1 Cristina Carrión Michele Peregrin Cynthia E. Freeman Aaron Samulcek Rhodes Perry Professor Kamal NYU-G-CC/MP/CF/AS/RP/BP20040403 BOOK PRESENTATION: GLOBALIZATION AND ITS DISCONTENTS BY: JOSEPH E. STIGLITZ INTRODUCTION The purpose of this paper is to summarize the book Globalization and its Discontents by Joseph E. Stiglitz. Stiglitz, as Chairman of the Council of Economic Advisors and chief economist at the World Bank, had a first hand look at most of the major economic events in the past decade. He became disillusioned when he witnessed the International Monetary Fund, World Bank, and other major institutions put the interest of financial institutions in developed countries (particularly the US) ahead of the developing world. Stiglitz provides no simple formula on how globalization works; however, he attempts to understand why the IMF and other institutions have failed in their missions and elucidates a reform agenda to improve international economic management. FACTS 1.0 The Promise of Global Institutions 1.1 Original Missions of the IMF and the World Bank: The World Bank and the IMF originated in World War II as a result of the UN Monetary and Financial Conference at Bretton Woods, New Hampshire (July 1944) part of an international effort to rebuild Europe and to prevent the world from any future economic crisis. World Bank originally entitled, The International Bank for Reconstruction and Development, was meant to deal with structural issues. IMF is a public institution funded by taxpayers around the world, and reports directly to central banks of the world. The IMF‟s mission was to ensure global economic stability, and specifically dealt with macroeconomics. The IMF is controlled through voting based on the economic powers (i.e. The US dominates) 2.0 Broken Promises 2.1 The IMF and the World Bank failed at their original missions. In the 1980s there was a dramatic change in the institutions towards free market ideology (i.e. The Washington Consensus). Today, the IMF provides funding only in if countries cut deficits, raise taxes, raise interest rates that lead to a contraction of the economy. World Bank went beyond lending projects (structural Loans); did this only with IMF approval, and with IMF approval came with IMF „conditions.” IMF took an imperialistic role controlling both structural and macroeconomic issues; (i.e. Washington dictated). IMF projects are ill-suited for countries in early stages of development or transition. The IMF pushes for premature capital liberalization contributing to global instability, making matters worse especially for the poor IMF current system is “taxation without representation.” IMF staff members spend insufficient time in countries they are assessing and creating appropriate policies. 2 IMF suspends assistance if a country does not meet the minimum standards, as do other donors such as the World Bank. IMF is not rooted in a long held concern about project sustainability IMF implements the „one-size- fits- all‟ approach IMF regularly hires economists trained in a standard competitive model (i.e. US model) IMF wants a central role in shaping policy, no other voices even if it might be more beneficial to have alternative approaches from economists from countries asking for assistance. “Monopoly supplier of sound advice.” IMF done a good job in convincing that market fundamentalism would help developing countries in the long run IMF believed interest rates should be freely determined by international market forces, “liberalized market force was an end in itself.” IMF lending program driven by politics IMF lack of greater participation of poorer countries Lack of communication between the World Bank and the IMF. IMF kept much of the negotiations and agreements a secret form World Bank members even in joint projects IMF lack of transparency IMF rigid timetables imposed on „client‟ countries to force pace of change 2.2 Step in the right direction As a result to the lack of a greater voice from the developing countries, the IMF and the World Bank have agreed to conduct “participatory” poverty assessments. Though they have not been effectively implemented, it is a step in the right direction. International institutions need to be graded on their performance, and be held accountable for their wrong actions. 3.0 Freedom to Choose? 