Globalization and Its Discontents Revisited

by Joseph E. Stiglitz

  One of my predecessors as chairman of the U.S. Council of Economic Advisers once said: that which is unsustainable won’t be sustained. But while I had worried that globalization that paid so little attention to ordinary workers was unsustainable and would come under attack from protectionism, the attack came faster than I expected, with greater vigor and success, with the election of Donald Trump on an explicitly protectionist platform.

  A retreat into protectionism is the second way of responding to the challenges of globalization. This “New Protectionism”—actually, little different from old-style protectionism—entails creating a wall between Mexico and the United States to stop the migration across the border (never mind that such immigration had already plummeted),37 taxes of 45 percent against China, and the castigation of firms that shift production out of the United States.

  Trump sought to put workers in the United States and other advanced countries in conflict with workers in developing countries and emerging markets. He suggests that the low-wage workers in China, Mexico, and elsewhere are effectively “stealing” American jobs. The real conflict is elsewhere: on one side, workers and consumers—the 99 percent—in both developed and developing countries, versus corporate interests on the other.

  The prospects of New Protectionism working are no better than the first approach, doubling down on the Washington Consensus. The New Protectionist policies—the wholesale destruction of globalization that Trump and other anti-globalizers seem hell-bent on—will only lower the living standards of those who they profess to be helping. The newly discontented have every reason to be unhappy. But the snake oil that Trump and the New Protectionists elsewhere are selling will only worsen the plight of those who are already suffering. In chapter 3, I explain why this is so.

  Doubling down on the Washington Consensus was a policy inspired by the special interests that it served, but the belief in the efficacy of these policies was supported by “market fundamentalist” ideologies—the notion that free, unregulated markets were the best way to organize a society. (Ironically, by the time these ideas had become fashionable under Reagan and Thatcher, economic theory had long shown the limitations of these theories. The actual policies pushed were markedly different than one would have thought based on free-market ideology—trade agreements were not free trade agreements, but managed trade agreements, and even the bankers who believed in small government enthusiastically endorsed the trillion-dollar bank bailout.)38

  By contrast, the belief in this protectionism is not so much based on corporate interests or a realistic analysis of the future as much as a simple nostalgia for the past, a nostalgia which appeared to have enormous appeal to large numbers of voters.

  Nostalgia for a World That Will Never Return

  Some Americans—especially those who have not been doing well—look back with nostalgia at those years of American dominance after World War II, when their manufacturing jobs seemed secure, their wages were high, and they could attain a middle-class lifestyle that was beyond anything that they, their parents, or their grandparents had dreamed of when they immigrated to the United States. Now, many families struggle to make ends meet even with both parents working; then, a single breadwinner could comfortably support a family. It is this long-gone period—never to return—that Trump recalls, promising to bring it back along with the confidence and the social structures that accompanied it. That won’t happen. One can’t reverse the arrow of time.

  There are many reasons that we can’t reshape our world back into the Leave It to Beaver era of American dominance that the Make America Great Again campaign fetishized. That period after World War II was unusual in many ways. The war had brought people from all walks of life together to fight the common enemy. There was an unprecedented level of social cohesion and solidarity. It seemed wrong to exploit those who had risked their lives for the sake of the country. In the United States and many European countries, the period after the war was one of rapid growth, but with shared prosperity: every group saw their incomes grow, but those at the bottom saw their incomes grow faster than those at the top.

  Trump promises to bring manufacturing back. This is one among many promises that will be broken. At the end of the war we were completing the transition from agriculture to manufacturing. In the nineteenth century, some 70 percent of workers were in agriculture. Now, in the United States, for instance, less than 3 percent of the workforce grows more food than even an obese society can consume. Now, the advanced countries are in the process of completing the transition from manufacturing to a service-based economy. Of course, just as agriculture still plays a role in our economy, manufacturing will continue to have a part. But it won’t employ as many people as it once did—those jobs aren’t coming back any more than will the farm jobs that were erased a hundred-odd years ago.

  The period after World War II had other distinctive characteristics, especially in the United States. High-paying manufacturing jobs went disproportionately to white males, and put them at the top of a social pyramid among workers, almost always above women and people of color. This was true even though it was nearly a century since the emancipation of slaves and a quarter of a century since women got the right to vote. Civil rights laws reflected and propelled civil society movements attempting to reduce the scope of this kind of discrimination,39 sometimes with explicit affirmative action programs, sometimes with just greater sensitivity to implicit biases. Once discrimination was reduced, in many arenas—including college graduation, with the access to further advancement that followed—women did better than men. Large numbers of men, who in the old order would have been the “alpha males”—often by dint of unearned social advantage—found themselves being surpassed. To them, it was as if they were climbing the ladder of life in the way that they had come to expect, and suddenly, someone was given the green light to pass them up.

