Globalization and Its Discontents Revisited

by Joseph E. Stiglitz

  In the Asian financial crisis, this was great for the American and European creditors, who were glad to get back the money they had lent to Thai or Korean banks and businesses or at least more of it than they otherwise would have. But it was not so great for the workers and other taxpayers of Thailand and Korea, whose tax money is used to repay the IMF loans, whether or not they got much benefit from the money. But adding insult to injury, after the billions are spent to maintain the exchange rate at an unsustainable level and to bail out the foreign creditors, after their governments have knuckled under to the pressure of the IMF to cut back on expenditures, so that the countries face a recession in which millions of workers lose their jobs, there seems to be no money around when it comes to finding the far more modest sums to pay subsidies for food or fuel for the poor. No wonder that there is such anger against the IMF.

  If one sees the IMF as an institution pursuing policies that are in the interests of creditors, other IMF policies also become more understandable. We noted earlier the focus on the trade deficit. After the crisis, the massive contractionary policies imposed on the East Asian countries led to quick reductions in imports and a massive rebuilding of reserves. From the perspective of an institution worried about the ability to repay creditors, this made sense: without reserves, the countries would not be able to repay the dollar loans that they and the firms in their country owed. But if one had focused more on the issue of global stability and the economic recovery of the countries and the region, one would have taken a more lax approach to the rebuilding of reserves, and at the same time instituted other policies to insulate the countries from the effects of the vagaries of international speculators. Thailand had run out of reserves because they had been used in 1997 to fight off speculators. Once it was decided that Thailand needed quickly to rebuild reserves, it was inevitable that it would have a deep recession. The IMF’s beggar-thyself policies, which, as we saw in chapter 8, have replaced the beggar-thy-neighbor policies of the Great Depression, were even worse in spreading the global crisis. From the perspective of the creditors, the policies sometimes worked, and remarkably quickly: In Korea, reserves went from essentially zero to almost $97 billion by July 2001; in Thailand, from essentially negative to more than $31 billion by July 2001. For the creditors, of course, all of this was good news; they could now rest assured that Korea had the dollars to repay any loans, should the creditors demand it.

  I would have taken a strategy that was sympathetic to the concerns of the debtors, less focused on the interests of the creditors. I would have said that it was more important to keep the economy going and to postpone building up reserves for a couple of years until the economy was back on track. I would have explored other ways of providing short-term stability—not only the standstills or bankruptcies to which I referred earlier, but short-term capital controls and “exit taxes” of the kind that Malaysia used. There are ways of protecting a country against the ravages of speculators, or even of short-term lenders or investors who have suddenly changed their sentiments. No policy comes without its risks or price; but these alternatives would almost surely have imposed lower costs and risks on those inside the crisis countries, even if they had imposed higher costs on the creditors.

  Defenders of the IMF’s policies point to the fact that the creditors did have to bear some of the costs. Many were not fully repaid. But this misses the point on two counts: The creditor-friendly policies attempted to reduce the losses from what they otherwise would have been. They did not engineer a full bailout, but a partial one; they did not stop the exchange rate from falling, but they worked to prevent it from falling further. Secondly, the IMF did not always succeed in doing what it set out to do. The IMF pushed contractionary policies in Indonesia too far, so that in the end, the interests of the creditors were not well served. More broadly, global financial stability was arguably not only in the interests of the global economy but also in the interests of the financial markets; yet many of the IMF’s policies—from the capital market liberalization to the massive bailouts—almost surely contributed to global instability.

  The fact that the IMF was concerned about and reflected the perspectives of the financial community also helps explain some of its defensive rhetoric. In the East Asia crisis, the IMF and the U.S. Treasury quickly sought to blame the problems on the borrowing countries, and in particular on their lack of transparency. Even then, it was clear that lack of transparency does not cause crises nor can transparency inoculate a country against crises. Prior to the East Asia crisis, the most recent financial crisis was the real estate crash in the late 1980s and early 1990s in Sweden, Norway, and Finland, some of the most transparent nations in the world. There were many countries that were far less transparent than Korea, Malaysia, and Indonesia—and they did not have a crisis. If transparency is the key to the economic riddle, then the countries of East Asia should have had more crises earlier, since the data showed that they were becoming more, not less, transparent. Despite its alleged failures on the transparency front, East Asia had not only shown remarkable growth but also remarkable stability. If the East Asian countries were as “highly vulnerable” as the IMF and the Treasury claimed, it was a newfound vulnerability based not on an increased lack of transparency but on another familiar factor: the premature capital and financial market liberalization that the IMF had pushed on these countries.

  In retrospect, there was a “transparent” reason for this focus on transparency:3 it was important for the financial community, the IMF, and the U.S. Treasury to shift blame. The policies that the Fund and Treasury had pushed in East Asia, Russia, and elsewhere were to blame: capital market liberalization had led to destabilizing speculation, financial market liberalization to bad lending practices. As their recovery programs failed to work as they said they would, they had further incentive to try to say the real problem lay not with their programs but elsewhere, with the afflicted countries.

