Globalization and Its Discontents Revisited

by Joseph E. Stiglitz

  The assumption underlying this failure is one that I saw made repeatedly; the IMF simply assumed that markets arise quickly to meet every need, when in fact, many government activities arise because markets have failed to provide essential services. Examples abound. Outside the United States, this point often seems obvious. When many European countries created their social security systems and unemployment and disability insurance systems, there were no well-functioning private annuity markets, no private firms that would sell insurance against these risks that played such an important role in individuals’ lives. Even when the United States created its social security system, much later, in the depths of the Great Depression as part of the New Deal, private markets for annuities did not work well—and even today one cannot get annuities that insure one against inflation. Again, in the United States, one of the reasons for the creation of the Federal National Mortgage Association (Fannie Mae) was that the private market did not provide mortgages at reasonable terms to low- and middle-income families. In developing countries, these problems are even worse; eliminating the government enterprise may leave a huge gap—and even if eventually the private sector enters, there can be enormous suffering in the meanwhile.

  In Côte d’Ivoire, the telephone company was privatized, as is so often the case, before either an adequate regulatory or competition framework was put into place. The government was persuaded by the French firm that purchased the state’s assets into giving it a monopoly, not only on the existing telephone services but on new cellular services as well. The private firm raised prices so high that, for instance, university students reportedly could not afford Internet connections, essential to prevent the already huge gap in digital access between rich and poor from widening even further.

  The IMF argues that it is far more important to privatize quickly; one can deal with the issues of competition and regulation later. But the danger here is that once a vested interest has been created, it has an incentive, and the money, to maintain its monopoly position, squelching regulation and competition, and distorting the political process along the way. There is a natural reason why the IMF has been less concerned about competition and regulation than it might have been. Privatizing an unregulated monopoly can yield more revenue to the government, and the IMF focuses far more on macroeconomic issues, such as the size of the government’s deficit, than on structural issues, such as the efficiency and competitiveness of the industry. Whether the privatized monopolies were more efficient in production than government, they were often more efficient in exploiting their monopoly position; consumers suffered as a result.

  Privatization has also come not just at the expense of consumers but at the expense of workers as well. The impact on employment has perhaps been both the major argument for and against privatization, with advocates arguing that only through privatization can unproductive workers be shed, and critics arguing that job cuts occur with no sensitivity to the social costs. There is, in fact, considerable truth in both positions. Privatization often turns state enterprises from losses to profits by trimming the payroll. Economists, however, are supposed to focus on overall efficiency. There are social costs associated with unemployment, which private firms simply do not take into account. Given minimal job protections, employers can dismiss workers, with little or no costs, including, at best, minimal severance pay. Privatization has been so widely criticized because, unlike so-called greenfield investments—investments in new firms as opposed to private investors taking over existing firms—privatization often destroys jobs rather than creating new ones.

  In industrialized countries, the pain of layoffs is acknowledged and somewhat ameliorated by the safety net of unemployment insurance. In less developed countries, the unemployed workers typically do not become a public charge, since there are seldom unemployment insurance schemes. There can be a large social cost nonetheless—manifested, in its worst forms, by urban violence, increased crime, and social and political unrest. But even in the absence of these problems, there are huge costs of unemployment. They include widespread anxiety even among workers who have managed to keep their jobs, a broader sense of alienation, additional financial burdens on family members who manage to remain employed, and the withdrawal of children from school to help support the family. These kinds of social costs endure long past the immediate loss of a job. They are often especially apparent in the case when a firm is sold to foreigners. Domestic firms may at least be attuned to the social context* and be reluctant to fire workers if they know there are no alternative jobs available. Foreign owners, on the other hand, may feel a greater obligation to their shareholders to maximize stock market value by reducing costs, and less of an obligation to what they will refer to as an “overbloated labor force.”

  It is important to restructure state enterprises, and privatization is often an effective way to do so. But moving people from low-productivity jobs in state enterprises to unemployment does not increase a country’s income, and it certainly does not increase the welfare of the workers. The moral is a simple one, and one to which I shall return repeatedly: Privatization needs to be part of a more comprehensive program, which entails creating jobs in tandem with the inevitable job destruction that privatization often entails. Macroeconomic policies, including low interest rates, that help create jobs, have to be put in place. Timing (and sequencing) is everything. These are not just issues of pragmatics, of “implementation”: these are issues of principle.

