Globalization and Its Discontents Revisited

by Joseph E. Stiglitz

  Most other African countries didn’t do quite so well, but with the abandonment, or at least weakening, of the Washington Consensus “structural adjustment” policies, Sub-Saharan Africa as a whole finally started to grow—an average of 4.9 percent from 2000 to 201626—and the long period of deindustrialization under the Washington Consensus policies was halted. Still, many worry that with the decline in global manufacturing employment and the bulge in the population of Africa (expected to be 2.5 billion by 2050),27 the export-led growth model will be insufficient to propel Africa out of poverty.

  The Battles over Transition

  The transition from communism to market economies in several countries turned out to be far more difficult and problematic than almost anyone thought, certainly at the beginning of that transition.

  The key policy controversy was between Washington Consensus policies typically implemented through shock therapy—rapid change at any cost—and a more gradual approach which begins by building the foundations of a market economy, what I called the institutional infrastructure, including the legal framework.

  At the time I wrote GAID, with a little more than a decade of data, the economies of transition provided another arena in which Washington Consensus policies seemed to be failing. The evidence strongly favored the gradualists, with their broader approach to economics. The shock therapists claimed that the jury was still out.

  It has always been a question of the tortoise versus the hare: shock therapy might seem to do better in the short run, but that is not what really matters. What matters is the long run. The gradualists believed that the best way to build a market economy was by constructing it slowly and carefully. These investments, while costly in the short run and requiring patience, would pay off in the long run. Those favoring the more gradualist approach included those, like myself, who believed that the success of a market economy depended on having the right legal framework—for instance, good corporate governance laws to ensure that the managers don’t steal the assets of the firm for their own benefit. Those calling for rapid transition thought that one could skip these “details.” The shock therapists argued that one had to quickly destroy the vestiges of the past, and kick-start the market economy through rapid privatization. With clear owners, there would be incentives to create the necessary institutional infrastructure. On the contrary, I worried that those who were engaged in stealing would have every incentive to ensure that they could continue stealing; those who were making their money by monopoly power would fight against good competition laws.

  Now, a quarter of a century after the beginning of the transition, the answer is clear: shock therapy and the Washington Consensus policies were an even greater failure than they appeared to be at the time that GAID was published, and gradualism even more of a success, as seen in countries such as China and Vietnam.28

  China and Vietnam continue their remarkable growth—China averaging more than 10 percent growth during the first thirty years of its transition, moving almost 800 million people out of poverty. Vietnam has averaged growth of 6.9 percent since 1990.29 Meanwhile, the shallow roots of the economies whose transition was based on shock therapy were exposed. Many of those that seemed to be doing well did so because of the real estate sector—there was no real economy underneath—and with the 2008 crisis showing real estate bubbles for what they were, those economies collapsed. Latvia, at one time heralded as a success story for shock therapy, illustrates: it has had an average growth rate of 1 percent over the last quarter century (1991–2016). Russia has deindustrialized, with its fortunes depending on movements in resource prices, especially oil. With the collapse of oil prices in 2014, Russia went into recession.

  As I note in GAID, communism was an inefficient way of organizing production. Moving from an inefficient system to an efficient dynamic market system should have led unambiguously to higher incomes. The countries that fell behind during the reign of communism should have been able to catch up—the transition should thus have been marked by extremely high growth rates. Of course, there might be some bumps along the way—like the transition recessions seen in so many countries immediately following the fall of the Berlin Wall—but after a quarter century, those bumps should have been a thing of the past. On the twenty-fifth anniversary of the fall of the wall, Branko Milanovic´, with whom I had worked closely at the World Bank, conducted a reckoning: Seven countries, with a combined population of 80 million—a fifth of all transition countries—have yet to reach the level of real income that they had in 1990. “Basically, they are countries with at least three to four wasted generations. At current rates of growth, it might take them some 50 to 60 years—longer than they were under Communism!—to get back to the income levels they had at the fall of Communism.”30 Forty percent live in countries whose GDP per capita under capitalism continues to fall further behind that of the OECD. This includes, most importantly, Russia. Only a third live in countries that are actually catching up. These include countries that have the good fortune of having an abundance of natural resources (Azerbaijan and Kazakhstan), some that are undemocratic (Belarus), and strong reformers.

  The one large country that did well by most accounts, Poland, grew at an average annual rate of 3.2 percent over the period 1989 to 2016.31 The shock therapists and gradualists both claim its victory as theirs. Leszek Balcerowicz, an early “reformer” in Poland, imposed macroshock therapy—tight monetary and fiscal policies that pushed Poland into deep recession, with a decline in GDP of close to 14 percent from 1989 to 1991. But then Gregory Kolodko, as the deputy prime minister and finance minister, helped structure a gradual privatization, a more gradual transition of the economy toward a market economy. To me, it is clear that Poland’s success was due to ­Kolodko’s gradualism. Poland would have been even more successful had it not been forced to go through the painful macroshock therapy.

