Globalismís Discontent

Globalismís Discontent

Dr. Joseph E. Stiglitz

Few subjects have polarized people throughout the world as much as globalization. Some see it as the way of the future, bringing unprecedented prosperity to everyone, everywhere. Others, symbolized by the Seattle protestors of December 1999, fault globalization as the source of untold problems, from the destruction of native cultures to increasing poverty and immiseration. In this article, I want to sort out the different meanings of globalization. In many countries, globalization has brought huge benefits to a few with few benefits to the many. But in the case of a few countries, it has brought enormous benefit to the many. Why have there been these huge differences in experiences? The answer is that globalization has meant different things in different places.

The countries that have managed globalization on their own, such as those in East Asia, have, by and large, ensured that they reaped huge benefits and that those benefits were equitably shared; they were able substantially to control the terms on which they engaged with the global economy. By contrast, the countries that have, by and large, had globalization managed for them by the International Monetary Fund and other international economic institutions have not done so well. The problem is thus not with globalization but with how it has been managed.

The international financial institutions have pushed a particular ideology - market fundamentalism- that is both bad economics and bad politics; it is based on premises concerning how markets work that do not hold even for developed countries, much less for developing countries. The IMF has pushed these economics policies without a broader vision of society or the role of economics within society. And it has pushed these policies in ways that have undermined emerging democracies.

More generally, globalization itself has been governed in ways that are undemocratic and have been disadvantageous to developing countries, especially the poor within those countries. The Seattle protestors pointed to the absence of democracy and of transparency, the governance of the international economic institutions by and for special corporate and financial interests, and the absence of countervailing democratic checks to ensure that these informal and public institutions serve a general interest. In these complaints, there is more than a grain of truth.

Beneficial Globalization

Of the countries of the world, those in East Asia have grown the fastest and done most to reduce poverty. And they have done so, emphatically, via "globalization." Their growth has been based on exports - by taking advantage of the global market for exports and by closing the technology gap. It was not just gaps in capital and other resources that separated the developed from the less-developed countries, but differences in knowledge. East Asian countries took advantage of the "globalization of knowledge" to reduce these disparities. But while some of the countries in the region grew by opening themselves up to multinational companies, others, such as Korea and Taiwan, grew by creating their own enterprises. Here is the key distinction: Each of the most successful globalizing countries determined its own pace of change; each made sure as it grew that the benefits were shared equitably; each rejected the basic tenets of the "Washington Consensus," which argued for a minimalist role for government and rapid privatization and liberalization.

In East Asia, government took an active role in managing the economy. The steel industry that the Korean government created was among the most efficient in the world - performing far better than its private-sector rivals in the United States (which, though private, are constantly turning to the government for protection and for subsidies). Financial markets were highly regulated. My research shows that those regulations promoted growth. It was only when these countries stripped away the regulations, under pressure from the U.S. Treasury and the IMF, that they encountered problems.

During the 1960s, 1970s, and 1980s, the East Asian economies not only grew rapidly but were remarkably stable. Two of the countries most touched by the 1997-1998 economic crisis had had in the preceding three decades not a single year of negative growth; two had only one year - a better performance than the United States or the other wealthy nations that make up the Organization for Economic Cooperation and Development (OECD). The single most important factor leading to the troubles that several of the East Asian countries encountered in the late 1990s - the East Asian crisis - was the rapid liberalization of financial and capital markets. In short, the countries of East Asia benefited from globalization because they made globalization work for them; it was when they succumbed to the pressures from the outside that they ran into problems that were beyond their own capacity to manage well.

Globalization can yield immense benefits. Elsewhere in the developing world, globalization of knowledge has brought improved health, with life spans increasing at a rapid pace. How can one put a price on these benefits of globalization? Globalization has brought still other benefits: Today there is the beginning of a globalized civil society that has begun to succeed with such reforms as the Mine Ban Treaty and debt forgiveness for the poorest highly indebted countries (the Jubilee movement). The globalization protest movement itself would not have been possible without globalization.

The Darker Side of Globalization

How then could a trend with the power to have so many benefits have produced such opposition? Simply because it has not only failed to live up to its potential but frequently has had very adverse effects. But this forces us to ask, why has it had such adverse effects? The answer can be seen by looking at each of the economic elements of globalization as pursued by the international financial institutions and especially by the IMF.

The most adverse effects have arisen from the liberalization of financial and capital markets - which has posed risks to developing countries without commensurate rewards. The liberalization has left them prey to hot money pouring into the country, an influx that has fueled speculative real-estate booms; just as suddenly, as investor sentiment changes, the money is pulled out, leaving in its wake economic devastation. Early on, the IMF said that these countries were being rightly punished for pursuing bad economic policies. But as the crisis spread from country to country, even those that the IMF had given high marks found themselves ravaged.

The IMF often speaks about the importance of the discipline provided by capital markets. In doing so, it exhibits a certain paternalism, a new form of the old colonial mentality: "We in the establishment, we in the North who run our capital markets, know best. Do what we tell you to do, and you will prosper." The arrogance is offensive, but the objection is more than just to style. The position is highly undemocratic: There is an implied assumption that democracy by itself does not provide sufficient discipline. But if one is to have an external disciplinarian, one should choose a good disciplinarian who knows what is good for growth, who shares one's values. One doesn't want an arbitrary and capricious taskmaster who one moment praises you for your virtues and the next screams at you for being rotten to the core. But capital markets are just such a fickle taskmaster; even ardent advocates talk about their bouts of irrational exuberance followed by equally irrational pessimism.

