Globalization and Its Discontents Revisited

by Joseph E. Stiglitz

  Clearly, growth alone does not always improve the lives of all a country’s people. Not surprisingly, the phrase “trickle-down” has disappeared from the policy debate. But, in a slightly mutated form, the idea is still alive. I call the new variant trickle-down-plus. It holds that growth is necessary and almost sufficient for reducing poverty—implying that the best strategy is simply to focus on growth, while mentioning issues like female education and health. But proponents of trickle-down-plus failed to implement policies that would effectively address either broader concerns of poverty or even specific issues such as the education of women. In practice, the advocates of trickle-down-plus continued with much the same policies as before, with much the same adverse effects. The overly stringent “adjustment policies” in country after country forced cutbacks in education and health: in Thailand, as a result, not only did female prostitution increase but expenditures on AIDS were cut way back; and what had been one of the world’s most successful programs in fighting AIDS had a major setback.

  The irony was that one of the major proponents of trickle-down-plus was the U.S. Treasury under the Clinton administration. Within the administration, in domestic politics, there was a wide spectrum of views, from New Democrats, who wanted to see a more limited role for government, to Old Democrats, who looked for more government intervention. But the central view, reflected in the annual Economic Report of the President (prepared by the Council of Economic Advisers), argued strongly against trickle-down economics—or even trickle-down-plus. Here was the U.S. Treasury pushing policies on other countries that, had they been advocated for the United States, would have been strongly contested within the administration, and almost surely defeated. The reason for this seeming inconsistency was simple: The IMF and the World Bank were part of Treasury’s turf, an arena in which, with few exceptions, they were allowed to push their perspectives, just as other departments, within their domains, could push theirs.

  PRIORITIES AND STRATEGIES

  It is important not only to look at what the IMF puts on its agenda, but what it leaves off. Stabilization is on the agenda; job creation is off. Taxation, and its adverse effects, are on the agenda; land reform is off. There is money to bail out banks but not to pay for improved education and health services, let alone to bail out workers who are thrown out of their jobs as a result of the IMF’s macroeconomic mismanagement.

  Many of the items that were not on the Washington Consensus might bring both higher growth and greater equality. Land reform itself illustrates the choices at stake in many countries. In many developing countries, a few rich people own most of the land. The vast majority of the people work as tenant farmers, keeping only half, or less, of what they produce. This is termed sharecropping. The sharecropping system weakens incentives—where they share equally with the landowners, the effects are the same as a 50 percent tax on poor farmers. The IMF rails against high tax rates that are imposed against the rich, pointing out how they destroy incentives, but nary a word is spoken about these hidden taxes. Land reform, done properly, peacefully, and legally, ensuring that workers get not only land but access to credit, and the extension services that teach them about new seeds and planting techniques, could provide an enormous boost to output. But land reform represents a fundamental change in the structure of society, one that those in the elite that populates the finance ministries, those with whom the international financial institutions interact, do not necessarily like. If these institutions were really concerned about growth and poverty alleviation, they would have paid considerable attention to the issue: land reform preceded several of the most successful instances of development, such as those in Korea and Taiwan.

  Another neglected item was financial sector regulation. Focusing on the Latin American crisis of the early 1980s, the IMF maintained that crises were caused by imprudent fiscal policies and loose monetary policies. But crises around the world had revealed a third source of instability, inadequate financial sector regulation. Yet the IMF pushed for reducing regulations—until the East Asia crisis forced it to change course. If land reform and financial sector regulation were underemphasized by the IMF and the Washington Consensus, in many places inflation was overemphasized. Of course, in regions like Latin America where inflation had been rampant, it deserved attention. But an excessive focus on inflation by the IMF led to high interest rates and high exchange rates, creating unemployment but not growth. Financial markets may have been pleased with the low inflation numbers, but workers—and those concerned with poverty—were not happy with the low growth and the high unemployment numbers.

  Fortunately, poverty reduction has become an increasingly important development priority. We saw earlier that the trickle-down-plus strategies have not worked. Still, it is true that, on average, countries that have grown faster have done a better job of reducing poverty, as China and East Asia amply demonstrate. It is also true that poverty eradication requires resources, resources that can only be obtained with growth. Thus the existence of a correlation between growth and poverty reduction should come as no surprise. But this correlation does not prove that trickle-down strategies (or trickle-down-plus) constitute the best way to attack poverty. On the contrary, the statistics show that some countries have grown without reducing poverty, and some countries have been much more successful in reducing poverty, at any given growth rate, than others. The issue is not whether one is in favor of or against growth. In some ways, the growth/poverty debate seemed pointless. After all, almost everyone believes in growth.