3.1 Facing very real problems in Latin American economies in the 1980s and 1990s, the IMF insisted that - in the name of fiscal discipline - countries seeking its loans adopt the “Washington Consensus” doctrine of fiscal austerity, privatization, and market liberalization (essentially, free market fundamentalism). The rapidity and single-mindedness with which these policies were pushed has had disastrous consequences for the poor in Latin America, Africa, and parts of Asia that implemented them: Trade liberalization was accompanied by high interest rates and destroyed jobs and increased unemployment. Financial market liberalization was unaccompanied by appropriate regulatory structures and caused higher interest rates, making it harder for poor farmers to buy the seeds and fertilizer needed for subsistence. Privatization was unaccompanied by competition policies and oversight to ensure that monopoly powers were not abused, leading to higher, rather than lower, prices for customers. Fiscal austerity was pursued blindly, leading to high unemployment and the shredding of the social contract. 4.0 The East Asia Crisis: How IMF Policies Brought the World to the Verge of a Global Meltdown 4.1 East Asia experienced rapid growth from the late 60s until the late 90s. This success was due to: Government policies requiring E.A. to save and invest heavily. Gradual trade liberalization. 3 4.2 Rise of Economic Downturn: IMF Policies exacerbated the economic downturns of East Asian Countries. Push for excessively rapid financial and capital market liberalization. IMF/US charges of weak banks deteriorated international investor confidence in East Asia, inducing capital investment outflows from the region. IMF pushed policies with little evidence that policies promoted growth/restoration, imposing huge risks on developing countries in the East Asian Region. IMF (w/out evidence) claimed capital market controls impeded economic efficiency and, as a result, would grow better without such controls. IMF pushed for contractionary monetary policy. It recommended that E.A. increase the interest rates. The application of this policy combined with East Asia‟s high debts created a recipe for disaster. Beggar-Thyself Policies imposed by IMF – cut down on exports and buy only domestic goods by imposing tariffs and devaluing currency. Cutting down on other E.A. countries‟ exports merely spread E.A. recession and deepened it. IMF tried to restructure East Asia by closing banks that administered bad loans and shut down firms in high debt. IMF continued to provide billions and billions in corporate welfare while eliminating food subsides for the growing poor in E.A. This policy resulted in increased riots and destroyed the gains of creating unified multiethnic societies in E.A. countries. 4.3 Recovery The East Asian Crisis was more severe than it should have been, recovery took longer than it needed to, and prospects for future growth are not what they should be. IMF mistakes most likely will be long lasting, and such mistakes have permanently depleted high output levels of E.A. countries. 4.4 Explaining Mistakes IMF has not admitted to the mistakes in its monetary policy, nor has it created an alternative intellectual framework to prevent similar mistakes. IMF reflected the interested and ideology of the Western financial community. 4.5 An Alternative Strategy Maintain expansionary monetary and fiscal policy. 4.6 Strong Government Intervention Conclusion: “The IMF policies in East Asia had exactly the consequences that have brought globalization under attack…The East Asia crisis made vivid to those in the more developed world some of the dissatisfaction that those in the developing world had long felt” (Stiglitz, 132). 5.0 Who Lost Russia? 5.1 The transition from communism to capitalism is not simply economic; it also requires a profound social and political transformation. Ignoring these needs, the IMF set in motion “shock therapy” liberalization and privatization in Russia before crucial institutions such as independent legal and regulatory bodies, bank regulation, a private property system, a tax collection and enforcement system, and unemployment insurance had been put in place. As a result: Instant price liberalization of most goods led to high inflation that wiped out savings overnight. Privatization accompanied by the opening of capital markets led to asset stripping: oligarchs who used political influence to garner billions in assets poured their money into the U.S. stock market and offshore bank accounts. 4 As recession deepened, the IMF feared devaluing the ruble and supported an overvalued currency with billions in loans that eventually crushed Russia‟s economy and led to its 1998 default, precipitating a global financial crisis. Russia‟s GDP in 2000 was more than 30% lower than its GDP in 1989. There has been a huge increase in poverty and inequality, and the future also looks bleak. “The middle class has been devastated, a system of crony and mafia capitalism has been created, and the one achievement, the creation of a democracy with meaningful freedoms, including a free press, appears fragile at best...(p.133).” 6.0 Unfair Fair Trade Laws and Other Mischief 6.1 The IMF and U.S. Treasury - political institutions IMF policies were inextricably linked to the political judgments of the Clinton administration‟s Treasury. The Treasury claimed Russian economic policy and refused to have open dialogue within government or outside. 