The Governance of Globalization

The Governance of Globalization

By Dr.Joseph E.Stiglitz

The Ethiopian Reporter 03/30/02

As the market economy has matured within countries, there has been increasing recognition of the importance of having rules to govern it. One hundred fifty years ago, in many parts of the world, there was a domestic process that was in some ways analogous to globalization. In the United States, government promoted the formation of the national economy, the building of the railroads, and the development of the telegraph-all of which reduced transportation and communication costs within the United States. As that process occurred, the democratically elected national government provided oversight: supervising and regulating, balancing interests, tempering crises, and limiting adverse consequences of this very large change in economic structure. So, for instance, in 1863 the U.S. government established the first financial-banking regulatory authority-the Office of the Comptroller of Currency-because it was important to have strong national banks, and that requires strong regulation.

The United States, among the least statist of the industrial democracies, adopted other policies. Agriculture, the central industry of the United States in the mid-nineteenth century, was supported by the 1862 Morrill Act, which established research, extension, and teaching programs. That system worked extremely well and is widely credited with playing a central role in the enormous increases in agricultural productivity over the last century and a half. We established an industrial policy for other fledgling industries, including radio and civil aviation. The beginning of the telecommunications industry, with the first telegraph line between Baltimore and Washington, D.C., was funded by the federal government. And it is a tradition that has continued, with the U.S. government's founding of the Internet.

By contrast, in the current process of globalization we have a system of what I call global governance without global government. International institutions like the World Trade Organization, the IMF, the World Bank, and others provide an ad hoc system of global governance, but it is a far cry from global government and lacks democratic accountability. Although it is perhaps better than not having any system of global governance, the system is structured not to serve general interests or assure equitable results. This not only raises issues of whether broader values are given short shrift; it does not even promote growth as much as an alternative might.

Governance through Ideology

Consider the contrast between how economic decisions are made inside the United States and how they are made in the international economic institutions. In this country, economic decisions within the administration are undertaken largely by the National Economic Council, which includes the secretary of labor, the secretary of commerce, the chairman of the Council of Economic Advisers, the treasury secretary, the assistant attorney general for antitrust, and the U.S. trade representative. The Treasury is only one vote and often gets voted down. All of these officials, of course, are part of an administration that must face Congress and the democratic electorate. But in the international arena, only the voices of the financial community are heard. The IMF reports to the ministers of finance and the governors of the central banks, and one of the important items on its agenda is to make these central banks more independent-and less democratically accountable. It might make little difference if the IMF dealt only with matters of concern to the financial community, such as the clearance of checks; but in fact, its policies affect every aspect of life. It forces countries to have tight monetary and fiscal policies: It evaluates the trade-off between inflation and unemployment, and in that trade-off it always puts far more weight on inflation than on jobs.

The problem with having the rules of the game dictated by the IMF-and thus by the financial community-is not just a question of values (though that is important) but also a question of ideology. The financial community's view of the world predominates-even when there is little evidence in its support. Indeed, beliefs on key issues are held so strongly that theoretical and empirical support of the positions is viewed as hardly necessary.

Recall again the IMF's position on liberalizing capital markets. As noted, the IMF pushed a set of policies that exposed countries to serious risk. One might have thought, given the evidence of the costs, that the IMF could offer plenty of evidence that the policies also did some good. In fact, there was no such evidence; the evidence that was available suggested that there was little if any positive effect on growth. Ideology enabled IMF officials not only to ignore the absence of benefits but also to overlook the evidence of the huge costs imposed on countries.

An Unfair Trade Agenda

The trade-liberalization agenda has been set by the North, or more accurately, by special interests in the North. Consequently, a disproportionate part of the gains has accrued to the advanced industrial countries, and in some cases the less-developed countries have actually been worse off. After the last round of trade negotiations, the Uruguay Round that ended in 1994, the World Bank calculated the gains and losses to each of the regions of the world. The United States and Europe gained enormously. But sub-Saharan Africa, the poorest region of the world, lost by about 2 percent because of terms-of-trade effects: The trade negotiations opened their markets to manufactured goods produced by the industrialized countries but did not open up the markets of Europe and the United States to the agricultural goods in which poor countries often have a comparative advantage. Nor did the trade agreements eliminate the subsidies to agriculture that make it so hard for the developing countries to compete.