  Closer scrutiny, however, showed that the industrialized nations were at fault in many other ways; weak banking regulation in Japan, for instance, might have provided an incentive for banks to lend to Thailand at such attractive rates that the borrowers could not resist borrowing more than was prudent. Banking regulatory policies in the United States and other major industrialized countries also encouraged unwise lending—banks were allowed to treat short-term foreign lending as safer than long-term. This encouraged short-term lending, and the short-term loans were among the important sources of instability in East Asia.

  The major investment firms also wanted to exculpate their advisers, who had encouraged their clients to put their money into these countries. Fully backed up by the governments in the United States and the other major industrialized nations, investment advisers from Frankfurt to London to Milan could claim that there was no way they could have been expected to know how bad things really were, given the lack of transparency in East Asian countries. These experts quietly slid over the fact that in a fully open and transparent market, one with perfect information, returns are low. Asia had been an attractive investment—it produced high returns—precisely because it was more risky. The advisers’ belief that they had better information—and their clients’ thirst for high returns—drove funds to the region. The key problems—South Korea’s high indebtedness, Thailand’s huge trade deficits and real estate boom that inevitably would bust, Suharto’s corruption—were well known, and the risks these posed should have been disclosed to investors.

  The international banks too found it convenient to shift blame. They wanted to blame the borrowers and bad lending practices of the Thai and South Korean banks, which, they alleged, were making bad loans with the connivance of the corrupt governments in their countries—and the IMF and the U.S. Treasury again joined them in the attack. From the start, one should have been suspicious of the IMF/Treasury arguments. Despite their attempt to get the major international lenders off the hook, the hard truth is that every loan has both a borrower and a lender. If the loan is inher
ently bad, the lender is as much at fault as the borrower. Moreover, banks in the Western developed countries were lending to the large Korean firms, knowing full well how leveraged many Korean firms were. The bad loans were a result of bad judgment, not of any pressure from the United States or other Western governments, and were made in spite of the Western banks’ allegedly good risk management tools. No wonder, then, that these big banks wanted to shift the scrutiny away from themselves. The IMF had good reason for supporting them, for the Fund itself shared in the culpability. Repeated IMF bailouts elsewhere had contributed to lack of due diligence on the part of the lenders.

  There was an even more profound issue at stake. The U.S. Treasury had during the early 1990s heralded the global triumph of capitalism. Together with the IMF, it had told countries that followed the “right policies”—the Washington Consensus policies—they would be assured of growth. The East Asia crisis cast doubt on this new worldview unless it could be shown that the problem was not with capitalism, but with the Asian countries and their bad policies. The IMF and the U.S. Treasury had to argue that the problem was not with the reforms—implementing liberalization of capital markets, above all, that sacred article of faith—but with the fact that the reforms had not been carried far enough. By focusing on the weaknesses of the crisis countries, they not only shifted blame away from their own failures—both the failures of policy and the failures in lending—but they attempted to use the experience to push their agenda still further.

  CHAPTER 13

  THE WAY AHEAD

  GLOBALIZATION TODAY IS not working for many of the world’s poor. It is not working for much of the environment. It is not working for the stability of the global economy. The transition from communism to a market economy has been so badly managed that, with the exception of China, Vietnam, and a few Eastern European countries, poverty has soared as incomes have plummeted.

  To some, there is an easy answer: Abandon globalization. That is neither feasible nor desirable. As I noted in chapter 5, globalization has also brought huge benefits—East Asia’s success was based on globalization, especially on the opportunities for trade, and increased access to markets and technology. Globalization has brought better health, as well as an active global civil society fighting for more democracy and greater social justice. The problem is not with globalization, but with how it has been managed. Part of the problem lies with the international economic institutions, with the IMF, World Bank, and WTO, which help set the rules of the game. They have done so in ways that, all too often, have served the interests of the more advanced industrialized countries—and particular interests within those countries—rather than those of the developing world. But it is not just that they have served those interests; too often, they have approached globalization from particular narrow mind-sets, shaped by a particular vision of the economy and society.

  The demand for reform is palpable—from congressionally appointed commissions and foundation-supported groups of eminent economists writing reports on changes in the global financial architecture to the protests that mark almost every international meeting. In response, there has already been some change. The new round of trade negotiations that was agreed to in November 2001 at Doha, Qatar, has been characterized as the “development round,” intended not just to open up markets further but to rectify some of the imbalances of the past, and the debate at Doha was far more open than in the past. The IMF and the World Bank have changed their rhetoric—there is much more talk about poverty, and at least at the World Bank, there is a sincere attempt to live up to its commitment to “put the country in the driver’s seat” in its programs in many countries. But many of the critics of the international institutions are skeptical. They see the changes as simply the institutions facing the political reality that they must change their rhetoric if they are to survive. These critics doubt that there is real commitment. They were not reassured when, in 2000, the IMF appointed to its number two position someone who had been chief economist at the World Bank during the period when it took on market fundamentalist ideology. Some critics are so doubtful about these reforms that they continue to call for more drastic actions such as the abolition of the IMF, but I believe this is pointless. Were the Fund to be abolished, it would most likely be recreated in some other form. In times of international crises, government leaders like to feel there is someone in charge, that an international agency is doing something. Today, the IMF fills that role.