  Perhaps the most serious concern with privatization, as it has so often been practiced, is corruption. The rhetoric of market fundamentalism asserts that privatization will reduce what economists call the “rent-seeking” activity of government officials who either skim off the profits of government enterprises or award contracts and jobs to their friends. But in contrast to what it was supposed to do, privatization has made matters so much worse that in many countries today privatization is jokingly referred to as “briberization.” If a government is corrupt, there is little evidence that privatization will solve the problem. After all, the same corrupt government that mismanaged the firm will also handle the privatization. In country after country, government officials have realized that privatization meant that they no longer needed to be limited to annual profit skimming. By selling a government enterprise at below market price, they could get a significant chunk of the asset value for themselves rather than leaving it for subsequent officeholders. In effect, they could steal today much of what would have been skimmed off by future politicians. Not surprisingly, the rigged privatization process was designed to maximize the amount government ministers could appropriate for themselves, not the amount that would accrue to the government’s treasury, let alone the overall efficiency of the economy. As we will see, Russia provides a devastating case study of the harm of “privatization at all costs.”

  Privatization advocates naively persuaded themselves these costs could be overlooked because the textbooks seemed to say that once private property rights were clearly defined, the new owners would ensure that the assets would be efficiently managed. Thus the situation would improve in the long term even if it was ugly in the short term. They failed to realize that without the appropriate legal structures and market institutions, the new owners might have an incentive to strip assets rather than use them as a basis for expanding industry. As a result, in Russia, and many other countries, privatization failed to be as effective a force for growth as it might have been. Indeed, sometimes it was associated with decline and proved to be a powerful force for undermining confidence in democratic and market institutions.

  Liberalization

  Liberalization—the removal of government interference in financial markets, capital markets, and of barriers to trade—has many dimensions. Today, even the IMF agrees that it has pushed that agenda too far—that liberalizing capital and financial markets contributed to the global financial crises of the 1990s and can wreak havoc on a small emerging country.

  The one aspect of liberaliza
tion that does have widespread support—at least among the elites in the advanced industrial countries—is trade liberalization. But a closer look at how it has worked out in many developing countries serves to illustrate why it is so often so strongly opposed, as seen in the protests in Seattle, Prague, and Washington, DC.

  Trade liberalization is supposed to enhance a country’s income by forcing resources to move from less productive uses to more productive uses; as economists would say, utilizing comparative advantage. But moving resources from low-productivity uses to zero productivity does not enrich a country, and this is what happened all too often under IMF programs. It is easy to destroy jobs, and this is often the immediate impact of trade liberalization, as inefficient industries close down under pressure from international competition. IMF ideology holds that new, more productive jobs will be created as the old, inefficient jobs that have been created behind protectionist walls are eliminated. But that is simply not the case—and few economists have believed in instantaneous job creation, at least since the Great Depression. It takes capital and entrepreneurship to create new firms and jobs, and in developing countries there is often a shortage of the latter, due to lack of education, and of the former, due to lack of bank financing. The IMF in many countries has made matters worse, because its austerity programs often also entailed such high interest rates—sometimes exceeding 20 percent, sometimes exceeding 50 percent, sometimes even exceeding 100 percent—that job and enterprise creation would have been an impossibility even in a good economic environment such as the United States. The necessary capital for growth is simply too costly.

  The most successful developing countries, those in East Asia, opened themselves to the outside world but did so slowly and in a sequenced way. These countries took advantage of globalization to expand their exports and grew faster as a result. But they dropped protective barriers carefully and systematically, phasing them out only when new jobs were created. They ensured that there was capital available for new job and enterprise creation; and they even took an entrepreneurial role in promoting new enterprises. China is just dismantling its trade barriers, twenty years after its march to the market began, a period in which it grew extremely rapidly.

  Those in the United States and the advanced industrialized countries should have found it easy to grasp these concerns. In the last two U.S. presidential campaigns, the candidate Pat Buchanan has exploited American workers’ worries about job loss from trade liberalization. Buchanan’s themes resonated even in a country with close to full employment (by 1999, the unemployment rate had fallen to under 4 percent), coupled with a good unemployment insurance system and a variety of assistance to help workers move from one job to another. The fact that, even during the booming 1990s, American workers could be so worried about the threat of liberalized trade to their jobs should have led to a greater understanding of the plight of workers in poor developing countries, where they live on the verge of subsistence, often on $2 a day or less, with no safety net in the form of savings, much less unemployment insurance, and in an economy with 20 percent or more unemployment.

