8 See World Bank, The East Asian Miracle: Economic Growth and Public Policy (Oxford: Oxford University Press, 1993).
9 In standardized tests, among the thirty-five countries in the OECD, the United States performed around average in science. Its performance was also around average in reading, but below average in mathematics. Source: OECD 2015 Programme for International Student Assessment (PISA) findings.
10 Source: 2014 data (most recent) from the Bureau of Labor Statistics.
11 “U.S. Energy and Employment Report,” U.S. Department of Energy, January 2017. The Department of Energy has acknowledged that the data it collects on solar industry is imperfectly comparable to some other industries. But regardless, the figures support a picture of an industry in ascendancy, whereas investment and employment in coal are in marked decline. This also suggests the foolishness of the imposition of duties on solar panels from China during the Obama administration—pushed by U.S. solar manufacturers. Lower panel costs induce more use of solar panels—a boon to the environment as well as to job creation. The new jobs created there almost surely outweigh the limited number of jobs that would have been created in manufacturing solar panels.
12 These ideas are developed at greater length in two papers I wrote with D. Delli Gatti, M. Gallegati, B.C. Greenwald and A. Russo: “Sectoral Imbalances and Long-Run Crises,” in Franklin Allen et al., eds., The Global Macro Economy and Finance, IEA Conference Volume No. 150-III (Houndmills, UK, and New York: Palgrave, 2012), pp. 61–97 (originally presented to World Congress of the International Economic Association, Jordan, June 2014); and “Mobility Constraints, Productivity Trends, and Extended Crises,” Journal of Economic Behavior and Organization 83 (3), pp. 375–93.
For a more popular and accessible account, see Part VIII in Joseph E. Stiglitz, The Great Divide, op. cit.
13 The most egregious example was the demand of the Western powers that China keep its markets open to opium, which was having a devastating effect on the country. From the perspective of the West, this was important to correct a trade imbalance. When China refused, the Opium Wars (1839–60) ensued. As I have already noted, tariff structures (called escalating tariffs) designed to encourage developing countries to produce raw materials, with value-added activities occurring in the more advanced countries, remain a part of today’s rules-based trade regime. See Andrew Charlton and Joseph E. Stiglitz, Fair Trade for All, op. cit.
14 In 2016, $3.7 trillion, higher than $3.6 trillion for the United States, according to the IMF.
15 In 2016, $5.2 trillion, compared to the United States’ $3.3 trillion, according to the IMF.
16 Much of GAID (Part II of this volume) was devoted to explaining the Washington Consensus and why it failed.
17 For an overview, see, for instance, A. Noman and J. E. Stiglitz, “Economics and Policy: Some Lessons from Africa’s Experience,” in Célestin Monga and Justin Yifu Lin, eds., The Oxford Handbook of Africa and Economics, Volume II: Policies and Practices (Oxford and New York: Oxford University Press, 2015), pp. 830–48; and Akbar Noman and Joseph E. Stiglitz, eds., Efficiency, Finance, and Varieties of Industrial Policy: Guiding Resources, Learning, and Technology for Sustained Growth (New York: Columbia University Press, 2016), and especially the “Overview,” pp. 1–20. For the cases of Tanzania or Mozambique, see “Learning to Compete: Industrialization in Africa and Emerging Asia,” Brookings Institution, 2014, https://www.brookings.edu/research/learning-to-compete-industrialization-in-africa-and-emerging-asia.
18 See World Bank, The East Asian Miracle: Economic Growth and Public Policy (New York: Oxford University Press, 1993); and J. E. Stiglitz, “Some Lessons from the East Asian Miracle,” World Bank Research Observer 11 (2) (August 1996), pp. 151–77.
19 Indeed, just before this time, Nobel Prize–winning economist Gunnar Myrdal had predicted that Asia would be condemned to continue the life of poverty in which they had been mired for centuries. See G. Myrdal, Asian Drama: An Inquiry into the Poverty of Nations (New York: Twentieth Century Fund, 1968).
20 In the introduction, I describe other aspects of this nostalgia which may have played an especially important role in the United States and some other countries: a nostalgia for a world in which certain groups (white males) had a more dominant role than they do today. That world too will not be coming back.
