Stuart Gourley
The title of this book is a bit of a misnomer. Stiglitz takes the view that globalisation is in principle a good thing, "a force that has brought so much good" (2002:4), and its problems arise from its mismanagement. He believes that globalisation, if governed better, would allow the developing world to grow, and with growth, all can be better off. The title could be understood to suggest a different view, one that is gaining growing support, almost in parallel with the rise of globalisation. Many people in both the developed and developing world believe that globalisation widens the divide between the rich and the poor, between the owners of capital and labour, both within and between countries (Dicken 1996:446-447). Stiglitz recognises that this is occurring and that poverty is increasing in many cases, but blames it not on globalisation itself but on the international financial institutions responsible for its governance.
As a result, this book has little to say on globalisation as it is commonly understood. It contains next to no analysis of the activities of multinational corporations, the impact of the Internet, or of the cultural imperialism of such corporations as McDonalds, Coca Cola, Nike, Microsoft, etc, to name just a few vehicles of globalisation. Neither does it mention the global environmental issues raised by other authors on this subject (Brennan 2003). Rather it focuses narrowly on IMF and World Bank dealings with developing countries and with those in transition to a market economy. To a very much lesser extent it discusses the trade liberalisation initiatives pursued through the GATT and more recently through the WTO.
Globalization also posits a strong nexus between the IMF, the US Treasury, Wall Street and the major US banks. Undoubtedly the US, through its voting power and its staff quota, tends to dominate IMF policy formulation. Many key staff members are Americans drawn from US financial institutions or from MIT, Princeton, Harvard and Stanford.
Stiglitz's central theme is that IMF policies are ideologically driven by the economic rationalism of Milton Friedman (the title of Stiglitz's second chapter, 'Freedom to choose?', is an ironic reference to Friedman's book: Free to choose (1980)), Reagan and Thatcher i.e. free markets, privatisation, deregulation, capital and trade liberalisation, with the central focus in policy making being on the control of inflation. Stiglitz, on the other hand, brings to policy making a Keynesian belief in the need for government intervention in markets to promote development, growth and employment. He knowledge of the limitations of free markets stems from his studies of market imperfections for which he was awarded a Nobel Prize in Economics. His ideology is reminiscent of that presented by J.K. Galbraith, much more succinctly, some 45 years ago (see Galbraith 1958).
A market imperfection occurs when a market fails to produce an efficient outcome or produces a negative externality, pollution being a common example. One such market imperfection is asymmetries in information, which contradicts what is possibly the most unrealistic of all neo-classical assumptions. Asymmetric information and in particular problems which economists call moral hazard and adverse selection are inherent in any capitalist system but are magnified in a global one (for a simple explanation see Mishkin: 2003:186-209). These problems are grounded in the global capitalist system itself, not its governance. These problems are preventing developing countries from attracting the private investment and hence the sustainable growth promised them by the proponents of globalisation. This has been at the centre of much of Stiglitz's work (Stiglitz and Greenwald: 1986), but in Globalization, although alluded to, its discussion is sadly missing.
According to Stiglitz the IMF response to financial crises, whether in S.E. Asia, South America or the former Soviet Union has been formula driven, taking little account of local social, cultural or political conditions, and invariably resulting in much the same prescription. An IMF bail out with short term funds is usually conditional on the adoption of policies aimed at counteracting inflation at the expense of employment and growth and involving tight contractionary fiscal and monetary policies and over rapid liberalisation of domestic financial and capital markets. The result of these policies, says Stiglitz, has simply been to exacerbate the problems they were designed to resolve. Further the maintenance of artificially high exchange rates by the Fund benefited foreign, mainly US, creditors at the expense of debtor developing countries the usual outcome for whom has been a higher level of national debt and a lower standard of living.