The U.S. negotiations with China over its membership in the WTO displayed a double standard bordering on the surreal. The U.S. trade representative, the chief negotiator for the United States, began by insisting that China was a developed country. Under WTO rules, developing countries are allowed longer transition periods in which state subsidies and other departures from the WTO strictures are permitted. China certainly wishes it were a developed country, with Western-style per capita incomes. And since China has a lot of "capitas," it's possible to multiply a huge number of people by very small average incomes and conclude that the People's Republic is a big economy. But China is not only a developing economy; it is a low-income developing country. Yet the United States insisted that China be treated like a developed country! China went along with the fiction; the negotiations dragged on so long that China got some extra time to adjust. But the true hypocrisy was shown when U.S. negotiators asked, in effect, for developing-country status for the United States to get extra time to shelter the American textile industry.

Trade negotiations in the service industries also illustrate the unlevel nature of the playing field. Which service industries did the United States say were very important? Financial services-industries in which Wall Street has a comparative advantage. Construction industries and maritime services were not on the agenda, because the developing countries would have a comparative advantage in these sectors.

Consider also intellectual-property rights, which are important if innovators are to have incentives to innovate (though many of the corporate advocates of intellectual property exaggerate its importance and fail to note that much of the most important research, as in basic science and mathematics, is not patentable). Intellectual-property rights, such as patents and trademarks, need to balance the interests of producers with those of users-not only users in developing countries, but researchers in developed countries. If we underprice the profitability of innovation to the inventor, we deter invention. If we overprice its cost to the research community and the end user, we retard its diffusion and beneficial effects on living standards.

In the final stages of the Uruguay negotiations, both the White House Office of Science and Technology Policy and the Council of Economic Advisers worried that we had not got the balance right-that the agreement put producers' interests over users'. We worried that, with this imbalance, the rate of progress and innovation might actually be impeded. After all, knowledge is the most important input into research, and overly strong intellectual-property rights can, in effect, increase the price of this input. We were also concerned about the consequences of denying lifesaving medicines to the poor. This issue subsequently gained international attention in the context of the provision of AIDS medicines in South Africa [see "Medicine as a Luxury" by Merrill Goozner, on page A7]. The international outrage forced the drug companies to back down-and it appears that, going forward, the most adverse consequences will be circumscribed. But it is worth noting that initially, even the Democratic U.S. administration supported the pharmaceutical companies.

What we were not fully aware of was another danger-what has come to be called "biopiracy," which involves international drug companies patenting traditional medicines. Not only do they seek to make money from "resources" and knowledge that rightfully belong to the developing countries, but in doing so they squelch domestic firms who long provided these traditional medicines. While it is not clear whether these patents would hold up in court if they were effectively challenged, it is clear that the less-developed countries may not have the legal and financial resources required to mount such a challenge. The issue has become the source of enormous emotional, and potentially economic, concern throughout the developing world. This fall, while I was in Ecuador visiting a village in the high Andes, the Indian mayor railed against how globalization had led to biopiracy.

Globalization and September 11

September 11 brought home a still darker side of globalization-it provided a global arena for terrorists. But the ensuing events and discussions highlighted broader aspects of the globalization debate. It made clear how untenable American unilateralist positions were. President Bush, who had unilaterally rejected the international agreement to address one of the long-term global risks perceived by countries around the world-global warming, in which the United States is the largest culprit-called for a global alliance against terrorism. The administration realized that success would require concerted action by all.