  The question has to do with the impact of particular policies. Some policies promote growth but have little effect on poverty; some promote growth but actually increase poverty; and some promote growth and reduce poverty at the same time. The last are called pro-poor growth strategies. Sometimes there are policies which are “win-win,” policies like land reform or better access to education for the poor which hold out the promise of enhanced growth and greater equality. But many times there are trade-offs. Sometimes trade liberalization might enhance growth, but at the same time, at least in the short run, there will be increased poverty—especially if it is done rapidly—as some workers are thrown out of a job. And sometimes, there are lose-lose policies, policies for which there is little if any gain in growth but a significant increase in inequality. For many countries, capital market liberalization represents an example. The growth-poverty debate is about development strategies—strategies that look for policies that reduce poverty as they promote growth, that shun policies that increase poverty with little if any gain in growth, and that, in assessing situations where there are trade-offs, put a heavy weight on the impact on the poor.

  Understanding the choices requires understanding the causes and nature of poverty. It is not that the poor are lazy; they often work harder, with longer hours, than those who are far better off. Many are caught in a series of vicious spirals: lack of food leads to ill health, which limits their earning ability, leading to still poorer health. Barely surviving, they cannot send their children to school, and without an education, their children are condemned to a life of poverty. Poverty is passed along from one generation to another. Poor farmers cannot afford to pay the money for the fertilizers and high-yielding seeds that would increase their productivity.

  This is but one of many vicious cycles facing the poor. Partha Dasgupta of Cambridge University has emphasized another. In poor countries, like Nepal, the impoverished have no source of energy other than the neighboring forests; but as they strip the forests for the bare necessities of heating and cooking, the soil erodes, and as the environment degrades, they are condemned to a life of ever-increasing poverty.

  Along with poverty come feelings of powerlessness. For its 2000 World Development Report, the World Bank interviewed thousands of poor in an exercise that was called The Voices of the Poor. Several themes—hardly unexpected—emerge. The poor feel that they are voiceless, and that they do not have control over their own destiny. They are buffeted by forces beyond
their control.

  And the poor feel insecure. Not only is their income uncertain—changes in economic circumstances beyond their control can lead to lower real wages and a loss of jobs, dramatically illustrated by the East Asia crisis—but they face health risks and continual threats of violence, sometimes from other poor people trying against all odds to meet the needs of their family, sometimes from police and others in positions of authority. While those in developed countries fret about the inadequacies of health insurance, those in developing countries must get by without any form of insurance—no unemployment insurance, no health insurance, no retirement insurance. The only safety net is provided by family and community, which is why it is so important, in the process of development, to do what one can to preserve these bonds.

  To ameliorate the insecurity—whether the capriciousness of an exploitative boss or the capriciousness of a market increasingly buffeted by international storms—workers have fought for greater job security. But as hard as workers have fought for “decent jobs,” the IMF has fought for what it euphemistically called “labor market flexibility,” which sounds like little more than making the labor market work better but as applied has been simply a code name for lower wages, and less job protection.

  Not all the downsides of the Washington Consensus policies for the poor could have been foreseen, but by now they are clear. We have seen how trade liberalization accompanied by high interest rates is an almost certain recipe for job destruction and unemployment creation—at the expense of the poor. Financial market liberalization unaccompanied by an appropriate regulatory structure is an almost certain recipe for economic instability—and may well lead to higher, not lower interest rates, making it harder for poor farmers to buy the seeds and fertilizer that can raise them above subsistence. Privatization, unaccompanied by competition policies and oversight to ensure that monopoly powers are not abused, can lead to higher, not lower, prices for consumers. Fiscal austerity, pursued blindly, in the wrong circumstances, can lead to high unemployment and a shredding of the social contract.

  If the IMF underestimated the risks to the poor of its development strategies, it also underestimated the long-term social and political costs of policies that devastated the middle class, enriching a few at the top, and overestimated the benefits of its market fundamentalist policies. The middle classes have traditionally been the group that has pushed for the rule of law, that has pushed for universal public education, that has pushed for the creation of a social safety net. These are essential elements of a healthy economy and the erosion of the middle class has led to a concomitant erosion of support for these important reforms.

  At the same time that it underestimated the costs of its programs, the IMF overestimated the benefits. Take the problem of unemployment. To the IMF and others who believe that when markets function normally demand must equal supply, unemployment is a symptom of an interference in the free workings of the market. Wages are too high (for instance, because of union power). The obvious remedy to unemployment was to lower wages; lower wages will increase the demand for labor, bringing more people onto employment rolls. While modern economic theory (in particular, theories based on asymmetric information and incomplete contracts) has explained why even with highly competitive markets, including labor markets, unemployment can persist—so the argument that says that unemployment must be due to unions or government minimum wages is simply wrong—there is another criticism of the strategy of lowering wages. Lower wages might lead some firms to hire a few more workers; but the number of newly hired workers may be relatively few, and the misery caused by the lower wages on all the other workers might be very grave. Employers and owners of capital might be quite happy, as they see their profits soar. These will endorse the IMF/market fundamentalist model with its policy prescriptions with enthusiasm! Asking people in developing countries to pay for schools is another example of this narrow worldview. Those who said charges should be imposed argued that there would be little effect on enrollment and that the government needed the revenue badly. The irony here was that the simplistic models miscalculated the impact on enrollment of eliminating school fees; by failing to take into account the systemic effects of policy, not only did they fail to take into account the broader impacts on society, they even failed in the more narrow attempts to estimate accurately the consequences for school enrollment.