International economist Paul Krugman warned of the dangers facing the countries of East Asia in his 1994 paper, most notably the consequences of a speculative attack on a currency (such an attack is what caused the collapse of the Thai baht in 1997 and set in motion the greatest economic crisis since the Great Depression). Krugman has been concerned with the possibility of financial crises under a liberalised global capital system since 1979 when he developed a model of balance-of-payments crises (Krugman 1979). His afterthoughts on the Asian crisis heavily criticised the IMF's remedies (Krugman 1999). Many of his arguments are mirrored here by Stiglitz, albeit in a simplified form. Krugman disagrees with Stiglitz in one respect. He believes that in some (but not all) cases, one of the IMF's recommendations, that being tight monetary policy, was warranted.
Stiglitz over simplifies some complex issues and ignores others, perhaps because he is addressing a lay audience. But this is something he has done and done well many times before in the writing of a myriad of undergraduate textbooks, books aimed at a similar audience (an example is Stiglitz 1988). Knowing what Stiglitz is capable of this book is a little disappointing.
This book brings to public attention the dealings of the international financial institutions. He confirms what many probably already suspected and those in developing countries who have dealt with the IMF already know. In some instances he even provides evidence. However, as he himself concedes (2002:271-272), he detracted from his argument by intemperately accusing the IMF's then chief economist, Stan Fisher, of a conflict of interest favouring CityCorp, his employer before and after his term at the Fund. This effectively allowed IMF spokesmen to avoid any substantive defence of their policies and to attack Stiglitz quite vindictively on a personal level (Camdessus: 2002, Rogoff: 2002).
Stiglitz's discontent with the IMF and the World Bank seems to be too heavily influenced by his short time there. Being a Keynesian (using the term loosely) he is all too aware of the spirit in which these institutions were founded. He emphasizes the divide between the ideology then and now but he says little of how it came to change and nothing of how it may change in the future. These institutions are a reflection of their people, people who, as Stiglitz did, may stay no more than 3 years. In a perfect world these people's ideas would be shaped by the world around them but in reality they are often shaped by past events, theories and economic issues. History has shown that the consensus of economic ideology does not change until it has to. When the IMF and World Bank were formed at Bretton Woods, ideology was driven by memories of the Great Depression, memories of mass unemployment. When the status quo changed in the 1980's (when economic rationalism became so widely supported) ideology was driven by memories of the 1970's, of unprecedented inflation in the developed world and hyperinflation in many developing countries, most notably in South America. The pendulum will swing back again but another disaster like the Great Depression may be needed for it to do so. For many, the Asian crisis should have been that disaster but unfortunately the spread of recession and unemployment didn't reach as far as Washington. There are exceptions to this simple explanation of what shapes economists way of thinking. Stiglitz himself is one, but he is in the minority and his displeasure in being so may have provided the motivation to write this book. It certainly wasn't any discontent with globalisation.
Bibliography
Brennan, Teresa Globalization and its terrors: daily life in the west, Routledge, London, 2003.
Camdessus, Michel Michel Candessus responds to Joseph Stiglitz, Nouvel Observateur, September 12, 2002.
Dicken, Peter Global Shift: transforming the world economy, 3rd ed, Paul Chapman, London, 1998.
Friedman, Milton and Friedman, Rose Free to Choose Secker and Warburg, London, 1980.
Galbraith, John Kenneth The Affluent Society, Houghton Miffin, Boston,
1958.
Krugman, Paul 'A Model of Balance-of-Payments crises', Journal of Money, Credit
and Banking, Volume 11, Issue 3 (Aug 1979), pp.311-325.
Krugman, Paul 'The myth of Asia's miracle: A cautionary fable', Foreign Affairs (Nov 1994).
Krugman, Paul 'Analytical Afterthoughts on the Asian Crisis', http://web.mit.edu/krugman/www/MINICRIS.htm, accessed 19 August 2003.
Mishkin, Frederic The Economics of Money, Banking and Financial Markets, 6th ed, Addison-Wesley, 2003, pp. 186-209.
Rogoff, Kenneth An open letter, IMF, July 2, 2002.
Stiglitz, J.E Economics of the Public Sector, 2nd ed, W.W Morton, New York, 1988.
Stiglitz, J.E and Greenwald B. 'Externalities in Economics with Imperfect Information and Incomplete Markets', Quarterly Journal of Economics 101(2), May 1986. pp. 229-64.