  Several studies have suggested that a longing for those “good old days”40—good in the eyes of the privileged if not in the view of those who were oppressed—has played a role in the discontent of the white males. No wonder their call to take the country back, and becoming drawn to politicians promising to bring back that old order—a promise which they will not be able to fulfill.

  The Third Approach: Fair Globalization with Shared Prosperity

  If going back to the past—to old protectionism in a new guise—won’t work; if doubling down on the Washington Consensus won’t work; what will? The third approach has two parts: (a) managing the consequences of globalization within each country to ensure that fewer lose as a result, and (b) rewriting the rules of globalization in ways that are fairer to developing countries and less dominated by the corporate and financial interests.

  Making Globalization Work for Each Country through Inclusive Globalization

  GAID strongly criticizes globalization as it has evolved, but its critique begins from exactly the opposite perspective of Trump. As I noted, he is under the delusion that our trade negotiators were snookered. The reality is that, for anyone looking at globalization from the perspective of global social justice, it is the poor countries and ordinary workers that got the short end of the stick. The great achievement of the emerging markets was that even with this “unfair” globalization, they managed to make globalization work for them and for much of their populations. That’s why a global middle class has emerged—in China, in India, and even in some African countries.41 For those concerned with the long-term stability of these parts of the world, nothing could be better news. The global economy is not a zero-sum game, with their gains coming at the expense of the United States or Europe. Rather, if others prosper, demand for the goods and services of the advanced countries overall can increase, and so too their GDP.

  But there were losers: workers in developed countries, especially those with fewer skills, and the poorest in the poor countries who are near-subsistence farmers whose cash crops, like cotton, have depressed prices because of U.S. subsidies, further impoverishing millions in S
ub-Saharan Africa and India. These farmers suffered too in another way from the actions of the United States, Europe, and China: massive pollution (greenhouse gas emissions) from the developed countries has contributed to desertification in Africa and India, further lowering their incomes.

  There are other ways that globalization has not worked well at the global level. The world has been marked by repeated crises since the beginning of the era of liberalization—the worse being that of 2008. A failure of American regulators combined with excessive greed and a total absence of moral standards by America’s financial system42 brought the entire globe into crisis. Since the crisis, the world has struggled to impose a set of rules on the financial sector that would prevent another such crisis. Matters are better today than they were in 2008, but few think that the problem has been “fixed.”

  Domestic Policies for Marking Globalization Work for All

  As most countries, and especially smaller ones, begin thinking about globalization’s impacts, they don’t begin with the grandiose question of how they can change the global rules. They begin with the more modest question: how should they design their economic policies, given the rules of the game and the particular economic situation in which they find themselves.

  Advanced countries have to adopt two core sets of policies: an overall economic framework that allows for a modicum of shared prosperity, and social protection for those hurt by globalization because no matter how well our economic system functions, some will be left behind. Those who fall off the ladder of success shouldn’t go into an economic abyss. What is required is a progressive agenda, one that recognizes the respective roles that the market, the state, and civil society must play; that recognizes that markets often don’t work well, and even when they are efficient, the distribution of income which they result in is often socially unacceptable; an agenda that realizes that markets don’t exist in a vacuum, and have to be structured.

  Over the past third of a century, there have been marked changes in the “rules of the game.” Earlier, I described the Washington Consensus policies. They had their counterpart within most of the advanced countries. The notion was that by freeing up markets—stripping away the regulations that constrained the economy—and incentivizing individuals and firms, through lower tax rates, the power of markets would be unleashed. Economies would grow, and even if those at the top got a larger share of the pie, everyone, even those at the bottom, would prosper. Better to have a smaller share of a much bigger pie than a larger share of a small pie. The results of this experiment, tried in countries around the world, are now in: it has been a dismal failure. Inequality grew even more than expected, but growth slowed, with the result that in countries such as the United States, the vast majority have seen incomes virtually stagnate. The new rules led to excessive financialization and short-termism, with corporate executives focusing on quarterly returns, and on their own compensation, rather than on the long-term well-being of the companies that were entrusted to their care. The rules of the game now have to be rewritten, once again, for the twenty-first century.

  We’ve learned a lot from the failed experiment of the past third of a century: about the need to curb abuses of corporate governance (the ability of CEOs to get a larger and larger share of corporate income), of the financial sector (including the predatory lending, market manipulation, and abusive credit card practices that became so evident in the 2008 crisis), and of market power generally. Workers’ productivity has grown, but workers’ compensation has not kept pace, partly because of the weakening of workers’ bargaining power, and that’s partly because of changes in labor legislation, but also partly because of globalization. The world has changed—there are no longer lifetime jobs. But systems of social protection have not kept pace.

