Joseph Stiglitz: Globalization and its Discontents

Joseph Stiglitz’s Globalization and its Discontents has sparked a major critical response since its publication in that it appears to encapsulate widespread doubts about globalization processes and their governance.
Joseph Stiglitz

Abstract: Joseph Stiglitz’s Globalization and its Discontents has sparked a major critical response since its publication in that it appears to encapsulate widespread doubts about globalization processes and their governance. This review aims to probe further Stiglitz’s general analysis and policy prescriptions. It is argued that Stiglitz’s central concern is how globalization as currently practised acts to exacerbate existing market failures and produce new ones, and the appropriate response of international economic institutions to address the resulting global collective action problems and ensure that the potential gains from globali­zation are realized. Whilst many of his proposals remain vague, they can be seen as part of an emerging global social democratic agenda.

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Economics books, even by Nobel prize winners, rarely become bestsellers. Joseph Stiglitz’s book is an exception in large part because it appeared to encapsulate the misgivings many have about contemporary globalization processes and their governance, an unease that goes well beyond anti-globalization protestors. This is undoubtedly a major contribution, Stiglitz’s intellectual acumen complemented by his insider’s knowledge from his terms first as chair of Clinton’s Council of Economic Advisers and then as Chief Economist at the World Bank. His travails in the latter post have been well documented. Nevertheless, it is important to probe further into how far Stiglitz’s analysis and policy prescriptions take us. Thus far the critical response to his work has been polarized between the laudatory reviews and his detractors;1 the latter have either focused on details and reflect turf wars between the IMF and World Bank during his period at the latter or, more generally, reflect one of two positions. A broadly laissez-faire position views the examples

Stiglitz raises as a case of missing the wood from the trees arguing that globalization processes are generally positive for developing economies and, indeed, the majority of the world’s population. From another side, critics charge that the difference between Washington Consensus policies and the ‘post-Washington Consensus’ policies Stiglitz advocates (and that he pursued at the World Bank) is rather less than the rhetoric suggests. Stiglitz prefigured his analysis whilst at the World Bank2 and has reiterated it since, notably in his recent critical analysis of US economic performance in the 1990s (Stiglitz, 2003b). To what extent does Stiglitz actually end up providing economic justifications for radical criticisms of globalization? Does his analysis provide the basis for coherent and achievable approaches to managing globalization processes effectively?

Beyond the sound and fury of Stiglitz’s accounts of how the IMF and the US have (mis)managed globalization, which has often been the focus of reviews of his book, Stiglitz is advancing a deeper analysis here. For Stiglitz central to the development process is overcoming multiple market failures, particularly in the provision of effective invest­ment finance, human capital formation and technology acquisition (see also Stiglitz, 1989). Global integration in this analysis has the potential to ameliorate these, but as currently practiced frequently tends to reinforce and aggravate these failures. Integration has led to the emergence of international market failures as economic activity increasingly shifts to the global level. Stiglitz’s concerns here can be seen in terms of the degree to which globalization can act to exacerbate existing market failures and produce new ones. The key challenge for international economic institutions, Stiglitz argues, is to address the resulting global collective action problems (see also Stiglitz, 2002). Economists’ focus on globalization has usually (but not invariably) been on the expected gains from integration. Critics have often eschewed (mainstream) economic analysis, often characterising it as being intrinsically biased towards free markets (e.g. DeMartino, 2000). It is no mean achievement in itself to have expressed many of the globalization critics’ concerns in terms of economic analysis.

