Globalization and Its Discontents Revisited

by Joseph E. Stiglitz

  Recently, attention has focused on debt forgiveness, and for good reason. Without the forgiveness of debt, many of the developing countries simply cannot grow. Huge proportions of their current exports go to repaying loans to the developed countries.19 The Jubilee 2000 movement mobilized enormous international support for debt forgiveness. The movement gained the backing of churches throughout the developed world. To them, it seemed a moral imperative, a reflection of basic principles of economic justice.

  The issue of the moral responsibility of the creditors was particularly apparent in the case of Cold War loans.20 When the IMF and World Bank lent money to the Democratic Republic of the Congo’s notorious ruler Mobutu, they knew (or should have known) that most of the money would not go to help that country’s poor people, but rather would be used to enrich Mobutu. It was money paid to ensure that this corrupt leader would keep his country aligned with the West. To many, it doesn’t seem fair for ordinary taxpayers in countries with corrupt governments to have to repay loans that were made to leaders who did not represent them.

  The Jubilee movement was successful in getting much larger commitments to debt forgiveness. Whereas before 2000 there had been a debt relief program for the highly indebted countries, few met the criteria that the IMF had erected. By the end of 2000, as a result of international pressure, twenty-four countries had passed the threshold.

  But debt relief needs to go further: as it stands now, the agreements touch only the poorest of the countries. Countries like Indonesia, devastated by the East Asia crisis and the failures of the IMF policies there, are still too well off to be brought in under the umbrella.

  REFORMING THE WTO AND BALANCING THE TRADE AGENDA

  The global protests over globalization began at the WTO meetings in Seattle, Washington, because it was the most obvious symbol of the global inequities and the hypocrisy of the advanced industrial countries. While these countries had preached—and forced—the opening of the markets in the developing countries to their industrial products, they had continued to keep their markets closed to the products of the developing countries, such as textiles and agriculture. While they preached that developing countries should not subsidize their industries, they continued to provide billions in subsidies to their own farmers, making it impossible for the developing countries to compete. While they preached the virtues of competitive markets, the United States was quick to push for global cartels in steel and aluminum when its domestic industries seemed threatened by imports. The United States pushed for liberalization of financial services, but resisted liberalization of the service sectors in which the developing countries have strength, construction and maritime services. As we have noted, so unfair has the trade agenda been that not only have the poorer countries not received a fair share of the benefits; the poorest region in the world, Sub-Saharan Africa, was actually made worse off as a result of the last round of trade negotiations.

  These inequities have increasingly been recognized, and that, combined with the resolve of some of the developing countries, resulted in the Doha “development” round of trade negotiations (November 2001), which put on its agenda the redressing of some of these past imbalances. But there is a long way to go: the United States and the other advanced industrial countries only agreed to discussions; just to discuss redressing some of these imbalances was viewed as a concession!

  One of the areas that was of particular concern at Doha was intellectual property rights. These are important, if innovators are to have incentives to innovate—though much of the most crucial research, such as that in basic science and mathematics, is not patentable. No one denies the importance of intellectual property rights. But these rights need to balance out the rights and interests of producers with those of users—not only users in developing countries but researchers in developed countries. In the final stages of the Uruguay negotiations, both the Office of Science and Technology and the Council of Economic Advisers worried that we had not got the balance right—the agreement put producers interests over users. We worried that in doing so, the rate of progress and innovation might actually be impeded; after all, knowledge is the most important input into research, and stronger intellectual property rights can increase the price of this input. We were also concerned about the consequences of the denial of life-saving medicines to the poor. This issue subsequently gained international attention in the context of the provision of AIDS medicines in South Africa. The international outrage forced the drug companies to back down—and it appears that, going forward, the most adverse consequences will be circumscribed. But it is worth noting that initially even the Democratic U.S. administration supported the pharmaceutical companies. What we were not fully aware of was another danger, what has come to be termed bio-piracy, international companies patenting traditional medicines or foods; it is not only that they seek to make money from “resources” and knowledge that rightfully belong to the developing countries, but in so doing, they squelch domestic firms that have long provided the products. While it is not clear whether these patents would hold up in court if they were effectively challenged, it is clear that the less developed countries may not have the legal and financial resources required to challenge the patent. This issue has become a source of enormous emotional, and potentially economic, concern all around the developing world. I was recently in an Andean village in Ecuador, where the indigenous mayor railed against how globalization had led to bio-piracy.

  Reforming the WTO will require thinking further about a more balanced trade agenda—more balanced in treating the interests of the developing countries, more balanced in treating concerns, like environment, that go beyond trade.

