31 July 2012

Globalization and Its Discontents by Joseph Stiglitz - A Commentary


This is an old book review I did when I took a globalization history course a couple of years back. I've been reading a little more about economics, and I thought this would be a great lead-in to one of my future blog entries on economics. Anyway, happy reading :D


Globalization tends to elicit both praise and vilification from many different factions, especially since the process of integrated economic activity among the world’s people and businesses has increased exponentially over the years. While there is no doubt that globalization has brought benefits, the fact that much of the developing world continues to languish in poverty shows its failure to live up to promises of prosperity. In Globalization and its Discontents, Joseph Stiglitz acknowledges the suffering of developing nations, but does not betray his belief that globalization can be a force for good. Instead, he focuses his criticisms on how the process of globalization was implemented, and why it has scarcely benefited developing countries, mostly because of the strict policies and incompetent economics of the International Monetary Fund, the IMF.

An international organization with a current membership of 188 countries, the IMF originated in World War II at Bretton Woods in 1944 to help rebuild Europe in the aftermath of destruction, and to prevent future economic depressions (Stiglitz). It was created to ensure exchange stability, promote monetary cooperation between countries, and provide temporary assistance to financially unstable countries by lending them money. When the IMF loans money to countries, it attaches economic and financial conditions to ensure its effective use within the country, as well as guarantee prompt repayment. However, the loan often transforms into a political tool because of the kinds of conditions the IMF applies (Stiglitz), and since developing countries are often in desperate need of foreign aid, their governments capitulate. These conditions often include rapid implementation of privatization of state enterprises and liberalization, based on the arguments that these strategies increase foreign investment and that trade enhances growth, thereby reducing poverty (Stiglitz).

western products invade the east(Image Source: Europe and Globalization)

However, Stiglitz’s examination of IMF policies at work in several countries, such as Morocco and Thailand, shows that shock-therapy strategies often fail, resulting in low gross-domestic products and more poverty. For example, the IMF told the Moroccan government that they should leave the business of selling chicks in the hands of private companies. After complying with the IMF’s wishes, the hard work of teaching village women to become independent and raise chickens became obsolete; private companies failed to compensate for the government’s discontinued practice of chick distribution (Stiglitz). Stiglitz agrees that privatization and liberalization can help developing countries (Stiglitz). For instance, trade liberalization promises an increase in national income by allocating resources to more efficient and productive uses (Stiglitz). However, trade liberalization has often caused more harm than good, since international companies from the developed world often out-compete local businesses. Stiglitz’s contention is that these strategies could have prevented the economic downturns of many developing countries if they had been implemented using the right sequence and pacing.

According to Stiglitz, the governments of developing countries need to establish safety nets and frameworks that ensure the well-being of those with little political clout, such as women, children, and the destitute, before pursuing the solutions offered by the IMF. The IMF supports a free market system, but to work fairly, it requires courts that enforce property and other rights in order to prevent corruption. It also requires competition and perfect information (Stiglitz), but developing countries have limited competition when it comes to foreign businesses that have more experience wading through economic minefields, and information can often be difficult to obtain, let alone distribute. One of the criticisms about Hayekian or laissez-faire economics is that it never considers how individual and collective liberties can be infringed upon without the proper sequencing and checking agencies, but this is precisely the kind of economics the IMF pursues, and why people around the world believe that IMF policies not only undermine national sovereignty, but also benefit the affluent more than the poor.

Faced with antagonism from developing countries and an increasingly negative attitude toward the United States and the developed world, Joseph Stiglitz’s book seems to preach to the already converted. At the same time, one of the advantages of globalization is its ability to provide benchmarks by which economic, social, and political ideas are evaluated, thereby empowering those that have access to such information. In this way, pointing fingers at the IMF and agreeing wholeheartedly with Stiglitz’s assessment is easy. Considering their history, changes within their policies and mindset should be unquestionable elements in the IMF’s plans for the future. They certainly warrant many of the criticisms aimed at them, but regardless of Stiglitz’s words, a few considerations should be taken into account.

The IMF is a public institution whose money is contributed by the world’s taxpayers, but it neither reports to these people, or to the citizens whose lives are negatively affected by their policies. Instead, they hold their meetings behind closed doors and are accountable only to the ministries of finance and central banks of the world’s governments, with the United States having effective veto due to its economic power just after World War II and in the present (Stiglitz). Furthermore, the IMF is often associated with the infamous Washington Consensus, a term invented by John Williamson in 1987 to describe structural policies intended to help developing countries, but which has been subverted by critics to portray the agreement between the IMF, the World Bank and the US Treasury to open the labour markets of developing countries to exploitation by the developed countries (Stiglitz).