The emphasis on market failures is crucial, for it implies that development is not automatic from market processes and integration. Stiglitz’s central argument is that globalization offers enormous potential gains provided it is managed effectively—not just for standard economic grounds but also through the emergence of global civil society and networks. Moreover, given technological developments and the spread of market relations it is neither desirable nor possible to reverse globalization processes. In practice, though, the management of globalization by the IMF in particular along Washington Consensus lines, and the unilateral actions of US administrations, has failed to deliver the claimed gains: outside of Asia and some European transition economies there are few signs of globalization delivering with the ‘lost decade’ in Latin America (despite many countries following Washington Consensus policies) and continuing stagnation in Africa and many transition economies (Chapters 2-3). Moreover, those countries that have succeeded—especially China and the East Asian boom economies—have done so by departing in key ways from Washington Consensus policies; as he argues more recently: ‘key to their success was that they governed or regulated the globalization process, enabling them to benefit from the opportunities which it afforded, while not suffering as much from the downside risks (Stiglitz, 2003a, p. 508; emphases in original). The IMF failures in managing the 1997 East Asian crises and the 1998 Russian crisis form centrepieces of his account (Chapters 4-5). Rules for trade have been rigged against developing countries and flows of international finance have often brought increased instability without significantly adding to the capital stock. Understandably this failure of globalization to deliver on the benefits expected of it has led to widespread disillusion with, even outright rejection of, it by a disparate range of groups. Of course these criticisms are not new even though Stiglitz’s insider knowledge adds weight to his account. Even the IMF has latterly acknowledged mistakes in its handling of these episodes; the key point here is not to pour over the details of particular cases but to discuss more general principles underlying the operation of Bretton Woods institutions. But Stiglitz’s critique runs deeper than this: in part it is his claim that the IMF (and others) have failed to take these market failures into account and propounded simplistic liberalisation policies. But his argument goes further: ‘There is a more fundamental criticism of the IMF/Washington Consensus approach: It does not acknowledge that development requires a transformation of society’ (p. 76). For Stiglitz, two key consequences follow from this proposition: models that assume fixed preferences can give misleading predictions of the effects of different policies; moreover, this transformation is not (or, at least, should not) be a process imposed on society but instead requires social inclusiveness to be effective. We now examine Stiglitz’s analysis of globalization processes and move on to consider his analysis of the role of Bretton Woods institutions.

To start with trade, Stiglitz drives home the point that the practice of trade policy in industrialised countries is often driven by the dirty politics of interest group lobbying (Chapters 2 and 6; see also Stiglitz, 2003b, ch. 9). He notes that the modelling of the effects Uruguay Round trade negotiations predicts losses from terms of trade effects for the lowest income countries, a symptom of the domination of industrialized countries’ interests and unequal bargaining relations in trade negotiations leading to unequal concessions. The belated introduction of development concerns through Doha and the sluggish pace of these negotiations reinforces the point. In many respects this analysis differs little from the most ardent free trader: for a Bhagwati, say, the WTO operates to apply free trade rules equally across the globe, thus undermining special interest group protection (e.g. Bhagwati, 2000). The recent WTO ruling against US cotton subsidies would doubtless be invoked as supporting evidence. In other respects he moves beyond this position. He emphasizes that dumping clauses are still invoked by industrialised countries against imports from countries that simply have relative advantage in their production and are using competitive practices that would be standard within national markets (see, further, Stiglitz, 1997). There is some discussion of the power relations involved in negotiations over intellectual property rights, investment measures and services, particularly the use of negotiations over services liberalisation as a device to push financial opening and liberalization. Stiglitz’s advocacy of the need to provide developing countries with technical and legal assistance for trade negotiations is well- made; nevertheless, despite his emphasis on unequal relations and his prior theoretical work on bargaining there is little here on the basic power asymmetries in negotiations (cf. Narlikar, 2003). Whilst acknowledging the standard gains from trade and lambasting the double standards of industrialized countries, particularly the US, in preaching but not practicing free trade, he recommends careful sequencing in trade liberalization (Chapter 3). Destruction of uncompetitive industries from trade liberalization will not quickly and easily be replaced by rising industries: as others have noted, trade liberalization programmes often coincide with restrictive macroeconomic policy which tends to lead to exchange rate overvaluation and high interest rates—hardly conducive to inducing investment necessary to lead to net job creation. Without developing effective financial systems, channelling of investment funds to new industries is likely to be insufficient. More broadly he advocates developing effective safety nets for social protection during adjustment. Yet for all the noting that East Asian countries used selective trade policy measures as development strategy, there is little by way of direct advocacy of such policies; Deraniyagala (2001) points out that in practice World Bank policy during Stiglitz’s time (and since) has shifted little on the question of industrial policy.

Finance, particularly international finance, forms the centrepiece of Stiglitz’s argument. Whatever the promise of development funds, in practice private financial flows have been insufficient, pro-cyclical and too volatile. They have been concentrated on a limited number of countries and skewed towards short-term liquid flows. They add little if anything to net capital funds; prudential offsetting of short run liabilities with acquisition of reserves effectively means no additional resources to a borrowing country. Capital inflow surges lead to significant real exchange rate appreciation, even where they can be sterilised (which, by raising domestic interest rates, acted to encourage further borrowing abroad). The increase in risk facing agents acts to raise the risk premia required by firms and financial institutions and thus reduce growth and employment creation. External financial liberalization reduces the ability of national authorities to target domestic macroeconomic variables and this may be further aggravated by the imposition of IMF policies. Moreover, the entry of foreign banks may also aggravate existing market failures in the domestic financial system by further biasing lending towards particular, mainly established, borrowers.