  Most importantly for purposes of this book, the laws governing globalization need to be rewritten—but not in the protectionist ways advocated by Le Pen and Trump. Here, for insights, I turn to Scandinavia. These countries were too small to dictate the rules of globalization, as Trump wrongly believes he can do. To manage globalization, they had to turn inward, designing policies based on principles of openness with inclusive growth—ensuring that the benefits of globalization are sufficiently shared so that no one, or at least no significant group, is left behind.43

  The failures and promises of globalization over the past third of a century have one more implication: politicians won’t be able just to promise to help those left behind, to provide them with a safety net, perhaps a little job training here or there. Workers who see globalization as threatening their future want more than a bare safety net, something to hold on to when they are drowning. And even such threadbare promises no longer seem credible. What is required is real commitment; many will be reassured only if there is an economic and social system that works for all—and works whether they lose their job as a result of trade or an advance of technology or a change in the structure of the economy.

  In chapter 4, I sketch the outlines of this alternative globalization as seen from the perspective of an advanced country like the United States.

  Structure of the Book

  Globalization and Its Discontents Revisited consists of three parts. In the first, I describe “Globalization’s New Discontents,” those in the advanced countries who have joined those in the developing world in their antipathy to globalization. I explain in detail why the benefits of globalization have been less than its advocates claimed and why so many have been made worse off by globalization—why there is so much anger toward globalization. I then explain why the new protectionism of Trump will only make matters worse, and describe the alternative policies that will deliver the promise of a globalization that will benefit all.

  In the second part, the original text is reprinted, largely unchanged. The original book focused, as I have noted, on the discontents in the developing world. To understand where globalization is today, one has to understand how we got here—and to a large extent GAID, written at this early crucial stage of the evolution of globalization when there was such optimism about it, helps us understand globalization as it is today.44

  The final section, the afterword, picks up where GAID ends: it describes the evolution of the battles over globalization over the subsequent fifteen years, and how the global landscape looks so different today than it did then. When GAID was first published, there were many battlefields in which the struggle over globalization was going on. There is a natural curiosity: How did these play out? Who, in the long run, won? Who lost? This afterword answers this question and looks toward the New Globalization that may emerge in the post-Trump world.

  ACKNOWLEDGMENTS TO GLOBALIZATION AND ITS DISCONTENTS REVISITED

  THE ACKNOWLEDGMENTS TO Globalization and Its Discontents described the many people who helped shape my thinking on globalization at the time. Over the past fifteen years, I have continued to be engaged in the great globalization debates that have emerged. I have learned much from the participants in those discussions, including the political leaders who drew me into them, and there is now an even longer list of debts.

  In 2009, in response to the financial crisis confronting the world, the president of the United Nations General Assembly, Father Miguel d’Escoto Brockmann, asked me to chair an international Commission of Experts on Reforms of the International Monetary and Financial System, to review the causes of the global crisis, what might be done to contain it, and what should be done to prevent a recurrence. That commission provided a unique opportunity to understand especially the workings of financial globalization, and some of these insights are reflected in the discussions in this book.1 I am deeply indebted to the commissioners and to all of those who helped with the work of the commission.

  The global financial crisis (sometimes called the North Atlantic crisis, since it was mainly a crisis in the United States and Europe) spurred many other efforts at rethinking globalization, along with other aspects of our capitalist system. Globalization had led to the rapid transmi
ssion of the consequences of America’s failures to manage its financial system to the rest of the world. Among the most important responses was the creation of the Institute of New Economic Thinking (INET), where I headed a task force focusing on financial contagion. I would like to acknowledge not just their financial support in bringing together economists to discuss these issues, but also the intellectual support, including from Rob Johnson (who has headed INET from its inception), George Soros, Andy Haldane (chief economist and the executive director of monetary analysis and statistics at the Bank of England), Stefano Battiston (University of Zurich),2 Mauro Gallegati (at the Polytechnic University of Marche, Ancona), Domenico Delli Gatti (at Catholic University, Milan), Tarik Roukny (at the MIT Media Lab), and Anton Korinek (at Johns Hopkins University).

  A third effort was undertaken by the Initiative for Policy Dialogue (IPD), a small think tank I set up after I returned to academia from the World Bank to encourage a rethinking of development strategies and globalization, and to translate some of the insights into changes in policy, bringing together academic and policy economists from both the developed and developing countries. I am particularly indebted to Stephany Griffith-Jones (financial markets program director for IPD) and José Antonio Ocampo (formerly under-secretary-general for economic and social affairs at the United Nations, now on leave from Columbia University, and on the Board of Directors of the Central Bank of Colombia), who coedited with me the proceedings of our conference, Time for a Visible Hand: Lessons from the 2008 World Financial Crisis.3

  Not surprisingly, dissatisfaction with and angst about globalization have given rise to numerous other commissions attempting to understand and reform it. In the early years of this century, the International Labor Organization (ILO) under Juan Somavía created the World Commission on the Social Dimension of Globalization. Membership in that unusual commission, which brought together people from government, business, labor, and civil society from both developed and developing countries, furthered my understandings of the multiplicity of perspectives on globalization.4