On one hand, at the beginning of the book, Stiglitz claims there is no conspiracy by the Washington Consensus to “take over the world” (Stiglitz), and yet, he often uses words that cast suspicion onto these institutions. For example, Stiglitz plays on the bully image when describing the IMF’s dealings with South Korea before and during the East Asia crisis of 1997, a time of major economic unrest in the Asia region. They wanted the Korean Central Bank to become independent from the government, and then focus its attention to inflation, despite the fact that the country had no problems with inflation (Stiglitz). Independent donors and the World Bank often withhold funds until the IMF approves the developing country’s economic policies (Stiglitz). This gives the IMF a lot of influence when dealing with client countries, such that even if South Korea had serious objections to IMF economic strategies, which they did (Stiglitz), any sign of dissent could cause them to lose funds provided by the IMF and other independent donors. Thus, as Stiglitz claims, “all the power [was] in their hands”, and they often used it to “impose” conditions which reduced the likelihood of client countries’ ability to repay loans, therefore trapping them in a cycle of debt to the IMF (Stiglitz).


On the other hand, while claiming that the IMF often takes an “imperialistic view of matters” (Stiglitz), Stiglitz seems to apologize for and justify some of the actions taken by the institution, declaring that the IMF’s economic policies, no matter how erroneous, were enacted with a sense of moral responsibility (Stiglitz). This is contradictory to many of his statements throughout the book, and makes the IMF appear like a martyr. The great colonial powers of the nineteenth century often went into Africa, India and Asia with this same sense of moral obligation. They wanted to lead the ‘other’ out of the darkness, which often resulted in countless deaths. During Hitler’s childhood, a major part of the European mentality was the belief that “the true compassion of the superior races consisted in helping them [“inferior races”] on the way [to extermination]” (Lindqvist); moral obligation was their justification for violence.

There is an old adage that claims “the road to hell is paved with good intentions”. It is not enough to intend good; the IMF must also do good. Stiglitz’s minor defense of the IMF is even more confusing in light of how their sense of morality did not stop them from pushing for policies the United States itself continues, such as the subsidization of the farming industry, which many criticize as a “waste of money and a violation of free market principles” (Stiglitz), or the switchover from subsistence crops to export crops that resulted in more poverty for the developing countries.

Stiglitz’s bipolar treatment of the IMF can confuse readers about where his true loyalties lie, but there is much more evidence for his condemnation of the IMF than for his understanding of the institution’s motives. Then again, the author may have his own reasons for handling the IMF in such a way. His book gives the impression that the IMF is largely responsible for the failures of globalization in the countries they intended to help. He writes so that in many cases, the IMF seemed to act alone in structural adjustment loans, when in fact, the World Bank, an organization he himself was a part of, also offered poor countries structural adjustment programs that advocated devaluation, rapid privatization and liberalization.

The World Bank is not nearly criticized enough. Either Stiglitz has selective memory and is merely cherry-picking for his audience, or his past dealings with the IMF and the US Treasury contribute to the uneven treatment. The East Asia crisis brought Stiglitz directly in conflict with the IMF, and though he made no dent in their negotiations with countries in the Asia region, he brought public attention to the issues surrounding what he believed were the IMF’s flawed solutions to the crisis. In 2000, Stiglitz left the World Bank because he believed the US Treasury and the IMF pressured the World Bank’s president, despite his belief in Stiglitz’s arguments, into silencing his criticisms (Stiglitz Autobiography). Already disheartened with the lack of democratic processes at work in his own country, Stiglitz had every right to want retribution, but at the same time, blatant diatribes against his rivals could discredit his position. This is most likely why he included a defense of IMF motives in his work, and why readers should be aware that despite this small concession, Stiglitz is very biased against the IMF.

True to his bent toward Keynesian economics, Stiglitz believes that while today, governments have a small role to play in ensuring the well-being of their people through slow transitioning into the free market system, readers should also consider the practicality of his belief that one day, a world government, accountable to the people of the world’s countries, will be capable of properly overseeing the process of globalization (Stiglitz). He is very idealistic in light of his own evidence against the IMF. Although not originally mandated in the Bretton Woods Conferences, the IMF took on the role of “governance” through its ability to influence economic, and hence, political decisions in their client countries. The IMF is an institution; a government is also an institution. Shakespeare once wrote, “What’s in a name? A rose by any other name would smell as sweet”, or in this case, an IMF by any other name would still be a governing body. Thus, Stiglitz’s call for a global government would only result in a changeover of governing elites.