The effects of sudden outflows and crises hardly need spelling out. Premature financial liberalization and openness is absolutely central to Stiglitz’s account here: ‘I believe that capital account liberalization was the single most important factor leading to the crisis’ (p. 99, emphasis in original). The interaction of volatile short-term flows with fragile financial systems leads to excessive lending cycles and distortion of macroeconomic variables. The collapse in East Asian particularly was hugely aggravated by IMF policies that effectively stoked the panic by precipitous bank closures and induced recession by inappropriate deflationary policies. Thus IMF policies produce large negative shocks to both aggregate demand and supply, deepening and prolonging the post-crisis downturn. This led to contagion effects across emerging markets. Compelling as this account may be, it is rapidly becoming orthodoxy; even ardent free traders like Bhagwati (2000) find the arguments for capital account liberalization much less compelling than for trade liberal­ization. The IMF has admitted to mistakes in handling and sequencing with the initial development of prudential regulatory systems. As other reviewers have pointed out, Stiglitz is frustratingly vague on his proposals for reform of the international financial architecture and institutions (cf. Basu, 2003). Much of his proposals (Chapter 9) are taken up with recommendations for reforms and sequencing within developing countries together with specific proposals for the IMF (see further below). His point about introducing orderly bankruptcy arrangements, along US Chapter 11 lines, is that this would both limit the persistent adverse effects of macroeconomic crises and act to discourage risky lending. Indeed here Stiglitz is possibly at this most radical in countenancing capital controls to ensure national monetary autonomy (see further Stiglitz, 2003a). This follows from his concerns over the ability of national authorities to target domestic economic activity, to manage flows without disruption and skewing their distribution more towards longer-term flows and the danger that opening up to foreign banks may aggravate asymmetric information problems in lending to domestic agents.

Surprisingly given the role of multinational corporations in globalization processes (including at least a large minority of world trade conducted within them), these are not discussed in much detail by Stiglitz and much of the discussion is given over to FDI in banking and its close relationship to financial openness. He points to the unequal bargaining relations between developing countries and MNCs, notes the variations in FDI regimes with development amongst successful industrializing countries and empha­sizes the need for effective competition policy to prevent abuses of monopoly power. This carries over into his analysis of privatisation programmes (with strong overlap where these are undertaken by selling assets to foreign strategic investors). Privatization undertaken before effective corporate governance mechanisms and competition policies leads to private sector rent-seeking just as costly as the public sector rent-seeking so emphasized in earlier accounts (Chapters 5 and 7; see further Stiglitz, 2001). This is embedded in his wider account of transition. Again, though, it is hard to see evidence that such analysis significantly altered World Bank policy towards privatization under the ‘post-Washington consensus’ (cf. Bayliss and Cramer, 2001).

It is worth asking which parts of the ‘Washington Consensus’ Stiglitz actually repudiates and why. Coiner of the phrase John Williamson has thrown down the gauntlet in its defence arguing both that it embodies guiding principles of economic policy any sensible government (including those of the left) would pursue and, further, that it leaves open key questions such as the progressivity of the tax system, the level of welfare expenditure (provided that it isn’t deficit financed) and the institutional form of capitalism (Williamson, 1993). Williamson also claims that it was never intended to be the be-all and end-all of development. Stated in this form contemporary social democratic governments in practice typically accept most or all of its strictures.

