundamental change. He quickly realised that despite its name the Council of which he was Chair was, relatively, without real influence as an economic policy-shaping agency capable of influencing the President. That role remained firmly in the hands of the Secretary of the Treasury and his Department. And the Treasury was busily advocating policies Stiglitz had lost faith in.
If he expected that his move to the World Bank was to rekindle faith, Stiglitz was to be disappointed.
It can be said, of course, that Stiglitz's disappointments arose from his own change of heart, though they are none the less worthy for that. The author does not say so explicitly, but it is obvious that he left academia a wholehearted supporter of the supremacy of market economics and of globalisation as a force for good - and especially so for developing countries.
His time in politics and the international civil service changed all that. Policies of globalisation imposed on developing countries, he later insisted, have been harmful and need to be rethought.
That is the essential theme of this book and he draws upon a wealth of practical experience to justify that view.
If there is a reason to find criticism of Stiglitz, it lies not in his overall conclusions, but in some of the supporting detail. In particular, his characterisation of "developing countries". While his point is true as far as it goes, nowhere does he concede that globalisation, as presently practised, is no less capable of harming small and medium sized economies as well as those of developing countries.
The trouble with the term "developing country" is that it no longer means anything. Originally, it was used to distinguish between mature economies and those newly emerging from colonial status. (Initially, such nations were called "underdeveloped countries"). However, that term was discarded - for euphemistic reasons - many years ago and replaced with the term "developing countries".
Since the change, the term has been invested with steadily more political and less economic content. Countries in the "developing" category were unwilling to give up that status even as their economies improved: because "developing" nation status entitled them to important economic and trade concessions.
Brazil is an example sufficient to illustrate the point. It still categorises itself as "developing" even though a Brazilian recently reminded me that it was the eighth largest economy in the world. It is much larger than Australia, for example, which certainly is not considered a developing country.
The emerging economies of Asia in the early 1990s provide perhaps the best example of those nations Stiglitz, incorrectly, in my view, characterises as "developing".
Many of those so characterised by Stiglitz have, to varying degrees, flourishing and growing economies, but almost all lack the well developed political and legal systems needed to sustain rapid economic development. (And it can be further observed that most are dysfunctional democracies because sophisticated political and legal systems are an absolute prerequisite for a functioning democracy.)
Many of the Asian countries Stiglitz calls "developing" were in fact nations with fast growing economies but with stunted legal and political structures.
None of this is to contradict Stiglitz's view that they have been harmed by globalisation. Quite the contrary. Stiglitz makes the point that deregulated and fully-open economies are just those which cannot possibly function effectively without mature political and legal systems. And he is right.
But he does not take the next step and recognise that small developed economies, even those with well-developed political and legal systems, are also disadvantaged by wholesale financial deregulation, privatisation and removal of border protection.
Of course, to say all of this is to offer no more than minor quibbles in a book by a major economic personality which fully exposes the shortcomings of globalisation and of the international organisations which stand behind it - in particular the International Monetary Fund, the World Bank and the World Trade Organisation.
As Stiglitz says in the preface to his book, he was persuaded from this view by his experiences both in the political arena and at the World Bank.
What obviously became clear to him when he began grappling with the problems of the real world and the reactions to them of the Washington power players, was that markets frequently don't work.
Further, the unrealistic assumptions of perfect competition and perfect consumer information which underpin them are both simplistic and misplaced.
The reasons why he had come so decisively to this belief are complicated and technical. The detail of them should not bother us here, but they are persuasive.
In essence he concludes that the reason market based policies can't work without regulation is because consumer groups can never be in possession of a sufficient volume of information to offset what is available to providers of goods and services.Observer
Stiglitz is quite frank in characterising his book as reflecting his experiences; for one used to the idea of research and study as a basis for reaching conclusions, it is an understandable point to make. But he is an observer and listener of real quality. And his book is able to tell us more about what is wrong with the conduct of economic life in our world than many of the heavily researched and carefully argued academic publications.
Much of the book is concerned with cataloguing the shortcomings of the International Monetary Fund (IMF) in attempting to manage the world economy. And quite right too. They are too numerous to mention here; though many who have studied the Asian financial crisis will be familiar with them.
Most of all he points to the fact that the IMF was prepared to look at almost anything but the real reasons for the Asian collapse. Stiglitz, correctly, identifies insufficient and inadequate financial regulation as the prime cause.
This explanation was, however, ideologically discomforting for the IMF - if only because it contradicted the objectives of the Washington Consensus of which the IMF was both a devotee and watchdog. (The Washington Consensus - the brainchild of the US Treasury - seeks globalisation based on deregulated, privatised free markets.)
Understandably, the Fund cast about for other explanations. Alleged Asian "Crony Capitalism", shorthand for corruption, was picked as the most plausible suspect.
And because the IMF got the reasons for the crisis wrong, so were its suggested solutions misguided. IMF type belt-tightening was exactly the wrong solution. Those Asian economies which followed most closely the IMF prescription did worse and those which followed a more sensible course recovered more quickly.
Most interesting of all - and not widely reported at the time - was the fact that Japan had offered to donate US$100 billion as a contribution to build an Asian Monetary Fund. Japan apparently was convinced that expansionary policies were needed to restart the Asian economies.
The IMF, and the US Government rejected the idea. Obviously such a fund, dominated by Japan, and possibly China, would have diluted US and IMF control of the world economies. Significantly, the Australian Government, driven by Treasury, went along with them. Once more Australia sent a clear message to Asia as to where it believed its best interests lay.
Stiglitz makes his most telling point at the end of his book when he asks the rhetorical question of the IMF: Why is it that when the US goes into recession, expansionary policies (lowering interest rates and taxes) are immediately prescribed; yet when the same happened to developing countries, contractionary policies were forced upon them?
It is hardly surprising that he prescribes solutions to the present difficulties in the form of sweeping reforms to the way the IMF, the World Bank and the WTO function.
Most probably Stiglitz has no need to be told that, allowing for the present disposition of world economic power, such reforms are hardly likely to be implemented.