  Beyond the fact that in almost none of the countries treated with shock therapy was there the burst of growth that so many had anticipated at the beginning of transition, there were three big disappointments, two of which are foreshadowed in GAID. The first was an increase in inequality: the way the IMF and the U.S. Treasury managed the transition in Russia and elsewhere helped create the oligarchs. In a short span of time, Russia, Georgia, Estonia, Latvia, and Lithuania managed to increase the Gini coefficient by an astonishing 10 points (by most accounts, twice the increase experienced in the United States since Reagan, an era of almost unprecedented growth of inequality in America).

  Second, there was hope that there would be a political transition to democracy as well as an economic transition. In many ways, the former was more important than the latter. Successful democratization would inevitably lead to a move to the market. But I worried that an unsuccessful economic transition would undermine support for democracy. In particular, I worried that the way the IMF, the World Bank, and the U.S. Treasury pushed privatization and the transition more generally in Russia would undermine democratic development there, and that is indeed what happened. As Russian interference in the U.S. election of 2016 showed, an authoritarian Russia is still a global threat to democracy. There is no way of being sure whether a more successful economic transition would have paved the way for a more democratic Russia; but clearly, the failures of economic transition described in GAID played some role in the disappointing political evolution of the country.

  Similarly, Hungary, after growing at a meager 1.2 percent annual rate from 1991 to 2009, elected Viktor Orbán as prime minister in 2010—and he quickly showed his authoritarian tendencies, working, for instance, to constrain the press. All the EU states are supposed to be committed to democracy: he challenged the rules and the willingness of the others to enforce them.32

  And then there was the big and unanticipated disappointment: I had expected that the countries in transition that joined the EU would do better in both economic and political transition than they have. Their long-term growth has been a disappointment, their commitment to democracy with t
ransparent and accountable institutions often even more so. The EU helped provide the institutional infrastructure that was necessary for success on both fronts. On both accounts, those countries did better than those who were not so lucky as to get into the EU. Being near the EU’s powerhouse, Germany, helps. German firms often located factories in Poland and the Czech Republic to take advantage of their much lower wages, especially given their relatively high levels of education and skills.

  In short, neither the political nor the economic transition from Communism to the market economy and democracy has gone smoothly. Some of the forebodings I had as I wrote GAID have materialized. In the end, of course, the countries themselves must bear responsibility for what happens there. Still, the way the international community “helped”—including the IMF, the World Bank, and the U.S. government—turned out to be unhelpful.

  THE BATTLE OVER GLOBAL GOVERNANCE

  A central message of GAID is the importance of governance—who makes the decisions matters. Globalization has long been governed by the developed countries for their interest—and most especially for the financial and corporate interests within those countries. In the years since the publication of GAID, dissatisfaction with global governance has spread. The disparity between the economic realities of the twenty-first century and governance structures created in 1944 for the World Bank and the IMF have become increasingly evident, even more so after 2008. During the East Asia crisis, the U.S. secretary of the Treasury said, when the countries complained about the conditions imposed upon them, that he who pays the piper calls the tune. With the onset of the 2008 crisis, the money was in Asia. Given that, the Asian countries now felt that it was their turn to call the tune. The old governance structure was increasingly unacceptable.

  And yet, since GAID, progress has been strikingly slow. The G-20, the group of twenty of the major countries, representing some two thirds of the world’s population and 80 percent of global GDP, has replaced the G-7,33 the small group of seven advanced countries that were trying to “run” the global economy. That’s an improvement; but still, the twenty countries of the G-20 were not chosen according to any set of global principles. They are unrepresentative and lack legitimacy. Small countries have almost no voice. Africa, a continent with 1.2 billion people in 2016, is massively underrepresented.34 Indeed, in terms of governance, in these respects, even the IMF is better.

  Financing for Development and Global Taxation

  The UN has recognized some of these limitations. In March 2002, it organized a global meeting on finance for development at Monterrey, Mexico. Its view, correct in my judgment, was that finance for development was too important to be left to finance ministers, who are simply too linked to their own financial markets.

  What happened in the third Finance for Development meeting, held in Addis Ababa in July 2015, illustrates the persistent problems in global governance. The developing countries had long since given up on the promises of financial assistance (aid) from the developed countries.35 They knew they had to develop their own sources of finance. Under the urging of the advanced countries, they opened up their markets to multinationals from the advanced countries. Now, the concern was the ability of those companies to avoid taxation—they came to the developing countries demanding and using infrastructure and other public services, but they refused to pay their fair share of taxes. The multinationals’ clever lawyers used the international system of taxation to avoid paying taxes both in the developed and the developing countries. The companies had no compunction about being free riders.

