Globalization and Its Discontents Revisited

by Joseph E. Stiglitz

  3. Grow more through internal demand. All cross-border trade represents a risk, because borders matter. Thus, countries should bias their economies toward internal demand. We saw earlier that markets don’t correctly price “border risk.” This bias can be thought of as just offsetting this market failure. One element of growing internal demand is improving the distribution of income—when income is skewed toward the top, internal demand will be weak.

  There will be high costs to moving from a world striving to reduce the impact of borders—working to facilitate the easier movement of goods, services, and capital across countries—to a world where borders matter and new walls are being constructed. There will be a cost to the inward-looking policies described above. But because in this new world borders can matter, there are grave risks confronting any country that does not take this into account and becomes excessively dependent on others.

  Economists had long castigated countries that sought energy or food security—attempting to rely on their own supplies for these vital items was costly and wasteful. But in a world where borders matter, countries that followed that advice, allowing themselves to become dependent on others for food or energy, may rethink their policies.

  It is thus likely that the world will be localizing in response to Trump. But for the world as a whole, deglobalization will be very costly, and it will be a kind of deglobalization from which the United States itself will not benefit.

  CONCLUDING REMARKS

  Chapters 1 and 2 explained that those in the advanced countries have many legitimate grievances against globalization. But I argued that the central problem with globalization was that it reflected an agenda driven by multinational corporations. One shouldn’t have expected that a “reform” agenda coming from an administration dominated by plutocrats, where the most responsible individuals with the greatest understanding of globalization come from the multinational corporations, and especially its financial institutions, would devise a reform of globalization that would work for ordinary individuals. And they haven’t.

  America is one of the few countries which, on its own, can try to change the rules of the game. I have explained why protectionism won’t work for the United States. Other countries which go down the protectionist route on their own are likely to fare even worse.

  But there are alternative ways of reforming globalization which hold out the promise of improving the lot of all, or at least most, citizens. The next chapter lays out what this kind of globalization might look like.

  Chapter 4

  Can Globalization Be Saved?

  An Agenda for Equitable Globalization with Shared Prosperity

  CAN GLOBALIZATION BE “saved”? Can it be managed in ways which redound to the benefit of most citizens in both the developing and the advanced countries?

  The question itself is not well stated: there is no way that we can be fully “unglobalized”; no way that we can be just reliant on what we produce within our own countries. Just as it is inconceivable that any of us individually could be completely reliant on ourselves.

  When we ask “What is the future of globalization?” what we are really asking is: What will be the rules governing globalization? Will it be the kind of unfettered trade toward which we seemed to be moving over the past quarter century, or a more regulated system? And who will make the regulations, and on whose behalf?

  In the early days of capitalism, we saw the ugly face of unfettered markets, portrayed for instance in the novels of Charles Dickens and chronicled in the writings of the global muckrakers, like Upton Sinclair. Gradually, we learned how to “temper” the market economy, without going to the extremes of the Soviet Union. Around the world, this became “bipartisan.” Under Richard Nixon, for instance, America passed strong environmental laws. Sometimes, it took a Great Recession or a Great Depression to curb the worst abuses, such as those of the financial sector (the passage of the Glass-Steagall Act, separating investment and commercial banking, in 1933, and of the Dodd-Frank Financial Reform Act in 2010). We painfully came to recognize that businesses could increase their profits by exploiting others—rather than through inventing better products or providing better services to their customers. As a response, we passed antitrust laws and consumer protection legislation.1

  To me, it seems clear: now we need to learn how to temper globalization. The era of idolization of globalization, where every president and prime minister sees as one of his great achievements signing a new free trade agreement with one or more of his country’s partners, allowing for the ever-freer flow of goods and services, is over. I think we can temper globalization, but it won’t be done if we begin with a Panglossian view that markets, always and everywhere, are efficient, and even less so if we think that the distribution of income that emerges out of market processes is necessarily socially acceptable. And it won’t happen if we have the kind of globalization we’ve had—not really based on free-market principles, but rather managed for the well-being of large corporations and the finance industry of the advanced countries. And it won’t happen if we pretend that households and firms can instantaneously adjust on their own to a change in regimes—such as resulted when we admitted China into the global trading system.

  Globalization is not an end in itself, but, possibly, if it’s made to work right, a means to an end—higher living standards for all, with the benefits of globalization equitably shared. Too often, the advocates of globalization confuse ends and means. They continue to glorify globalization, even when it appears to harm a majority of the citizenry, or at least a large portion of it.