Lessons of Crisis

Nowhere was the fickleness more evident than in the last global financial crisis. Historically, most of the disturbances in capital flows into and out of a country are not the result of factors inside the country. Major disturbances arise, rather, from influences outside the country. When Argentina suddenly faced high interest rates in 1998, it wasn't because of what Argentina did but because of what happened in Russia. Argentina cannot be blamed for Russia's crisis.

Small developing countries find it virtually impossible to withstand this volatility. I have described capital-market liberalization with a simple metaphor: Small countries are like small boats. Liberalizing capital markets is like setting them loose on a rough sea. Even if the boats are well captained, even if the boats are sound, they are likely to be hit broadside by a big wave and capsize. But the IMF pushed for the boats to set forth into the roughest parts of the sea before they were seaworthy, with untrained captains and crews, and without life vests. No wonder matters turned out so badly!

To see why it is important to choose a disciplinarian who shares one's values, consider a world in which there were free mobility of skilled labor. Skilled labor would then provide discipline. Today, a country that does not treat capital well will find capital quickly withdrawing; in a world of free labor mobility, if a country did not treat skilled labor well, it too would withdraw. Workers would worry about the quality of their children's education and their family's health care, the quality of their environment and of their own wages and working conditions. They would say to the government: If you fail to provide these essentials, we will move elsewhere. That is a far cry from the kind of discipline that free-flowing capital provides.

The liberalization of capital markets has not brought growth: How can one build factories or create jobs with money that can come in and out of a country overnight? And it gets worse: Prudential behavior requires countries to set aside reserves equal to the amount of short-term lending; so if a firm in a poor country borrows $100 million at, say, 20 percent interest rates short-term from a bank in the United States, the government must set aside a corresponding amount. The reserves are typically held in U.S. Treasury bills - a safe, liquid asset. In effect, the country is borrowing $100 million from the United States and lending $100 million to the United States. But when it borrows, it pays a high interest rate, 20 percent; when it lends, it receives a low interest rate, around 4 percent. This may be great for the United States, but it can hardly help the growth of the poor country. There is also a high opportunity cost of the reserves; the money could have been much better spent on building rural roads or constructing schools or health clinics. But instead, the country is, in effect, forced to lend money to the United States.

Thailand illustrates the true ironies of such policies: There, the free market led to investments in empty office buildings, starving other sectors - such as education and transportation - of badly needed resources. Until the IMF and the U.S. Treasury came along, Thailand had restricted bank lending for speculative real estate. The Thais had seen the record: Such lending is an essential part of the boom-bust cycle that has characterized capitalism for 200 years. It wanted to be sure that the scarce capital went to create jobs. But the IMF nixed this intervention in the free market. If the free market said, "Build empty office buildings," so be it! The market knew better than any government bureaucrat who mistakenly might have thought it wiser to build schools or factories.

The Costs of Volatility

Capital-market liberalization is inevitably accompanied by huge volatility, and this volatility impedes growth and increases poverty. It increases the risks of investing in the country, and thus investors demand a risk premium in the form of higher-than-normal profits. Not only is growth not enhanced but poverty is increased through several channels. The high volatility increases the likelihood of recessions - and the poor always bear the brunt of such downturns. Even in developed countries, safety nets are weak or nonexistent among the selfemployed and in the rural sector. But these are the dominant sectors in developing countries. Without adequate safety nets, the recessions that follow from capital-market liberalization lead to impoverishment. In the name of imposing budget discipline and reassuring investors, the IMF invariably demands expenditure reductions, which almost inevitably result in cuts in outlays for safety nets that are already threadbare.

But matters are even worse - for under the doctrines of the "discipline of the capital markets," if countries try to tax capital, capital flees. Thus, the IMF doctrines inevitably lead to an increase in tax burdens on the poor and the middle classes. Thus, while IMF bailouts enable the rich to take their money out of the country at more favorable terms (at the overvalued exchange rates), the burden of repaying the loans lies with the workers who remain behind.

The reason that I emphasize capital-market liberalization is that the case against it --and against the IMF's stance in pushing it - is so compelling. It illustrates what can go wrong with globalization. Even economists like Jagdish Bhagwati, strong advocates of free trade, see the folly in liberalizing capital markets. Belatedly, so too has the IMF - at least in its official rhetoric, though less so in its policy stances - but too late for all those countries that have suffered so much from following the IMF's prescriptions.

But while the case for trade liberalization - when properly done - is quite compelling, the way it has been pushed by the IMF has been far more problematic. The basic logic is simple: Trade liberalization is supposed to result in resources moving from inefficient protected sectors to more efficient export sectors. The problem is not only that job destruction comes before the job creation - so that unemployment and poverty result - but that the IMF's "structural adjustment programs" (designed in ways that allegedly would reassure global investors) make job creation almost impossible. For these programs are often accompanied by high interest rates that are often justified by a single-minded focus on inflation. Sometimes that concern is deserved; often, though, it is carried to an extreme. In the United States, we worry that small increases in the interest rate will discourage investment. The IMF has pushed for far higher interest rates in countries with a far less hospitable investment environment. The high interest rates mean that new jobs and enterprises are not created. What happens is that trade liberalization, rather than moving workers from low-productivity jobs to high-productivity ones, moves them from low-productivity jobs to unemployment. Rather than enhanced growth, the effect is increased poverty. To make matters even worse, the unfair trade-liberalization agenda forces poor countries to compete with highly subsidized American and European agriculture.

(next week Dr. Joseph E. Stiglitz will write on "The Governance of Globalization")