Stiglitz offers a compelling account of his experiences with the IMF, the World Bank, and the U.S. Treasury. By combining his experiences with his economics background, he gives a vivid account of how globalization has been mired with failure after failure and economies in transition have suffered widely as a result of poor global economic policy. His first hand accounts are illustrated by evidence of how international institutions of global integration, like the IMF, the World Bank, and the WTO have pursued narrow interests at the expense of those who needed the most help.
Two overarching themes in this book are the need for a balance between free markets and government intervention and the need for a fundamental change in governance of international agents of globalization. Stiglitz does a great job of showing how important both of these are and what can happen, or has happened, as a result of not meeting these needs. This is a book to be taken seriously and one that should compel its readers to watch more closely the process of globalization as well as the international organizations entrusted to facilitate it.
Balance between Free Markets and Government Intervention
“I tried to forge an economic policy and philosophy that viewed the relationship between government and markets as complimentary, both working in partnership, and recognized that while markets were at the center of the economy, there was an important, if limited, role for government to play.“
Stiglitz did a superb job of illustrating where markets rely on government to function efficiently. For example, a clear prerequisite for a market system to operate is the establishment of a rule of law that protects property rights as well as the courts to enforce them. Well established property rights create an incentive in society to build wealth. Competition is another area of the market that requires some form of government intervention. U.S. experience is a testament to this with the age of the robber barons, U.S. Steel, and Standard Oil, where restrictions were put into place to keep a small number of firms from controlling output and thereby maximizing the price at which those products could be sold.
Sometimes governments are required to serve an area of the market that is underserved or not served at all. Some forms of insurance, for example, are provided by the government in the U.S. because of an inadequate or nonexistent supply by private firms. The IMF made some mistakes in its programs by pushing for rapid privatization; simply because it “assumed that markets arise quickly to meet every need, when in fact, many government activities arise because markets have failed to provide essential services.”
The Dangers of Financial and Capital Market Liberalization
The East Asia Crisis
Stiglitz comments that, “excessively rapid financial and capital market liberalization was probably the single most important cause of the [East Asia] crisis.” Before the crisis hit, the East Asia countries were outperforming most of the world’s developed nations. They were experiencing phenomenal growth. One important factor that led to this growth was the level of saving in those countries. He shows how speculative attacks on currencies can cause pandemic problems for the world economies. The collapse of the Thai Baht induced a domino effect on the East Asia economies that created a regional exchange rate emergency and threatened entire world economies.
The IMF’s reaction and strategy towards the crisis not only exacerbated the problem, but as Stiglitz points out, it was “partially responsible for the onset”. It pushed for rapid capital market liberalization which would open the door to outside investment. In the case of the countries in East Asia, there was no need for additional capital, precisely because of their high savings rate. The IMF, however, continued to push for liberalization. After the crisis hit, the IMF agitated the problem by not allowing the East Asia countries to control capital flows.
Malaysia, the only country that did institute capital controls, was able to outperform all of the other countries hit in terms of recovering from the crisis. Stiglitz makes it clear that although there is little evidence that liberalization policies promote growth, there is â€œample evidence that they [impose] huge risks on developing countries. Even a developed nation would be hurt by a considerable speculative attack or sudden change in investor sentiment that could create a sudden vacuum of capital from one country into another.
Russia and the 1998 Bailout
“There was one important difference between the transition from war to peace, and from communism to a market economy: Before World War II, the United Sates had the basic market institutions in place, even though during the war many of these were suspended and superceded by a ‘command and control’ approach. In contrast, Russia needed both resource redeployment and the wholesale creation of market institutions.”
Stiglitz illustrates how Russia provides another case study where rapid financial and capital market liberalization was the impetus for declining real wages, corruption, and a blatant robbery of the national stock of Russia’s assets by the rich.
Perhaps of all the IMF’s blunders, it is the mistakes in sequencing and pacing, and the failure to be sensitive to the broader social context, that have received the most attention forcing liberalization before safety nets were put into place, before there was an adequate regulatory framework, before the countries could withstand the adverse consequences of the sudden changes in market sentiment that are part and parcel of modern capitalism; forcing policies that led to job destruction before the essentials for job creation were in place; forcing privatization before there were adequate competition and regulatory frameworks.