21 I explain how it works in chapter 1. In brief: when a country saves less than it invests, it has to borrow the difference from abroad (or in some other way get the difference through capital inflows). But capital inflows, in turn, are just equal to the difference between a country’s imports and exports. Hence, an increase in the gap between domestic investment and savings leads to more capital inflows, which must mean an increase in the trade deficit. So in the end, to analyze changes in the trade deficit, one has to go back to analyze changes in domestic savings and investment. If there are no changes in domestic savings and investment, then there can’t be a change in the trade deficit.
22 Higher prices might induce households to save less (until they can adjust their living standards), and if so, that would lead to a still higher trade deficit.
23 See J. Furman, K. Russ and J. Shambaugh, “US Tariffs Are an Arbitrary and Regressive Tax,” VOX Column, January 12, 2017, http://voxeu.org/article/us-tariffs-are-arbitrary-and-regressive-tax.
24 Indeed, as I note in the introduction, the rules-based system prevented an outbreak of beggar-thy-neighbor protectionism as the world sank into the Great Recession.
25 As I note earlier, his administration has already announced that it will not honor adverse rulings from the WTO.
26 Source: IMF World Economic Outlook, April 2017. This is the source of GDP data in Part I and the afterword, unless otherwise noted.
27 Source: People’s Bank of China, see “Template on International Reserves and Foreign Currency Liquidity (as at July 31 2017)” at http://www.safe .gov.cn/wps/portal/english/Data.
28 For instance, if a country provides “illegal” subsidies, one can levy what are called countervailing duties. The U.S. has claimed that China has subsidized solar panels—even though having inexpensive solar panels is of enormous benefit to the world in the fight against climate change. Ironically, though the rationale for the suit was that China was stealing American manufacturing jobs (without China’s subsidies, allegedly there would have been more manufacturing jobs), China indirectly helped create more U.S. jobs. There are far more jobs associated with the installation of solar panels than with manufacturing them, and lower solar panel prices encouraged the development of this new industry.
There are provisions in U.S. law that allow the imposition of duties when imports threaten U.S. security. As this book goes to press, Trump is threatening to use this little-used provision in steel, even though America’s current steel capacity seems more than adequate to meet any security needs.
29 This is true even in the case of long-term friendly trading partners—like Canada—when we start acting in a hostile manner. Trump has threatened to impose duties on Canadian lumber, claiming that the way the government allocates logging rights effectively subsidizes it. Canada denies it. (The U.S. has been accused of subsidizing the lumber industries, though in different ways.) One response, broached by the premier of one of Canada’s provinces, was to forbid dirty American coal from its ports—a measure long sought by environmentalists. See Sunny Dhillon and Wendy Stuek, “Christy Clark Calls on Ottawa to Ban Coal Exports After Softwood Lumber Duties,” Globe and Mail, April 26, 2017, available at http://www.theglobeandmail.com/news/british-columbia/christy-clark-calls-on-ottawa-to-ban-coal-exports-after-softwood-lumber-duties/article34822276/.
30 M. Angeles Villareal, “U.S.-Mexico Economic Relations: Trends, Issues, and Implications,” Congressional Research Service, 2017, https://fas.org/sgp/crs/row/RL32934.pdf. Data source is the Global Trade Atlas.
CHAPTER 4
1 This point has been forcefully made in a recent book by two Nobel Prize winners, George Akerlof and Rob Shil
ler, entitled Phishing for Phools: The Economics of Manipulation and Deception (Princeton, NJ: Princeton University Press, 2015).
2 As we discuss in the afterword, one of the marked changes in globalization since GAID was first published is the position taken by the IMF towards capital controls or other measures designed to stabilize short-term capital flows. While among the major battles I had with the IMF was over their adamant opposition to such measures, their official “institutional” view now is that at least in certain situations, such measures are desirable.
3 That excessive faith in markets—combined with special interests—fed the zeal for privatization that I describe in GAID. Failures in privatization in the years since GAID, in both developed and developing countries, reinforce this conclusion. In GAID, I describe the story of America’s privatization of USEC, the public company making enriched uranium. The privatized company was very unsuccessful and filed for Chapter 11 bankruptcy in the first quarter of 2014. Among the most criticized privatizations in the United States has been the privatization of its prisons, which proved to be the training grounds for many of those engaged in human rights abuses in the Iraq War. Other privatizations that are widely viewed as failures include UK’s railroads and road privatizations in Mexico.