  The fact that trade liberalization all too often fails to live up to its promise—but instead simply leads to more unemployment—is why it provokes strong opposition. But the hypocrisy of those pushing for trade liberalization—and the way they have pushed it—has no doubt reinforced hostility to trade liberalization. The Western countries pushed trade liberalization for the products that they exported, but at the same time continued to protect those sectors in which competition from developing countries might have threatened their economies. This was one of the bases of the opposition to the new round of trade negotiations that was supposed to be launched in Seattle; previous rounds of trade negotiations had protected the interests of the advanced industrial countries—or more accurately, special interests within those countries—without concomitant benefits for the lesser developed countries. Protestors pointed out, quite rightly, that the earlier rounds of trade negotiations had lowered trade barriers on industrial goods, from automobiles to machinery, exported by the advanced industrial countries. At the same time, negotiators for these countries maintained their nations’ subsidies on agricultural goods and kept closed the markets for these goods and for textiles, where many developing countries have a comparative advantage.

  In the most recent Uruguay Round of trade negotiations, the subject of trade in services was introduced. In the end, however, markets were opened mainly for the services exported by the advanced countries—financial services and information technology—but not for maritime and construction services, where the developing countries might have been able to gain a toehold. The United States bragged about the benefits it received. But the developing countries did not get a proportionate share of the gains. One World Bank calculation showed that Sub-Saharan Africa, the poorest region in the world, saw its income decline by more than 2 percent as a result of the trade agreement. There were other examples of inequities that increasingly became the subject of discourse in the developing world, though the issues seldom made it into print in the more developed nations. Bolivia not only brought down its trade barriers to the point that they were lower than those in the United States but also cooperated with the United States in virtually eradicating the growth of coca, the basis of cocaine, even though this crop provided a higher income to its already poor farmers than any alternative. The United States responded, however, by keeping its markets closed to the alternative agriculture products, like sugar, that Bolivia’s farmers might have produced for export—had America’s markets been open to them.

  Developing countries get especially angry over this sort of double standard because of the long history of hypocrisy and inequities. In the nineteenth century the Western powers—many of which had grown through using protectionist policies—had pushed unfair trade treaties. The most outrageous, perhaps, followed the Opium Wars, when the United Kingdom and France ganged up against a weak China, and together with Russia and the United States forced it, in the Treaty of Tientsin in 1858, not just to make trade and territorial concessions, ensuring it would export the goods the West wanted at low prices, but to open its markets to opium, so that millions in China would become addicted. (One might call this an almost diabolical approach to a “balance of trade.”) Today, the emerging markets are not forced open under the threat of the use of military might, but through economic power, through the threat of sanctions or the withholding of needed assistance in a time of crisis. While the World Trade Organization was the forum within which international trade agreements were negotiated, U.S. trade negotiators and the IMF have often insisted on going further, accelerating the pace of trade liberalization. The IMF insists on this faster pace of liberalization as a condition for assistance—and countries facing a crisis feel they have no choice but to accede to the Fund’s demands.

  Matters are perhaps worse still when the United States acts unilaterally rather than behind the cloak of the WTO. The U.S. Trade Representative or the Department of Commerce, often prodded by special interests within the United States, brings an accusation against a foreign country; there is then a review process—involving only the U.S. government—with a decision made by the United States, after which sanctions are brought against the offending country. The United States sets itself up as prosecutor, judge, and jury. There is a quasi-judicial process, but the cards are stacked: both the rules and the judges favor a finding of guilty. When this arsenal is brought against other industrial countries, Europe and Japan, they have the resources to defend themselves; when it comes to the developing countries, even large ones like India and China, it is an unfair match. The ill will that results is far out of proportion to any possible gain for the United States. The process itself does little to reinforce confidence in a just international trading system.

  The rhetoric the United States uses to push its position adds to the image of a superpower willing to throw its weight around for its own special interests. Mickey Kantor, when h
e was the U.S. Trade Representative in the first Clinton administration, wanted to push China to open its markets faster. The 1994 Uruguay Round negotiations, in which he himself had played a major role, established the WTO and set ground rules for members. The agreement had quite rightly provided a longer adjustment period for developing countries. At the time, the World Bank, and every economist, treated China—with its per capita income of $450—not only as a developing country but also as a low-income developing country. But Kantor was a hard negotiator. He insisted that it was a developed country, and should therefore have a quick transition.

  Kantor had some leverage because China needed U.S. approval in order to join the WTO. The United States–China agreement that eventually led to China’s being admitted to the WTO in November 2001 illustrates two aspects of the contradictions of the U.S. position. While the United States dragged out the bargaining with its unreasonable insistence that China was really a developed country, China began the adjustment process itself. In effect, unwittingly, the United States gave China the extra time it had wanted. But the agreement itself illustrates the double standards and inequity at play here. Ironically, while the United States insisted that China adjust quickly, as if it were a developed country—and because China had used the prolonged bargaining time well, it was able to accede to those demands—the United States also demanded, in effect, that America be treated as if it were a less developed country, that it be given not just the ten years of adjustment for lowering its barrier against textile imports that had been part of the 1994 negotiations, but an additional four years.