  But redressing the current imbalances does not require that the world wait until the end of a new round of trade negotiations. International economic justice requires that the developed countries take actions to open themselves up to fair trade and equitable relationships with developing countries without recourse to the bargaining table or attempts to extract concessions in exchange for doing so. The European Union has already taken steps in this direction, with its “Everything But Arms” initiative to allow the free importing of all goods, other than arms, from the poorest countries into Europe. It does not solve all the complaints of the developing countries: they still will not be able to compete against highly subsidized European agriculture. But it is a big step in the right direction. The challenge now is to get the United States and Japan to participate. Such a move would be of enormous benefit to the developing world and would even benefit the developed countries, whose consumers would be able to obtain goods at lower prices.

  TOWARD A GLOBALIZATION WITH A MORE HUMAN FACE

  The reforms I have outlined would help make globalization fairer, and more effective in raising living standards, especially of the poor. It is not just a question of changing institutional structures. The mind-set around globalization itself must change. Finance and trade ministers view globalization as largely an economic phenomenon; but to many in the developing world, it is far more than that.

  One of the reasons globalization is being attacked is that it seems to undermine traditional values. The conflicts are real, and to some extent unavoidable. Economic growth—including that induced by globalization—will result in urbanization, undermining traditional rural societies. Unfortunately, so far, those responsible for managing globalization, while praising these positive benefits, all too often have shown an insufficient appreciation of this adverse side, the threat to cultural identity and values.21 This is surprising, given the awareness of the issues within the developed countries themselves: Europe defends its agricultural policies not just in terms of those special interests, but to preserve rural traditions. People in small towns everywhere complain that large national retailers and shopping malls have killed their small businesses and their communities.

  The pace of global integration matters: a more gradual process means that traditional institutions and norms, rather than being overwhelmed, can ada
pt and respond to the new challenges.

  Of equal concern is what globalization does to democracy. Globalization, as it has been advocated, often seems to replace the old dictatorships of national elites with new dictatorships of international finance. Countries are effectively told that if they don’t follow certain conditions, the capital markets or the IMF will refuse to lend them money. They are basically forced to give up part of their sovereignty, to let capricious capital markets, including the speculators whose only concerns are short-term rather than the long-term growth of the country and the improvement of living standards, “discipline” them, telling them what they should and should not do.

  But countries do have choices, and among those choices is the extent to which they wish to subject themselves to international capital markets. Those, such as in East Asia, that have avoided the strictures of the IMF have grown faster, with greater equality and poverty reduction, than those who have obeyed its commandments. Because alternative policies affect different groups differently, it is the role of the political process—not international bureaucrats—to sort out the choices. Even if growth were adversely affected, it is a cost many developing countries may be willing to pay to achieve a more democratic and equitable society, just as many societies today are saying it is worth sacrificing some growth for a better environment. So long as globalization is presented in the way that it has been, it represents a disenfranchisement. No wonder then that it will be resisted, especially by those who are being disenfranchised.

  TODAY, GLOBALIZATION IS being challenged around the world. There is discontent with globalization, and rightfully so. Globalization can be a force for good: the globalization of ideas about democracy and of civil society have changed the way people think, while global political movements have led to debt relief and the treaty on land mines. Globalization has helped hundreds of millions of people attain higher standards of living, beyond what they, or most economists, thought imaginable but a short while ago. The globalization of the economy has benefited countries that took advantage of it by seeking new markets for their exports and by welcoming foreign investment. Even so, the countries that have benefited the most have been those that took charge of their own destiny and recognized the role government can play in development rather than relying on the notion of a self-regulated market that would fix its own problems.

  But for millions of people globalization has not worked. Many have actually been made worse off, as they have seen their jobs destroyed and their lives become more insecure. They have felt increasingly powerless against forces beyond their control. They have seen their democracies undermined, their cultures eroded.

  If globalization continues to be conducted in the way that it has been in the past, if we continue to fail to learn from our mistakes, globalization will not only not succeed in promoting development but will continue to create poverty and instability. Without reform, the backlash that has already started will mount and discontent with globalization will grow.

  This will be a tragedy for all of us, and especially for the billions who might otherwise have benefited. While those in the developing world stand to lose the most economically, there will be broader political ramifications that will affect the developed world too.

  If the reforms outlined in this last chapter are taken seriously, then there is hope that a more humane process of globalization can be a powerful force for the good, with the vast majority of those living in the developing countries benefiting from it and welcoming it. If this is done, the discontent with globalization would have served us all well.