  The Underlying Problem: Global Governance

  At the global level, the reason globalization has not worked out well—whether it’s creating a stable global financial system or a global trading regime that’s fair to the poorest countries—has to do with governance, how the rules of the game are set and enforced. We live in a world in which countries are heavily interdependent. When the U.S. Federal Reserve lowers its interest rate, it can cause money to rush into emerging markets, setting off asset price bubbles; and when it then raises its interest rates, it can cause those bubbles to break. Yet there is no way to encourage one country to do things that might benefit others, or to adequately prevent one country—especially a large country like the United States—from harming others. It is not fully the law of the jungle, where might makes right, but neither is it a world marked by fairness or social justice. The poor countries, and the poor within each country, have only limited power to affect globalization. The poorer the country, the less its influence. Thus, in spite of our interdependence, there is no global government to ensure fair and efficient outcomes. Sometimes we work together as a global community, as when we dealt with the hole in the ozone layer. Often we don’t. We have a system of global governance without global government.

  A central message of GAID is that the way the rules of the globalization game are set has enormous distributive consequences, both between and within countries. Globalization has in part been a vehicle for the rich to get richer at the expense of the poor. Finance ministers and central bank governors make the key decisions concerning the global financial architecture; and when they do, they are typically thinking more of multinational enterprises, the firms in the financial sector, the banks and the hedge funds, than they are of the workers and other citizens that are affected by the policies. The siloed structure of international governance exacerbates the problem—finance ministers and central bank officials meet with each other, but seldom with the labor ministers who deal with the labor market consequences of financial sector instability. And of course, making matters worse is the fact that developed countries have disproportionate influence in the bodies in which the rules are made, such as the IMF.

  It is not economics that is stopping us from achieving win-win globalization, from rewriting the rule of the global economy—we largely know what to do—but politics, and the shortsightedness on the part of some of the national politicians, and the corpora
te and financial elites with whom they work. This is perhaps not a surprise: the big critique of our corporate and financial sector is that in every sphere they are shortsighted, unable to make the long-term investments that would enhance long-term growth; and with politicians on two- or four-year election cycles, we can’t expect much long-term thinking from them.

  The world is changing rapidly, as I have already noted. The five BRICS countries (Brazil, Russia, India, China, and South Africa) alone are now larger than were all the advanced countries at the end of World War II. So the United States can’t dominate anymore. Nor does announcing that one is pursuing a policy of “America First,” making all other interests and all principles secondary, help much in persuading others to follow American leadership.

  If, as Trump seems to be proposing, the United States disengages from the global economy unless the rest of the world agrees to its terms, others will step forward to fill the gap, and there will be a New Globalization, one that the United States will have an even smaller role in shaping.

  An Alternative Globalization Is Possible

  As this book goes to press, we face a new world. The United States worked hard for more than three-quarters of a century to create a global economic and political order—a rules-based system, an order with the United States at the center. Goods, services, and capital now move more easily across borders. No one had any doubts that America was putting its interests first, but it was a relatively enlightened self-interest, which took into account the benefits that the United States itself would receive from the peace, growth, and stability it engendered. The United States’ leadership was only possible because other countries recognized America’s pursuit of its enlightened self-interest. It was a world of multilateralism—where there was an attempt to understand and improve the workings of the system as a whole.

  Unfortunately, while the United States pursued an enlightened self-interest, it was not as enlightened as it should have been. It was not entirely selfish, but neither was it fully altruistic. The United States used its leadership to create a globalization that advanced corporate and financial interests in America and other rich countries; the interests of workers, consumers, and those in emerging markets and developing countries were only of secondary concern. The (admittedly questionable) assumption was that if the rich countries’ corporate interests were well served, all would benefit.

  An alternative world is possible, not that of the New Protectionism being pushed by Trump nor globalization as it has been in recent decades—the managed globalization, managed for various vested interests in advanced countries. We can have social protection without protectionism—helping protect individuals, especially the most vulnerable, against the shocks they face, without cutting ourselves off, partially or fully, from the rest of the world.

  PRINCIPLES OF A REFORMED GLOBALIZATION

  It is obviously impossible to summarize in a few pages a set of principles that should guide such a reformed globalization. The following ten provide guidelines for the future—and indirectly, a good summary of my critique of globalization as it has been managed.

  1. Globalization is a means to an end, not an end in itself. The end is improving the living standards of people in all the countries of the world. Too often, ends and means are confused, when, for instance, citizens are asked to lower their wages and accept cutbacks in job protections and government services in order to compete in the global economy.