6.2 Problems of the IMF and U.S. Treasury’s Russian reform strategy Their policies at best led to stabilization of the Russian economy, but did not lead to growth. Russia tried to open the economic policies up to a democratic debate, but the IMF and U.S. Treasury wanted to suppress the discussion. 6.3 What the IMF and U.S. Treasury should have done The U.S. should have avoided a few of Russia‟s corrupt leaders, supported the younger fair-minded democratic leaders, and backed a broad-based democratic process. 6.4 U.S. interests and Russian Reform U.S. labor and business interests use the “fair trade laws” (“unfair fair trade laws”) to create barriers to imports. U.S. supports fair trade, but often when a poor country has a commodity to export, the U.S. domestic protectionist interests are galvanized. 6.5 U.S. special interests interfering in trade The Aluminum Case (1994) - price of aluminum plummeted and U.S. aluminum producers accused Russia of dumping. The U.S. created a global aluminum cartel. The privatization of the United States Enrichment Corporation (USEC). 7.0 Better Roads to the Market 7.1 Poland’s gradualist policy of privatization Poland rejected IMF‟s policy of rapid privatization, but instead focused on job creation, unemployment benefits, and institutional infrastructure via democratic processes. 7.2 China’s partial privatization policy (individual responsibility system) China deemed it more important both politically and economically to maintain social stability during its economic transformation. They focused on the creation of jobs and new enterprises before privatization and enterprise restructure. 7.3 Gradualist policies - deeper reforms more rapidly China‟s stock market is larger than Russia‟s. China managed the transition of the “individual responsibility system” in less than five years, while Russia still manages its agriculture system in about the same way. 7.4 Criticisms of the IMF and U.S. Treasury - vision was to narrow. They only focused on economics and implemented just one global model across diverse countries. Both lacked policies for attacking poverty and enhancing growth. 5 7.5 Recommendations for Russia’s successful “road to the future.” Russia must create an investment friendly environment, curtail government abuses, and implement a federalist structure that provides compatible incentives. Specifically, they need to collect taxes, build up democratic think tanks, and support independent media. 7.6 Democratic accountability and the failures. Russia and U.S. must hold its leaders liable for Russia‟s recent history and its fate. 8.0 The IMF’s Other Agenda- The IMF has failed in its original mission as a consequence of how it has understood that mission. According to Stiglitz, the IMF seems to believe that “what the financial community views as good for the global economy is good for the global economy and should be done.” (p. 195) The original conception of the IMF and its role incorporated an understanding of potential market failure. Today, however, the IMF is dominated by market fundamentalism. The IMF massively intervenes in the exchange rate market. It has not presented a clear explanation for why this market requires intervention over others. The Fund argues that it must intervene quickly if it determines that an ongoing crisis in one country will spill over to others. However, the lack of a clear theory of contagion has resulted in the IMF spreading “the disease” rather than containing it. Trade deficit is not solely a problem concerning developing countries. Since the sum of all deficits in the world must add up to the sum of all surpluses, the surplus countries are equally at fault. IMF programs provide funds for governments to bailout Western creditors. Consequently, creditors have less incentive to ensure that borrowers will be able to repay. They neglect to buy insurance, knowing that the IMF will intervene to support exchange rates until they are repaid. The IMF was insisting that before it lent money to a country in a bailout, the private sector would have to “participate” by forgiving debt that was owed. This gave creditors enormous leverage: a country would not be able to get funds from any source if the private banks did not lend money or agree to a settlement. 8.1 The IMF’s New Agenda? The IMF is not just pursuing its original objectives, but the interests of the financial community. Consequently, objectives often conflict and there is a lack of coherency in its policies. The IMF argues that problems are not with the reforms, but with the weaknesses of the crisis countries. This not only shifts blame but pushes the agenda further. 9.0 The Way Ahead- International economic institutions have served the interests of the more advanced industrialized countries rather than those of the developing world. The rhetoric has changed, but real commitment to reform has not been demonstrated. 