  The current situation reminds me of the world some seventy years ago. As the world plummeted into the Great Depression, advocates of the free market said, “Not to worry; markets are self-regulating, and given time, economic prosperity will resume.” Never mind the misery of those whose lives are destroyed waiting for this so-called eventuality. Keynes argued that markets were not self-correcting, or not at least in a relevant time frame. (As he famously put it, “In the long run, we are all dead.”)* Unemployment could persist for years, and government intervention was required. Keynes was pilloried—attacked as a Socialist, a critic of the market. Yet in a sense, Keynes was intensely conservative. He had a fundamental belief in the markets: if only government could correct this one failure, the economy would be able to function reasonably efficiently. He did not want a wholesale replacement of the market system; but he knew that unless these fundamental problems were addressed, there would be enormous popular pressures. And Keynes’s medicine worked: since World War II, countries like the United States, following Keynesian prescriptions, have had fewer and shorter-lived downturns, and longer expansions than previously.

  Today, the system of capitalism is at a crossroads just as it was during the Great Depression. In the 1930s, capitalism was saved by Keynes, who thought of policies to create jobs and rescue those suffering from the collapse of the global economy. Now, millions of people around the world are waiting to see whether globalization can be reformed so that its benefits can be more widely shared.

  Thankfully, there is a growing recognition of these problems and increasing political will to do something. Almost everyone involved in development, even those in the Washington establishment, now agrees that rapid capital market liberalization without accompanying regulation can be dangerous. They agree too that the excessive tightness in fiscal policy in the Asian crisis of 1997 was a mistake. As Bolivia moved into a recession in 2001, caused in part by the global economic slowdown, there were some intimations that that country would not be forced to follow the traditional path of austerity and have to cut governmental spending. Instead, as of January 2002, it looks like Bolivia will be allowed to stimulate its economy, helping it to overcome the recession, using revenues that it is about to receive from its newly discovered natural gas reserves to tide it over until the economy starts to grow again. In the aftermath of the Argentina debacle, the IMF has recognized the failings of the big-bailout strategy and is beginning to discuss the use of standstills and restructuring through bankruptcy, the kinds of alternatives that I and others have been advocating for years. Debt forgiveness brought about by the work of the Jubilee movement and the concessions made to initiate a new development round of trade negotiations at Doha represent two more victories.

  Despite these gains, there is still more to be done to bridge the gap between rhetoric and reality. At Doha, the developed countries only agreed to begin discussing a fairer trade agenda; the imbalances of the past have yet to be redressed. Bankruptcy and standstills are now on the agenda; but there is no assurance that there will be an appropriate balance of creditor and debtor interests. There is a lot more participation by those in developing countries in discussions concerning economic strategy, but there is little evidence yet of changes in policies that reflect greater participation. There need to be changes in institutions and in mind-sets. The free-market ideology should be replaced with analyses based on economic science, with a more balanced view of the role of government drawn from an understanding of both market and government failures. There should be more sensitivity about the role of outside advisers, so they support democratic decision making by clarifying the consequences of different policies, including impacts on different groups, especially the poor, rather than undermining it by pushing particular policies on reluctant countries.

  It is clear that there must be a multipronged strategy of reform. One should be concerned with reform of the international economic arrangements. But such reforms will be a long time coming. Thus, the second prong should be directed at encouraging reforms that each country can take upon itself. The developed countries have a special responsibility, for instance, to eliminate their trade barriers, to practice what they preach. But while the developed countries’ responsibility may be great, their incentives are weak: after all, offshore banking centers and hedge funds serve interests in the developed countries, and the developed countries can withstand well the instability that a failure t
o reform might bring to the developing world. Indeed, the United States arguably benefited in several ways from the East Asia crisis.

  Hence, the developing countries must assume responsibility for their well-being themselves. They can manage their budgets so that they live within their means, meager though that might be, and eliminate the protectionist barriers which, while they may generate large profits for a few, force consumers to pay higher prices. They can put in place strong regulations to protect themselves from speculators from the outside or corporate misbehavior from the inside. Most important, developing countries need effective governments, with strong and independent judiciaries, democratic accountability, openness and transparency and freedom from the corruption that has stifled the effectiveness of the public sector and the growth of the private.

  What they should ask of the international community is only this: the acceptance of their need, and right, to make their own choices, in ways which reflect their own political judgments about who, for instance, should bear what risks. They should be encouraged to adopt bankruptcy laws and regulatory structures adapted to their own situation, not to accept templates designed by and for the more developed countries.22

  What is needed are policies for sustainable, equitable, and democratic growth. This is the reason for development. Development is not about helping a few people get rich or creating a handful of pointless protected industries that only benefit the country’s elite; it is not about bringing in Prada and Benetton, Ralph Lauren or Louis Vuitton, for the urban rich and leaving the rural poor in their misery. Being able to buy Gucci handbags in Moscow department stores did not mean that country had become a market economy. Development is about transforming societies, improving the lives of the poor, enabling everyone to have a chance at success and access to health care and education.