  If the IMF had an overly optimistic view of the markets, it had an overly pessimistic view of government; if government was not the root of all evil, it certainly was more part of the problem than the solution. But the lack of concern about the poor was not just a matter of views of markets and government, views that said that markets would take care of everything and government would only make matters worse; it was also a matter of values—how concerned we should be about the poor and who should bear what risks.

  THE RESULTS OF the policies enforced by Washington Consensus have not been encouraging: for most countries embracing its tenets development has been slow, and where growth has occurred, the benefits have not been shared equally; crises have been mismanaged; the transition from communism to a market economy (as we shall see) has been a disappointment. Inside the developing world, the questions run deep. Those who followed the prescriptions, endured the austerity, are asking: When do we see the fruits? In much of Latin America, after a short burst of growth in the early 1990s, stagnation and recession have set in. The growth was not sustained—some might say not sustainable. Indeed, at this juncture, the growth record of the so-called post-reform era looks no better, and in some countries much worse, than in the pre-reform import substitution period (when countries used protectionist policies to help domestic industries compete against imports) of the 1950s and 1960s. The average annual growth rate in the region in the 1990s, at 2.9 percent after the reforms, was just more than half that in the 1960s at 5.4 percent. In retrospect, the growth strategies of the 1950s and 1960s were not sustained (critics would say they were unsustainable); but the slight upsurge in growth in the early 1990s also did not last (these also, critics would say, were unsustainable). Indeed, critics of the Washington Consensus point out that the burst of growth in the early 1990s was little more than a catch-up, not even making up for the lost decade of the 1980s, the decade after the last major crisis, during which growth stagnated. Throughout the region people are asking, has reform failed, or has globalization failed? The distinction is perhaps artificial—globalization was at the center of the reforms. Even in the countries that have managed some growth, such as Mexico, the benefits have accrued largely to the upper 30 percent, and have been even more concentrated in the top 10 percent. Those at the bottom have gained little; many are even worse off.

  The Washington Consensus reforms have exposed countries to greater risk, and the risks have been borne disproportionately by those least able to cope with them. Just as in many countries the pacing and sequencing of reforms has resulted in job destruction outmatching job creation, so too has the exposure to risk outmatched the ability to create institutions for coping with risk, including effective safety nets.

  There were, of course, important messages in the Washington Consensus, including lessons about fiscal and monetary prudence, lessons which were well understood by the countries that succeeded; but most did not have to learn them from the IMF.

  Sometimes the IMF and the World Bank have unfairly taken the blame for the messages they deliver—no one likes to be told that they have to live within their means. But the criticism of the international economic institutions goes deeper: while there was much that was good on their development agenda, even reforms that are desirable in the long run have to be implemented carefully. It’s now widely accepted that pacing and sequencing cannot be ignored. But even more important, there is more to development than these lessons suggest. There are alternative strategies—strategies that differ not only in emphases but even in policies; strategies, for instance, which include land reform but do not include capital market liberalization, whi
ch provide for competition policies before privatization, which ensure that job creation accompanies trade liberalization.

  These alternatives made use of markets, but recognized that there was an important role for government as well. They recognized the importance of reform, but that reforms needed to be paced and sequenced. They saw change not just as a matter of economics, but as part of a broader evolution of society. They recognized that for long-term success, there had to be broad support of the reforms, and if there was to be broad support, the benefits had to be broadly distributed.

  We have already called attention to some of these successes: the limited successes in Africa, for instance, in Uganda, Ethiopia, and Botswana; and the broader successes in East Asia, including China. In chapter 9, we shall take a closer look at some of the successes in transition, such as Poland. The successes show that development and transition are possible; the successes in development are well beyond that which almost anyone imagined a half century ago. The fact that so many of the success cases followed strategies that were markedly different from those of the Washington Consensus is telling.

  Each time and each country is different. Would other countries have met the same success if they had followed East Asia’s strategy? Would the strategies which worked a quarter of a century ago work in today’s global economy? Economists can disagree about the answers to these questions. But countries need to consider the alternatives and, through democratic political processes, make these choices for themselves. It should be—and it should have been—the task of the international economic institutions to provide the countries the wherewithal to make these informed choices on their own, with an understanding of the consequences and risks of each. The essence of freedom is the right to make a choice—and to accept the responsibility that comes with it.