  2. Global rules are needed where there are cross-border externalities. When what one country does affects others in a significant way, we need rules and referees, to prevent countries from harming others, and to encourage countries to take actions that benefit others. Of course, matters are not usually black and white; there will often be some cross-border externalities. But global governance is difficult, so there should be a focus on those areas where cross-border externalities are particularly significant. The problem, as I’ve noted, is that too little attention has been paid to those areas, like tax competition—the infamous race to the bottom—fiscal paradises, and short-term capital flows where there are significant adverse externalities; and too much attention on areas—like regulatory harmonization—where cross-border externalities are not as significant. The costs of short-term capital flows can be especially great for developing countries; and there are a variety of measures that they can take to stabilize capital flows, preventing surges of short-term money into or out of a country.2

  3. Global action will become increasingly important as we become more interdependent and as we recognize our interdependencies. We now recognize, for instance, the importance of what are called global public goods—goods from which everyone in the world benefits (global security, global health, and knowledge) or suffers—as in the case of climate change or global pandemics. The carbon dioxide molecules don’t know about visas and passports: pollution generated in the United States easily goes across borders. So too for the viruses associated with bird flu, or the Zika virus. The global climate represents the quintessential global public good. We all share the same atmosphere. Increased concentration of global warming gasses results in global climate change: no one in the world can protect himself. Only through collective global action—working together, cooperatively—can climate change be addressed. Similarly, if we don’t act in concert to contain highly contagious diseases, we risk facing global epidemics.

  4. Governance matters. Who makes the rules and enforces them—that is, who makes the decisions concerning globalization—matters. Good governance has to be based on a few simple principles of representativeness, legitimacy, transparency, and accountability. We’ve argued that globalization will only work if we move away from the law of the jungle to a rule of international law. But it has to be a “rule of law” that is not written by and for corporations. One of the reasons for the failures of globalization is how decisions have been made—who was in the room and who was not. When politicians and governments are not held accountable for the consequences of their actions, they obviously will not have the incentive to do the “right” thing. And they can’t be held accountable in the absence of transparency.

  5. Government and civil society will both have to be part of the system regulating, and tempering, globalization. There has been excessive faith in markets and the private sector.3 The private sector, on its own, created many of the central problems facing national economies and global society: inequality, environmental degradation, and instability. The private sector, on its own, won’t solve these problems.

  6. Large economies are different from small economies. Economies like the United States, China, and the EU must be sensitive to the effects of what they do on others in ways that smaller countries don’t. Thus, when the United States began its policy of quantitative easing in 2008, it led to massive capital inflows into many emerging markets, a sharp appreciation in their exchange rates, and a loss of competitiveness of their export industries, among other effects. In short, the United States caused global havoc. Also, in the early 1980s, when the Fed raised interest rates massively to fight inflation in the United States, it brought on the Latin American debt crisis. The difference between the global consequences of Hugo Chávez or Nicolás Maduro in Venezuela and Trump in America also illustrates the point.

  7. One-size-fits-all policies don’t work—and one must be especially careful in applying the same policies and rules to both developed and developing countries: developing countries are different from developed countries. They are poorer, and they need to close the resource and knowledge gap that separates them from more advanced countries. Our trade laws, for instance, have tried to provide for excessive harmonization of intellectual property regimes. The IPR regimes appropriate for developing countries—or the climate change policies—may differ from those appropriate for a developed country.

  8. Any change in the rules of the game involves winners and losers. Change itself is costly and difficult, and households and firms, especially those at the bottom, may need assistance
in making changes imposed by globalization. The antipathy being expressed toward globalization has more to do with the failure to take into account its distributional consequences than with anything else—and especially so when the losers from globalization are those in the middle and bottom, and the winners are those at the top—the same people who keep winning. It adds to the view that our whole system is unfair, rigged, and that the government—which after all is making the rules—can’t be trusted. We should be particularly skeptical of reforms in which the winners are corporations—many such reforms are negative sum, with the losses of ordinary citizens even outweighing the gains of the corporations. Governments need to be particularly mindful of the losers when they are at the bottom of the economic pyramid since they are less able to fend for themselves. If, as the advocates of globalization claim, there are net benefits from globalization, then the winners can be taxed to help the losers. If the winners can’t or won’t compensate the losers, it should be questioned whether the change is desirable.

  9. There are social dimensions of globalization—effects that extend beyond just economics—and reforms to globalization need to be particularly mindful of them. Provisions of international trade agreements that have denied access to life-saving generic medicines to the poor have in effect put drug company profits above the value of life.4 The attempts by overly zealous globalists to curb the ability of countries to subsidize their movie industries provides another illustration. Hollywood has put enormous pressure on the U.S. government to demand that other countries not provide such help. Every country views culture as part of their national identity, and films are one of the ways they maintain this identity. Rambo 17, Transformers 17, or Fast & Furious 17 are not going to be harmed significantly if France decides to subsidize an artistic movie about the life of André Gide—and if France decides that doing so is a good use of its public funds, it should be allowed to do so, without being held in violation of WTO or other trade rules.