There are two types of response to this. First, Stiglitz argues that whatever the intellectual justification for the Washington Consensus, in practice its implementation by the IMF typically entailed cuts both in programmes that promoted human development (and/or the introduction of charges for these services) and policies that protected the poor from adjustment. Moreover, often it is has effectively been promoted as providing necessary and sufficient conditions for growth and poverty alleviation. Second, there is the more fundamental question of whether these measures do provide the most effective basis for development. In places Stiglitz’s argument here appears to be an Augustian one: give me liberalization, but not yet; there is an emphasis on cautious and careful sequencing of reforms but sometimes with the implication that it is the speed rather than the direction of policy that Stiglitz is arguing over. This is partly due to his focus on market failures and argument that these are typically greater in developing countries and so policy aimed at rectifying or ameliorating them is central to any developmental strategy. Overall one may infer that Stiglitz regards the Washington Consensus strictures on fiscal discipline as excessively restrictive, not least in the light of his recent criticism of central bank practice (Stiglitz, 2003b, ch. 2-3). The claimed commitment to orientating public expenditure towards well-directed social expenditure, he argues, has too often been undermined by the emphasis on cutting taxes to achieve fiscal discipline. Moreover, he argues that policies to cut subsidies often critically undermine the social fabric and protection (see further below). Stiglitz would reject blanket moves towards liberalization of interest rates determination in the light of market failures in the financial system noted above. Whilst maintaining a competitive exchange rate consistent with medium-term equilibrium is a laudable enough aim, Stiglitz argues the capital account liberalization is likely to undermine such efforts. As already noted, Stiglitz urges caution on second best grounds regarding trade and FDI liberalization and points out the selective openness prac­ticed by East Asian countries during their industrialisation; his qualifications regarding privatization have already been noted. Whilst in some ways Stiglitz is an enthusiastic proponent of product market deregulation he is more cautious on labour markets deregulation given the social impact. It is clear that Stiglitz does not subscribe to any simple notions of liberalization leads to growth which leads to poverty reduction; it is thus all the more surprising that he barely mentions the controversy surrounding the 2000 World Bank, World Development Report on poverty. The tensions within the World Bank over the drafting of this report are well known and sections are consistent with the Washington Consensus prescriptions Stiglitz criticizes.

Do the problems of globalization identified by Stiglitz matter and do his proposals address them adequately? A systematic assessment of the significance of the mechanisms highlighted by Stiglitz is beyond the scope of this review; nevertheless, besides the development record since the 1970s noted above there is evidence that deflationary tendencies in the global economy are having a detrimental impact on development now (Pettifor, 2003), whilst escalating anti-dumping actions could significantly undermine potential gains from trade (Aggarwal, 2004). The effectiveness of IMF structural adjust­ment programmes and their impact on longer term development have already been debated in great detail (e.g. Bird and Mosley, 2004). Although Stiglitz’s proposals for reform of the international financial architecture remain vague, the key is to prevent global deflation. The asymmetric pressures on deficit and surplus countries to adjust create dangers of global deflation. Presumably the IMF, following chief economist Kenneth Rogoff, regards the external effects of national adjustment as second order problems (cf. Obstfeld and Rogoff, 2002). For Stiglitz avoidance of global recession rested on particular circumstances (notably in the US) which cannot be assumed to continue (see also Stiglitz, 2003b).

The issues raised by Stiglitz over operation of Bretton Woods institutions in part reflect the blurring of roles between the IMF and the World Bank since the 1970s. Nevertheless, it is difficult to see an end to this within the logic of Stiglitz’s analysis stressing the persistent effects of IMF adjustment policies. Standing (2000) argues that Stiglitz is largely arguing for replacing IMF prescriptions with World Bank ones, whereas more humility on the part of international agencies and a willingness to accept that they do not possess unique wisdom to be imposed on others is required. Arguably this is a bit unfair on Stiglitz: whilst the tenor of much of his prose here has an air of World Bank- right/IMF-wrong, at another level his analysis does privilege dialogue and inclusiveness with recipient country officials and stakeholders. Nor does Stiglitz’s analysis presage moves towards the World Bank effectively focusing down on policy consultancy and concessional finance for the lowest income countries: the cycles and instability of private capital flows even to middle income countries point to a continued role for World Bank lending. Stiglitz explicitly rejects proposals to make the IMF a technocratic institution effectively instituted from political pressures akin to an independent central bank (see also Stiglitz, 2002). Stiglitz insists that it is impossible to divorce the operations of such institutions from political considerations. Rather participation and openness are necessary to ensure that institutions do not get captured by interest groups or effectively reflect internal bureaucratic interests.3 Once again Stiglitz is vague on proposals to make international governance institutions accountable, although an agenda from others on this is emerging (Held, 2004). One can certainly question, though, how far the World Bank lives up to these ideals in practice, whilst its sister institution the EBRD is arguably even less accountable than the IMF.

