Globalization Economy Financial
Globalization and Its Discontents was a book written in 2002 by Joseph Stiglitz who has a number of credits to his name. Not only is he one of his generation's finest academic economists (became a Nobel Laureate in 2001), he also became one of its premier practicing public economists through his tenure as chairman of the President's Council of Economic Advisers under Clinton, and latterly as chief economist at the World Bank. It was the frustrations of his time at the Bank that led him to write this book, distilling his experiences in public policy into a general critique of the "Washington Consensus" that shapes the international economic agenda. This book can be thought of as two books in one: a general essay on what has prevented the developing world from catching up with the economic leaders, and an expose of the institutional structures of the international politico-economic system and the failure of globalization.
Stiglitz is not against the broader goals of globalization but deplores its less appealing aspects. He acknowledges the significant advantages globalization has led to in integrating the world economy and, above all, in reducing the isolation of developing countries from the world economy. Although trade liberalization has brought tangible benefits, in Stiglitz's view, it has also caused economic havoc, due largely to the absence of safety net for the poor. He abhors the hypocritical attitude of rich countries when they force the developing countries to liberalize trade, but keep intact their own formidable barriers and subsidies, particularly on agricultural trade. His criticism is particularly incisive when it comes to the quality of governance in the major institutional institutions that have shaped globalization agenda.
He criticizes other specific policies such as fiscal austerity, high interest rates and insistence on the privatization of state assets. In response, Stiglitz calls for greater transparency and better governance of international financial institutions, as well as proper economic "sequencing." Despite his populist tendencies, Stiglitz presents an insightful and unsettling account of the inner workings of global financial institutions, ultimately reaffirming that there is no simple formula on how to make globalization work.
Critical Analysis:
Of all the institutions involved in globalization, Stiglitz focuses excessively on the International Monetary Fund (IMF) for the major part of his criticism, since this institution has single-handedly played a monumental part in developing countries and in emergent economies, such as Russia. Stiglitz believes that the misguided policies of IMF have caused instability and disastrous consequences wherever it has intervened. For instance, its policies in East Asia worsened matters because it pursued unsuitable demand management policies in the wake of financial crisis there. These policies failed not because of lack of commitment but rather because their very foundation was one of flawed economic analysis.
Stiglitz provides numerous examples of these faulty policies from Africa, Latin America, Russia and most recently, East Asia. Since the original purpose of the IMF was to provide liquidity for short-term stabilization, the core focus of its policies would have to be the developing countries. Russia after the fall of the Berlin Wall and East Asia in the aftermath of the 1989 financial crisis, became part of that focus. In all these cases, policy failures can be attributed to the IMF pursuit of the supremacy of the 'market' in the name of 'Washington Consensus'. The negativity regarding IMF policies, specially the way in which 'conditionality' was applied, is not new. What Stiglitz draws attention to is the insight that shortcomings in the perception and analysis of the problem led to the design of inappropriate policies. In most cases, Stiglitz offers his own parallel analysis on the basis of sound economic reasoning and always aligns it with human concerns.
The failures of IMF in the developing world have been the subject of much controversy, especially among economists and policy makers in those countries. But the recent policy failures in Russia and East Asia are no less glaring, and for much of the same reasons. Stiglitz's account of the crisis in Russia and East Asia are particularly illuminating. His detailed description of policy failures in these regions is in itself not surprising, given IMF's narrow conceptual framework and its never-hidden concern for the financial health of the lending banks. However, what is surprising are the serious gaps in its analysis of economic phenomena, even in countries where it has been a familiar presence for a long time. These analytical lapses are not a one-off occurrence. Rather, they are of a pervasive nature: for e.g., a total disregard of the institutional infrastructure (as in Russia); insistence on trade liberalization before safety nets are in place (as in Africa); tight monetary policies regardless of circumstance (as in East Asia); privatizing a monopoly before an effective competition or a credible regulatory agency was in place (as in Russia). In Russia, the IMF insisted on maintaining an overvalued currency and supported it with massive inflows of official aid. This latter transfusion of cash led to 'rent-seeking' on an unprecedented scale which ultimately bankrupted the country (Hass & Litan, 1998).
Its support of 'shock therapy' in Russia was particularly naïve, when it is very commonly known that China and Taiwan managed a successful transition through proper 'sequencing' of policies. These and many other lapses on the part of highly-paid professional IMF staff raise alarming questions. Stiglitz is harshly critical of IMF's sponsorship of capital market liberalization, and rightly so, when it should have been clear that much of the developing world did not possess the required preconditions for such large-scale liberalization. In developing and transition economies, where banking supervision is rudimentary, capital market liberalization is a high-risk proposition. Those risks were not unknown to policy makers in those countries as well as to other knowledgeable economists. Still the IMF advocated this policy probably because the financial institutions wanted it to and exerted pressure.
However, all the above withstanding, it seems Stiglitz is too rigid in his views, almost as if he is out to settle a personal score with the IMF. He blames the East Asian financial crisis almost entirely on one factor: capital account liberalization. He blames liberalization pushed by the IMF for allowing short-term "hot money" to flee vulnerable countries at the first sign of trouble. He praises Malaysia for spurring IMF advice during the 1997-98 crisis by imposing capital controls to stem the flight of short-term flows. As a result, "Malaysia's downturn was shorter and shallower than that of any of the other countries," but he provides no evidence to back his claim. A few pages later, he cites GDP figures that show the steep fall in output in Indonesia, Thailand, and South Korea in 1998, but oddly, Malaysia is not on this list. According to Griswold (2003), Malaysia's GDP actually fell further than Korea's that year - contracting 7.3 percent vs. 6.7 percent - and recovered less rapidly in 1999 and 2000 even though Korea did not resort to the capital controls Stiglitz is an advocate of. He also does not mention the crucial fact of how certain East Asian countries weathered the storm without resorting to capital controls. Hong Kong did not fare worse than Malaysia, and Singapore, and all of developing Asia (with the exception of Thailand and Indonesia) performed far better. Hence, Malaysia's employment of capital controls did not set it apart from the pack.
Suggested Reforms:
Nevertheless, Stiglitz insider critique is definitely an enlightening one and he does raise some valid points about how the IMF has essentially failed in its mission, fifty years after it was formed. Ultimately, however, the IMF cannot be expected to solve all the problems of the developing countries. The AIDS pandemic, for example, requires a response from the industrial economies. Agricultural support policies and trade barriers in the United States and the European Union restrict the potential of developing economies to use agricultural exports to grow. Corruption and strife within nations reduce the effectiveness of structural policies as well as sabotaging aid. The IMF, like any public institution, should be put under public scrutiny and, when deserved, criticized. It is possible to reform this and other international economic institutions, even though this might take some time to happen. These institutions should not be abandoned, rather, they should be restructured in a way so that their policies represent and reflect the interests of the developing countries and the world's poor. A mobilized global society is needed to exert pressure on these institutions to reform their governance structures and change the ideological orientation of their representatives. Change, when needed, will come not from bashing these institutions but from fresh ideas and policies that promise new solutions to persistent problems.
References
Hass, Richard & Litan, Robert. Globalization and Its Discontents: Navigating the Dangers of a Tangled World. Foreign Affairs May/June 1998: 2-6.
Pike, R. Book Review: Globalization and Its Discontents. Canadian Journal of Sociology 321-324.
Stiglitz, Joseph. Globalization and its Discontents. New York: W. W. Norton and Co., 2002,
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