  I believe that globalization can be reshaped to realize its potential for good and I believe that the international economic institutions can be reshaped in ways that will help ensure that this is accomplished. But to understand how these institutions should be reshaped, we need to understand better why they have failed, and failed so miserably.

  Interests and Ideology

  In the last chapter we saw how, by looking at the policies of the IMF as if the organization was pursuing the interests of the financial markets, rather than simply fulfilling its original mission of helping countries in crises and furthering global economic stability, one could make sense of what otherwise seemed to be a set of intellectually incoherent and inconsistent policies.

  If financial interests have dominated thinking at the International Monetary Fund, commercial interests have had an equally dominant role at the World Trade Organization. Bilateral trade agreements have been even worse. Embedded in such agreements are often provisions, designed by large multinationals, which require governments to compensate foreign investors for a decrease in their future expected profits, if the government passes a regulation which adversely affects them—no matter how important the regulation is for protecting public health, safety, the environment, or even ensuring economic stability. Private corporations are allowed to sue governments, with the adjudication occurring in private arbitration panels in which the corporations get to pick one of the three judges. The intent is to have a chilling effect on regulations, especially concerning the environment, and it’s worked.

  While the institutions seem to pursue commercial and financial interests above all else, they do not see matters that way. They genuinely believe the agenda that they are pursuing is in the general interest. In spite of the evidence to the contrary, many trade and finance ministers, and even some political leaders, believe that everyone will eventually benefit from trade and capital market liberalization. Many believe this so strongly that they support forcing countries to accept these “reforms,” through whatever means they can, even if there is little popular support for such measures.

  The greatest challenge is not just in the institutions themselves but in mind-sets: Caring about the environment, making sure the poor have a say in decisions that affect them, promoting democracy and fair trade are necessary if the potential benefits of globalization are to be achieved. The problem is that the institutions have come to reflect the mind-sets of those to whom they are accountable. The typical central bank governor begins his day worrying about inflation statistics, not poverty statistics; the trade minister worries about export numbers, not pollution indices.

  The world is a complicated place. Each group in society focuses on a part of the reality that affects it the most. Workers worry about jobs and wages, financiers about interest rates and being repaid. A high interest rate is good for a creditor—provided he or she gets paid back. But workers see high interest rates as inducing an economic slowdown; for them, this means unemployment. No wonder that they see the danger in high interest rates. For the financier who has lent his money out long- term, the real danger is inflation. Inflation may mean that the dollars he gets repaid will be worth less than the dollars he lent.

  In public policy debates, few argue openly in terms of their own self-interest. Everything is couched in terms of general interest. Assessing how a particular policy is likely to affect the general interest requires a model, a view of how the entire system works. Adam Smith provided one such model, arguing in favor of markets; Karl Marx, aware of the adverse effects
that capitalism seemed to be having on workers of his time, provided an alternative model. Despite its many well-documented flaws, Marx’s model has had enormous influence, especially in developing countries where for the billions of poor capitalism seemed not to be delivering on its promises. But with the collapse of the Soviet empire, its weaknesses have become all too evident. And with that collapse, and the global economic dominance of the United States, the market model has prevailed.

  But there is not just one market model. There are striking differences between the Japanese version of the market system and the German, Swedish, and American versions. There are several countries with per capita income comparable to that of the United States, but where inequality is lower, poverty is less, and health and other aspects of living standards higher (at least in the judgment of those living there). While the market is at the center of both the Swedish and American versions of capitalism, government takes on quite different roles. In Sweden, the government takes on far greater responsibilities promoting social welfare; it continues to provide far better public health, far better unemployment insurance, and far better retirement benefits than does the United States. Yet it has been every bit as successful, even in terms of the innovations associated with the “New Economy.” For many Americans, but not all, the American model has worked well; for most Swedes, the American model is viewed as unacceptable—they believe their model has served them well. For Asians, a variety of Asian models has worked well, and this is true for Malaysia and Korea as well as China and Taiwan, even taking into account the global financial crisis.

  Over the past fifty years, economic science has explained why, and the conditions under which, markets work well and when they do not. It has shown why markets may lead to the underproduction of some things—like basic research—and the overproduction of others—like pollution. The most dramatic market failures are the periodic slumps, the recessions and depressions, that have marred capitalism over the past two hundred years, that leave large numbers of workers unemployed and a large fraction of the capital stock underutilized. But while these are the most obvious examples of market failures, there are a myriad of more subtle failures, instances where markets failed to produce efficient outcomes.