  There was a real need for reform to the tax regime for multinational corporations. As chairman of the Council of Economic Advisers in the 1990s, I had argued for this reform, but matters have only grown worse. Apple became emblematic, paying a tax in the United States that was far, far below the 35 percent of its income that is the official tax rate by taking advantage of loopholes in the United States tax code and routing much of its profits through Irish subsidiaries. So arrogant was its CEO that he said that he would pay taxes in the United States if the United States lowered the tax rate to (what he judged to be) a reasonable level:36 some read this to mean “only if.”

  At Addis Ababa, the debate was over the venue for discussions on global tax reform—a matter of global governance. The United States, home of some of the biggest and best tax avoiders and evaders, wanted it to be the OECD, the “club” of the advanced countries—a venue in which it had enormous influence. The developing world, led by India, said that the appropriate forum was the UN, where all countries have a voice. Power matters: the United States got its way.37

  United States Blocks Vital Reforms in the Global Economic Architecture

  The United States has blocked other important reforms in the global economic architecture—and the fact that it has the power to do so reflects deficiencies in global governance.38 These much-needed reforms include the following:

  • The replacement of the G-20 with a more representative and legitimate Global Economic Coordination Council (GECC). The G-20 was, as I noted, far more globally representative than the G-7, which included small countries like Canada, but excluded large countries like China and India. Still, the G-20 is missing representation from the poorer countries, and even among the richer countries, there is a certain randomness—it was just the list of people President George W. Bush invited to the initial meeting.

  The G-20 played an important role in designing the response to the global financial crisis of 2008–9. It was important for every country to stimulate its economy. As each expanded its economy, others benefited from the resulting increase in trade. But since then, the G-20 has been relatively ineffective in garnering the kinds of cooperation needed to make the global economy work well.

  A GECC reflects the obvious need for more global economic cooperation in our highly integrated global economy. At the UN, there are too many voices—we need a smaller group than 193 members to move the conversation forward. The IMF is distorted: it has traditionally been an institution in which creditor interests and views are disproportionately represented; and with the United States being the only country with the veto power, its perspectives are inevitably strongly influenced by the United States. A GECC can be designed to provide a forum with greater legitimacy and representativeness to address the world’s economic problems. The hope is that common understandings could be developed, and in the areas where global cooperation is most needed, unified actions could be taken.

  • The establishment of a framework for debt restructuring for countries that have borrowed more than they can repay. While the need for such a framework had long been evident, following the Argentina crisis of 2001–2, U.S. court decisions undermining long-standing principles of international law provided urgency to the matter. Among the principles attacked was that of “sovereign immunity”—the idea that countries could not, in general, be sued without their consent. The U.S. court went so far as to make debt restructuring almost impossible. In 2015 the UN overwhelmingly adopted a set of principles for debt restructuring—by a vote of 136 to 6, with 41 abstentions. The strongest opponent was the United States, where the government seemed beholden to a few hedge funds that had bought Argentinean bonds after Argentina defaulted, paying cents on the dollar, and were now trying to collect as if they had been the ones who originally lent to Argentina. (Worse, they then took advantage of a quirk in the law to try to get interest on what they had not been paid at rates far, far in excess of the market rate.) In short, the U.S. government sided with those trying to exploit the suffering of countries in crises.39

  Of course, when global growth is strong and stable, few countries face the extreme situation in which they cannot pay back what they owe. The 2008 global financial crisis racheted up the importance of this issue further, as several countries looked like they would not be able to make their debt commitments. (There were debt restructurings for Cyprus, Greece, and the Seychelles.)

  • The establishment of a global reserve sy
stem to replace the U.S. dollar as the de facto global reserve currency. We have already described the inequities in the dollar-based system—involving large transfers of money from developing countries and emerging markets to the United States—and how the buildup of reserves depresses global demand, resulting in an overall poorer performance for the global economy. The dollar-based system can also contribute to global instability. Yet the American government refuses to entertain serious discussion of reforming the global reserve system in any venue.40

  Governance of the IMF and the World Bank

  Global financial markets have grown enormously since GAID was published,41 and for the World Bank and the IMF to continue to play the critical role they played in the past, they must have more resources. When the 2008–9 crisis hit, the IMF succeeded in getting substantial additional funding. The World Bank was slow to act, and now, as the deficiencies in its resources become increasingly evident, it appears impossible to get enough funds. The problem is partly that the U.S. Congress won’t provide the funds (and, with the Trump presidency, it is not likely to even be asked for them). But the obvious source of money is Asia and the Middle East. It is inevitable that there will be a linkage between funds and governance: naturally, these countries want more of a voice if they give more money. But the United States and other advanced countries are unwilling to allow this. The United States would rather see these institutions lose their influence than lose its own influence within these institutions.