As Russia began to convert itself into a more democratic country it also began to reestablish its economy. As Stiglitz points out, there were crucial elements that were needed for Russia to obtain before it could effectively begin a transition. One was the establishment of the appropriate market institutions needed to provide protections, through regulations and statutes, as well as the mechanisms to enforce them. The IMF pushed for rapid privatization of national industries while there were no effective mechanisms to allow for an equitable redistribution of resources. As Stiglitz points out, privatization done the wrong way had not let to increased efficiency or growth but to asset stripping and decline. He gives a vivid account of how the rich oligarchs and political leaders were enabled to strip Russia of crucially needed resources and international aid; [capital] market liberalization and privatization made it easier to take money out of the country; privatization before a legal infrastructure was in place enhanced the ability and incentive for asset stripping rather than reinvesting in the country’s future.
The Need for a Change in Governance
Stiglitz makes it clear, through his exhaustive accounts of policy failures, that there is a need for fundamental change in the governance of the international agents of globalization. He shows how the International Monetary Fund, the World Bank and the World Trade Organization all have consistently failed to deliver on their mandates. He cites among other reasons the lack of transparency, the inclination for these institutions to assume a larger role than that of their mandates, and the insufficient, if not inexistent, level accountability.
Because so much of its decision making was done behind closed doorsâ€¦ the IMF left itself open to suspicions that power politics, special interests, or other hidden reasons not related to the IMF’s mandate and stated objectives were influencing its institutional policies and conduct. As Stiglitz points out, not only did this lack of transparency preclude these institutions from obtaining the international support that it should have bolstered, but it engendered a level of distrust and perhaps even animosity towards their existence.
The IMF was supposed to limit itself to matters of macroeconomics in dealing with a country, to the government’s budget deficit, its monetary policy, its inflation, its trade deficit, its borrowing from abroad; and the World Bank was supposed to be in charge of structural issues – what the country’s government spent money on, the country’s financial institutions, its labor markets, its trade policies. Stiglitz provides clear examples of how these institutions assumed roles that did not fall within their stated mandate.
The institutions [the IMF and the World Bank] are not representative of the nations they serve. Perhaps the most important feature Stiglitz mentions is the need for accountability. Many of the mistakes made by the IMF, the World Bank, and the WTO could have been corrected with the appropriate levels of accountability in place. Unfortunately, however, this was not the case and therefore allowed mistakes of regional and global economic, social, and political proportions to take place. The lack of accountability has sponsored a new wave of distrust, animosity, and opposition to the international institutions of change that are crucial to developed as well as developing nations.
What I Have Learned from this Book
Globalization and Its Discontents offers a different perspective of globalization from what I have learned in the classroom. It has shown me what globalization, in terms of global economic policy and the role of international institutions, can do for developed and developing countries when good as well as bad policies are instituted. It has taken me out of the realm of possibility and exposed me to actual results of what economic theories imply. I learn by example, and the examples I have read from Stiglitz have allowed me to understand how important the material I learned is.
Some of the accounts Stiglitz gives are appalling and embarrassing. It allows me to understand how important it is to hold political leaders accountable for their actions. I am embarrassed of how U.S. special interests, whether originating in Wall Street or coming from the Treasury, took a disregard for their responsibilities. Paul O’Neil’s proposal and the U.S.’s proceeding adoption of an aluminum cartel is an outright and blatant show of unilateral policy and susceptibility to special interest. The 1998 bailout for Russia, and the subsequent theft of over $20 billion by a small group of people was nothing less than appalling.
The implications of actions such as these do not bode well for the credibility of globalization and the international institutions put into place to facilitate it. If credibility becomes a problem, support for the institutions themselves as well as the policies they implement will dwindle. Although these institutions have made mistakes, it is important to continue their existence and compel a change in their governance. Their mandates were established to provide the international forum for participation and cooperation needed for a truly global society. Globalization is not a force we can stop, but is one we can use to our advantage. These institutions must, among other responsibilities, respond to emerging threats of political, social and economic hegemony and special interests.