9.1 Interests and Ideology Government needs to play a role is mitigating market failures and ensuring social justice. Stiglitz advocates a “balanced view of the role of government, one which recognizes both the limitations and failure of markets and government, but which sees the two as working together, in partnership, with the precise nature of the partnership differing among countries, depending on their states of both political and economic development” (p. 220). 9.2 The Need for International Public Institutions Systems of global governance are essential in order to deal with issues regarding the environments, health, education, humanitarian assistance, etc. 6 9.3 Governance Stiglitz argues that “the most fundamental change that is required to make globalization work in the way that it should is a change in governance.” (p. 226). Changes in voting rights and greater participation from developing countries are required. 9.4 Transparency There needs to be greater openness and transparency. Institutions like the IMF and WTO are public, but there is no direct accountability to the public. Secrecy undermines the political sustainability of policies and democracy. 9.5 Reforming the IMF and the Global Financial System The IMF should now longer be involved in development of the economies of transition, except with regards to managing crisis. What is needed: An acceptance of the dangers of capital market liberalization, bankruptcy reforms and standstills, less reliance on bailouts, improved banking regulation, improved risk management, improved safety nets, improved response to crises, and most importantly, a return to basic economic principles. 9.6 Reforming the World Bank and Development Assistance Assistance: Conditionality should be replaced by selectivity (giving aid to countries with a successful track record and allowing them to choose for themselves their own development strategies). Debt forgiveness is needed. 9.7 Reforming the WTO and Balancing the Trade Agenda It needs a more balanced trade agenda; one that considers the interests of the developing countries and concerns beyond trade. Developed countries should open to fair trade and equitable relationships with developing countries. Doing so would benefit both the developing and developed world. 9.8 Towards Globalization With a More Human Face The aforementioned reforms would help make globalization fairer and more effective in raising living standards. A more gradual process of globalization would help traditional institutions and norms adapt and respond to new challenges, rather than feel attacked. More still needs to be done, however, to match rhetoric with reality. The free market ideology needs to be replaced with analyses based on economic science, with a more balance view off the role of government. There needs to be more sensitivity towards the role of outside advisors. There must be a “multipronged” strategy of reform. One should look at the reform of international economic arrangements while the other should encourage reforms that each country can take upon themselves. Most important, developing countries need effective governments. What they should ask of the international community is acceptance of their need, and right, to make their own choices. What is needed are policies for sustainable, equitable, and democratic growth. The debate over development must be democratic and incorporate several voices. ANALYSIS Stiglitz effectively argues that significant reform of the major institutions of globalization is required. Unfortunately, all of his principle arguments still apply. Developed countries, especially the U.S., continue to spew rhetoric that seems hypocritical to actions taken. With the several recent corporate scandals, however, it is becoming increasingly evident- both to the domestic and international populations- that a liberal capital market system is not always the best model. This should be taken as yet another lesson that demonstrates the need to consider 7 multiple development models and how they could be tailored to the unique circumstances of each individual country. CONCLUSION Stiglitz demonstrates that international economic institutions, such as the IMF, are no longer fulfilling their original missions. Instead, they continue to pursue the agenda of the finance community in developed countries. This strategy is increasingly detrimental to developing countries and the impoverished within them. It is in the interest of both the developed and developing countries to reverse the negative trends of globalization by encouraging democratic decision-making and reform within international economic institutions. Only then will the world witness improved living standards and global stability.
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