These ideas—what Stiglitz has recently characterized as ‘a new democratic idealism’ (Stiglitz, 2003b, ch. 12)—are closely related to the arguments around developing preferences. Relatively narrow models of human agency predict that agents will respond in predictable ways to relative price changes from reforms. In practice the response to IMF reforms may not simply be an adjustment of production and consumption to changing relative prices but has often entailed political protest, revolt and riots with consequent damage to the nation’s social fabric and longer-term economic prospects. Imposing reform processes, particularly where the burdens of adjustment are distributed inequitably, is likely to lead to social conflict whereas inclusiveness can promote effective adjustment. The lessons Stiglitz draws from successful adjustment are not simply technocratic ones over the appropriate sequencing, but more broadly how to promote governance institutions that manage social conflict effectively.

Nevertheless, it may be questioned whether the focus on international institutions is warranted. Stiglitz himself has no doubts: ‘The most fundamental change that is required to make globalization work the way it should is a change in governance’ (p. 226; emphasis in original). In one sense this follows virtually by definition: if international market failures mean that globalization processes are failing to deliver the benefits they could then there is a prima facie case for governance by international agencies to change the incentive structures. In another sense, though, this approach tends to overestimate the real power of global governance institutions and fails to spell out how global governance institutions would acquire the power and resources to operate effectively; whatever mistakes the IMF may have made in its operations it is essentially reactive to crises. Although the IMF and other institutions may have provided perverse incentives that contributed to the crisis, it is easy to exaggerate this. Most of the attention in Globalization and its Discontents is on the operation of these institutions, particularly the IMF, and relatively little is devoted to analysing the effects of international market integration and production networks. For example, whilst there is a case for social protection to insure citizens against risks for integration and ensure, however approximately, that the gainers compensate the losers; however, globalization processes generally have operated to undermine fragile welfare systems in several developing countries (Rundra, 2002): it is not simply (or even mainly) the effects of IMF programmes that is operating here.

One could argue that Stiglitz’s key points are not especially new and he freely acknowledges many intellectual debts. The conception of development is similar to Amartya Sen; the emphasis on robust, accountable institutions and systems of social protection to ensure widespread gains from openness has also been proposed by Dani Rodrik; the criticisms of IMF operations in East Asia and beyond have been articulated by Jeffrey Sachs and many others. For a critic like Fine (2001), Stiglitz’s models may be more sophisticated and interesting than textbook ones but they remain ahistorical and asocial. One can have a positive or negative reading of Stiglitz here; it might be argued that such models are only intended as a starting point with concrete analysis and, still more, policy making needing to be grounded in the particular historical circumstances. The key limitation here is that although Stiglitz is both a highly skilled technical economist and an acute commentator on contemporary economic affairs he is apt to jump between the two without filling in the gaps. As an example, he is both one of the originators of efficiency wage theory and he then uses this to criticise IMF economists who observing unemployment in a country automatically attribute it to labour market imperfections and advocate wage cuts (chapters 2-3). The efficiency wage model provides a neat, parsimo­nious explanation for involuntary unemployment, albeit one that abstracts from differ­ences in national traditions and cultures of worker motivation and labour supervision structures. Unemployment in a particular country may be due to classical, Keynesian, efficiency wage or other mechanisms and it may require a variety of measures to cure it.

Elsewhere Stiglitz expands on this allowing for different developmental paths between low trust-high labour supervision systems that tend to be characterised by high unemployment and limited worker skill development against inclusive, co-operative labour systems that are able to deliver skill development leading to growing wages and employment (Stiglitz, 2000). The agenda on globalization that Stiglitz raises would be best served not by continuing to rake over particular details but by debating, developing and fleshing out the analysis and policy proposals he has made here.—Jonathan Perraton


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1. His spat with Lawrence Summers shows no sign of abating. Commenting on a recent paper where Stiglitz develops the ideas in Globalization and Its Discontents (Stiglitz, 2003a), Summers retorts: ‘I was in complete disagreement with every sentence that Joe uttered that included the word globalization. Which is not to limit the set of sentences he uttered that I was in complete disagreement with.’ (Summers, 2003, p. 525).

2. See the papers collected in Chang (2001), favourably reviewed in Journal of International Development, 15(2) (March 2003).

3. Unusually Stiglitz is sceptical of the arguments for making central banks independent for these reasons: monetary policy in his analysis has important effects on activity and income distribution and independent central banks are likely to reflect the interests of the financial sectors (as well as the internal bureaucracy). Stiglitz (2003b) is critical of the recent performance of several leading independent central banks.

Journal of International Development J. Int. Dev. 16, 897-905 (2004)


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