4 The drug companies’ retort that these high prices are necessary to finance their research has little validity. Indeed, I note in chapter 2 that intellectual property protection was stripped away from naturally occurring genes in the United States. The result was not just lower prices, but an increased pace of innovation—better, and lower-cost tests for the presence of the relevant genes.
5 In Europe, the Troika (the IMF, the European Central Bank, and the European Commission, which together managed the bailouts and rescue packages) has consistently and massively underestimated the effects of their programs—which induced a 25 percent collapse in Greece’s GDP between 2009 and 2013. One might think that after missing the mark once or twice they would have come to question their models. But no, they held on to them with even more vigor, and doubled down on the policies which brought so many countries in Europe into depression.
6 A fuller description of these changes is given in Joseph E. Stiglitz et al., Rewriting the Rules of the American Economy, op. cit.
7 This is part of the critique of Thomas Piketty’s analysis of the source of the growth of inequality. See his book, Capital in the Twenty-First Century (Cambridge, MA: Belknap Press of Harvard University Press, 2014), and my books The Great Divide, op. cit., and The Price of Inequality, op. cit.
8 See in particular Joseph E. Stiglitz et al., Rewriting the Rules of the American Economy, op. cit.
9 See S. F. Reardon and K. Bischoff, “Income Inequality and Income Segregation,” American Journal of Sociology 116 (4) (2011), pp. 1092–153.
10 With the earned income tax credit, an individual with a low income receives money from the government in proportion to his wage income.
11 There are many details of how this can be done that take us beyond this brief overview. For instance, the United States could impose a global minimum corporate income tax. The underlying problem is what is called the transfer price system, which allows multinationals largely to make up prices—allowing them to pretend that most of their profits originate in low-tax jurisdictions. Apple, discussed in an earlier chapter, provided an example of how this could be done in ways that almost eliminated taxes on profits made in Europe.
12 Data for 2016. For the United States, the figure is the share of manufacturing in total nonfarm employment from the BLS. For Germany, employment in manufacturing is from the OECD and total employment is from Bundesagentur für arbeit. The definition of manufacturing sometimes differs across countries, but the picture is still clear: the share of employment in manufacturing has been declining in the past decades.
13 Recall from our earlier discussion that industrial policies are not limited to policies promoting industry. Any policies by which government promotes a particular sector are called industrial policies—including policies aimed at restructuring the economy from manufacturing to a service sector.
14 See Bruce C. Greenwald and Joseph E. Stiglitz, Creating a Learning Society: A New Approach to Growth, Development, and Social Progress, op. cit.
15 Joseph E. Stiglitz and Mary Kaldor, eds., The Quest for Security: Protection Without Protectionism and the Challenge of Global Governance (New York: Columbia University Press, 2013).
16 We also need to manage the trade deficit—sudden changes in the trade deficit, such as occurred under Reagan (as a percentage of GDP, the trade deficit increased from 0.5 percent in 1981 to 3.1 percent in 1987) or Bush (increasing from around 3.6 percent in 2000 to 5.5 percent in 2006), put enormous stress on the economy.
17 We can, for instance, backward-engineer what is required to achieve all of these goals. Take the hardest case which the United States confronted after the onset of the Great Recession, where interest rates were set at zero, so there was no further scope for monetary policy. Even at a 0 percent interest rate, there is some level of government expenditure that can support full employment. At this zero interest rate, full employment equilibrium, we can calculate both the trade and fiscal deficits, and the exchange rate which is consistent with that trade deficit.
Assume now, worried about the effect of the trade deficit on industrial workers, the United States wished to lower it. There are again tools at the government’s disposal with which it can do this—and simultaneously continue to maintain full employment. It can, for instance, spend more on items, like education, with more “U. S.” content. This enables full employment to be maintained with a lower fiscal deficit. The lower fiscal deficit resulting from the changed expenditure policies means a lower trade deficit.
18 That is, if at full employment, domestic savings is increased relative to investment, the exchange rate falls, helping the manufacturing sector.