A global government is also prone to the same criticisms that national governments face, mainly that it will be captured by special interests. Macroeconomic management does not guarantee that an impersonal public good will be promoted. For example, if China’s textile export out competes another country’s textile industry, a global government could be vulnerable to the protectionist strategies of special interest groups within the threatened country. The IMF itself has shown a penchant for pursuing policies that benefit the financial moguls of Wall Street.

wall street sign(Image Source: Donklephant)

While laissez-faire economics as advocated by Hayek also do not necessarily mitigate the chances of violating individual and collective rights, the question then becomes whether market knowledge can out compete government knowledge. Historical precedent shows that free market systems, left on their own, are imperfect systems. At the same time, governments can never fully regulate the economy without being able to keep up with its rapid pace, especially now in an age when most investments and financial transactions are made using the internet. New technologies also make it increasingly difficult to control the flow of capital into and out of the country. In light of these concerns, Stiglitz’s idea of a global government requires more information on how it can be implemented without succumbing to the vulnerabilities detailed by critics.

Or, instead of merely focusing on what governments can do to help make the advantages of globalization a reality for developing countries, Stiglitz could have looked at corporate social responsibility. Accusing businesses solves nothing; instead, Stiglitz should include corporations in his vision for the future and make them “part of the solution to the challenges of globalization” (UN Global Compact). If corporations implemented social responsibility into their global market relations, countries would have less reason to rely on government regulation. The United Nations Global Compact, introduced during the World Economic Forum in 31 January 1999 by Kofi Annan, is an international initiative that challenges the leaders of corporations to advance responsible corporate citizenship through public accountability and transparency (Ibid).

Stiglitz writes of social contracts between the government and its people, and how riots occur when this contract is breached. A similar contract exists between businesses and their consumers that can be harnessed to make globalization work for more people around the world. But, like Stiglitz’s idea of a world government, spouting possible solutions is easier than implementing them. The United Nations Global Compact asks corporations to embrace universal environmental and social values (Ibid), but while globalization certainly disseminates ideas and values, it does not necessarily mean they will be indoctrinated into the societies they enter. Thus, it is possible that in enacting one version of a set of “universal” social values, a set of local values can be violated. Stiglitz and the United Nations may be idealistic when they insist on global governance and an acceptance of universal values, respectively, but having hope in a truly global community is never a bad thing.

Stiglitz is against a group of doctrines that demands dogmatic belief in free market ideology, and his suggestions ring a bell for people because the current zeitgeist is to point fingers at the IMF. His book brings awareness to the hypocrisy of the IMF, which proposes solutions like the removal of subsidies and protectionist tariffs that countries in the developed countries themselves used in their climb to economic dominance. Globalization can offer many opportunities for developing nations, but in reality, it often increases disparity and inequality. For Stiglitz, globalization is driven by economics and is an inevitable and unstoppable phenomenon. The fact that it is shaped by politics could be one of the reasons why it has not lived up to its promise; economics changes faster than political mindsets, and in an age of instant policy-making and technological novelty (Rothschild), it is easy to determine the fates of people at a distance, but Stiglitz’s book shows that while this was how it was done in the past, passivity can no longer be an option.



Sources

“About the International Monetary Fund”. International Monetary Fund. 6 July 2005. http://www.imf.org/external/about.htm

“Joseph E. Stiglitz – Autobiography”. Nobelprize.org. December 2002. http://nobelprize.org/nobel_prizes/economics/laureates/2001/stiglitz-autobio.html

Lindqvist, Sven. “Exterminate All the Brutes”: One Man’s Odyssey Into the Heart of Darkness and the Origins of European Genocide. Trans. Joan Tate. New York: The New York Press, 1996.

Rothschild, Emma. “Globalization and the Return of History”. Foreign Policy. 115. 1999.

Stiglitz, Joseph. Globalization and its Discontents. W.W. Norton and Company Ltd., 2003.

“What is the Global Compact?”, United Nations Global Compact, 21 December 2006, http://www.unglobalcompact.org/AboutTheGC/index.html
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