One of the ways to fight terrorists, Washington soon discovered, was to cut off their sources of funding. Ever since the East Asian crisis, global attention had focused on the secretive offshore banking centers. Discussions following that crisis focused on the importance of good information-transparency, or openness--but this was intended for the developing countries. As international discussions turned to the lack of transparency shown by the IMF and the offshore banking centers, the U.S. Treasury changed its tune. It is not because these secretive banking havens provide better services than those provided by banks in New York or London that billions have been put there; the secrecy serves a variety of nefarious purposes-including avoiding taxation and money laundering. These institutions could be shut down overnight--or forced to comply with international norms--if the United States and the other leading countries wanted. They continue to exist because they serve the interests of the financial community and the wealthy. Their continuing existence is no accident. Indeed, the OECD drafted an agreement to limit their scope-and before September 11, the Bush administration unilaterally walked away from this agreement too. How foolish this looks now in retrospect! Had it been embraced, we would have been further along the road to controlling the flow of money into the hands of the terrorists.

There is one more aspect to the aftermath of September 11 worth noting here. The United States was already in recession, but the attack made matters worse. It used to be said that when the United States sneezed, Mexico caught a cold. With globalization, when the United States sneezes, much of the rest of the world risks catching pneumonia. And the United States now has a bad case of the flu. With globalization, mismanaged macroeconomic policy in the United States-the failure to design an effective stimulus package--has global consequences. But around the world, anger at the traditional IMF policies is growing. The developing countries are saying to the industrialized nations: "When you face a slowdown, you follow the precepts that we are all taught in our economic courses: You adopt expansionary monetary and fiscal policies. But when we face a slowdown, you insist on contractionary policies. For you, deficits are okay; for us, they are impermissible-even if we can raise the funds through 'selling forward,' say, some natural resources." A heightened sense of inequity prevails, partly because the consequences of maintaining contractionary policies are so great.

Global Social Justice

Today, in much of the developing world, globalization is being questioned. For instance, in Latin America, after a short burst of growth in the early 1990s, stagnation and recession have set in. The growth was not sustained-some might say, was not sustainable. Indeed, at this juncture, the growth record of the so-called post-reform era looks no better, and in some countries much worse, than in the widely criticized import-substitution period of the 1950s and 1960s when Latin countries tried to industrialize by discouraging imports. Indeed, reform critics point out that the burst of growth in the early 1990s was little more than a "catch-up" that did not even make up for the lost decade of the 1980s.

Throughout the region, people are asking: "Has reform failed or has globalization failed?" The distinction is perhaps artificial, for globalization was at the center of the reforms. Even in those countries that have managed to grow, such as Mexico, the benefits have accrued largely to the upper 30 percent and have been even more concentrated in the top 10 percent. Those at the bottom have gained little; many are even worse off. The reforms have exposed countries to greater risk, and the risks have been borne disproportionately by those least able to cope with them. Just as in many countries where the pacing and sequencing of reforms has resulted in job destruction outmatching job creation, so too has the exposure to risk outmatched the ability to create institutions for coping with risk, including effective safety nets.

In this bleak landscape, there are some positive signs. Those in the North have become more aware of the inequities of the global economic architecture. The agreement at Doha to hold a new round of trade negotiations-the "Development Round"-promises to rectify some of the imbalances of the past. There has been a marked change in the rhetoric of the international economic institutions-at least they talk about poverty. At the World Bank, there have been some real reforms; there has been some progress in translating the rhetoric into reality-in ensuring that the voices of the poor are heard and the concerns of the developing countries are listened to. But elsewhere, there is often a gap between the rhetoric and the reality. Serious reforms in governance, in who makes decisions and how they are made, are not on the table. If one of the problems at the IMF has been that the ideology, interests, and perspectives of the financial community in the advanced industrialized countries have been given disproportionate weight (in matters whose effects go well beyond finance), then the prospects for success in the current discussions of reform, in which the same parties continue to predominate, are bleak. They are more likely to result in slight changes in the shape of the table, not changes in who is at the table or what is on the agenda.

September 11 has resulted in a global alliance against terrorism. What we now need is not just an alliance against evil, but an alliance for something positive-a global alliance for reducing poverty and for creating a better environment, an alliance for creating a global society with more social justice.