19 This was one of the key recommendations of the International Commission of Experts on Reforms of the International Monetary and Financial System. See discussion in the afterword, pp. 363–64.
20 Warren Buffett, “Here’s How I Would Solve the Trade Problem,” Fortune, April 29, 2016, available at http://fortune.com/2016/04/29/warren-buffett-foreign- trade/.
21 See the discussion of trade chits in Joseph E. Stiglitz, The Euro: How a Common Currency Threatens the Future of Europe, op. cit., and J. E. Stiglitz, “Macro-Economic Management in an Electronic Credit/Financial System,“ NBER Working Paper 23032, January 2017.
22 As I noted, though, under the rules of globalization—that allow free mobility of short-term money in and out of the country—if those in the financial market believe that deficits will lead to problems, they will pull their money out of the country. The belief itself is what creates the problems—whether that belief is grounded in theory or empirical evidence or not.
Some Republicans in the United States have opposed increasing the deficit or, more accurately, have opposed it during Democratic administrations; they’ve supported it under Republican presidents, such as Reagan, George W. Bush, and most recently Trump. But even then, they support it not for financing the structural transformation described earlier or for addressing the problems of inequality, but for tax cuts for the rich and an expansion of military spending.
23 Poverty head count ratio at national poverty lines, percentage of total population. Source: World Bank.
24 The strictures imposed by the European Union may be even worse. See Joseph E. Stiglitz, The Euro, op. cit.
25 See Joseph E. Stiglitz et al., Rewriting the Rules of the American Economy, op. cit.
26 See, for instance, Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides, “Redistribution, Inequality, and Growth,” IMF Staff Discussion Notes, 2014, available at https://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf.
27 In The Great Divide, op. cit., Part I: Big Think, “Of the 1 Percent, by the 1 Percent, for the 1 Percent” (originally published in Vanit
y Fair, May 2011), I describe more fully the dangers of pursuing an unenlightened self- interest. In the introduction to that volume, I describe a dinner party of billionaires, where the conversation turned repeatedly to “remember the guillotine,” a reference to the risk of ignoring what is going on with the majority of citizens.
28 See, in particular, Stiglitz, The Great Divide, op. cit.
PART II
CHAPTER 5
1. J. Chirac, “The Economy Must Be Made to Serve People,” address at the International Labour Conference, June 1996.
2. In 1990, 2.718 billion people were living on less than $2 a day. In 1998, the number of poor living on less than $2 a day is estimated at 2.801 billion—World Bank, Global Economic Prospects and the Developing Countries 2000 (Washington, DC: World Bank, 2000), p. 29. For additional data, see World Development Report and World Economic Indicators, annual publications of the World Bank. Health data can be found in UNAIDS/WHO, Report on the HIV/AIDS Epidemic 1998. While there has been some controversy concerning these numbers, there is little disputing three facts: There has been little progress eliminating poverty; most of the progress has been in Asia, and especially China; and in much of the rest of the world the plight of the poor has worsened. In Sub-Saharan Africa, 46 percent of the population lives in absolute poverty (on less than a dollar a day), and in Latin America and the former Soviet Union the percentage of the population in poverty (on this very stringent definition) is 16 percent and 15 percent, respectively.
3. See Gerard Caprio, Jr., et al., eds., Preventing Bank Crises: Lessons from Recent Global Bank Failures. Proceedings of a Conference Co-Sponsored by the Federal Reserve Bank of Chicago and the Economic Development Institute of the World Bank. EDI Development Studies (Washington, DC: World Bank, 1998).
4. While there have been a host of critiques of the structural adjustment program, even the IMF’s review of the program noted its many faults. This review includes three parts: internal review by the IMF staff (IMF Staff, The ESAF at Ten Years: Economic Adjustment and Reform in Low-Income Countries. Occasional Papers #156, February 12, 1998); external review by an independent reviewer (K. Botchwey, et al., Report by a Group of Independent Experts Review: External Evaluation of the ESAF [Washington, DC: IMF, 1998]); and a report from IMF staff to the Board of Directors of the IMF, distilling the lessons from the two reviews (IMF Staff, Distilling the Lessons from the ESAF Reviews [Washington, DC: IMF, July 1998]).
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