Joseph Stiglitz
MAKING GLOBALIZATION WORK
The next steps to global justice
358pp. Allen Lane. £20.
0 7139 9909 8
US: Norton. $29.95. 0 393 06122 1
Frederic S. Mishkin
THE NEXT GREAT GLOBALIZATION
How disadvantaged nations can harness their financial systems to get rich
310pp. Princeton University Press. £17.95.
(US $27.95).
0 691 12154 0
Are the big debates about globalization now over? The massive demonstrations that disrupted the 1999 WTO meetings, or the 2001 Genoa summit, or the annual meetings of the World Bank and the IMF, or of the Davos World Economic Forum (WEF), now seem part of a rather distant past. Many former critics now see at least some advantages of globalization, and the more intelligent insist that they always wanted a “better globalization” rather than looking for out-and-out confrontation with economic modernity (in the style of, for instance, Islamic fundamentalists). In particular, the dramatic economic growth of India and China seems to indicate that opening to the world market is a way of producing growth but also of alleviating poverty. Third World activists want more, not less, globalization, and a dismantling of the trade barriers of the industrial countries.
At the same time, many of the former advocates of globalization in the business and political world of the advanced industrial countries are now deeply worried, because in their countries globalization seems to be responsible for job losses and pay reductions. The consequence is not only a political backlash, but also an intense populist concern with corporate governance, corporate abuses and the excesses of executive pay. Whereas, until recently, the most dramatic effects were seen in the market for unskilled labour, and consequently most policy thinkers simply saw better training as an answer, it has become clear that skilled service jobs (most famously in computer software, but also in medical and legal analysis) can also be “outsourced”. Consequently, the gigantic Western middle class – the great winner of the twentieth century – is now alarmed. Such responses naturally terrify business leaders, who want to devise some appropriate response that will not hurt them too much. Events such as the WEF, formerly parodied as the fiesta of pro-globalization fanatics, are now packed with presentations by globalization critics and choruses about corporate social responsibility.
Probably the leader of the now triumphant caucus of intellectual globalization critics is Joseph Stiglitz, the Nobel Prizewinning economist for work on the economics of information. He became famous as a result of his previous book, Globalization and Its Discontents, which sold over a million copies. He starts Making Globalization Work with the observation that “the passions evoked by the global financial crises and the difficult transitions from communism to a market economy have now faded”, and he even goes on to claim that there “is an emerging consensus that resembles the ideas put forth in Globalization and its Discontents”.
The core of his analysis concerns the harm done by the excessive degree of financial globalization: the vast capital flows that are not matched by a similar ability of other factors of production (goods and, above all, labour) to move freely across the boundaries of states.
In comparison with the earlier book, which offered very similar diagnoses, Stiglitz shows slightly more nuance and slightly less alarm over global poverty, and much more concern about environmental threats, and in particular about global warming. His presentation is filled with brilliant analyses of a wide range of issues, which become most compelling when he writes about corporate interests distorting the current international-trade and intellectual-property regimes so that they work against developing countries and poor people in general.
Stiglitz’s principal ambition is to offer not just critique, but a very concrete reform agenda, which involves a reassertion of political will to harness an otherwise destructive process, and to limit the one-sidedness of financial globalization. “Economic globalization has outpaced political globalization”, and the imbalance needs to be corrected. In his view, such global governance as currently exists in the UN, the IMF, the WTO, the G8, etc, is chaotic and uncoordinated, and though there are existing mechanisms to deal with each particular problem, they cannot be effective because all the problems are interrelated.
The most moderate and reasonable of the Stiglitz proposals is for a new synthetic international reserve currency, which could kill two birds with one stone. It might end the spiral in which Asian exporters build up claims on US dollars, which may be vulnerable to a financial panic. Secondly, in place of the US government issuing securities (Treasury bills) which are spent in the propagation of American interests, but bought by the rest of the world, an international authority might spend money on global public goods, such as curbing environmental damage or ameliorating poverty. This kind of proposal is not new: the synthetic currency was part of Keynes’s proposals at Bretton Woods; and was revived again in debates in the 1960s which led to the creation of the IMF’s Special Drawing Rights (SDRs); and again, in the face of the dollar weakness of the late 1970s, when the IMF proposed a so-called Substitution Account. Since then, advocates of developing countries have been calling for special issues of SDRs to fund developing countries or to write off debt. None of these proposals has ever been realized, in each case because of the opposition of the United States. Short of a major financial disaster, it is impossible to see circumstances in which the US would accept such a scheme, and after a major financial disaster it would be too late, and the scheme would be pleasing but redundant. In other words, very major political changes would be needed for even the mildest and most rational of the remedies to be feasible.
Almost all the solutions Stiglitz offers are staggeringly ambitious and massively interventionist, although it is never quite clear who should do the intervening. All that is certain is that such interventions cannot come from the US. Thus, for example, he rightly thinks that a decade or so of lecturing from international financial institutions about the damage done by corrupt governments in poor countries is hypocritical (because there is corruption and abuse of corporate governance in rich countries, too) and ineffective.
Legislation is needed on the model of the US Foreign Corrupt Practices Act, which makes the bribing of foreign officials illegal. But what happens if countries do not agree? They might be shamed by revelations of the outrageous practices of their business community. But in the last instance, they may need to be forced. Who will exercise that force? The answer is not at all clear.
There is a graphic description of the dangers posed by global warming, and the need for action on carbon emissions. But the story of the US resistance to the Kyoto Protocol is also narrated, and in answer to the question what can be done, Stiglitz suggests that other countries should apply unilateral penal tariffs on US goods. “Any system, whether of targets or taxes, will require enforcement – including action against countries that refuse to cooperate.” Again, there is a considerable lack of clarity about the body that would decide on this sort of enforcement.
A fundamental theme is thus that regulation as currently practised is fundamentally flawed. But on what principles should it be reformed? The issue becomes clearest in the discussion of how the global intellectual-property regime has been distorted by the prominence of corporate interests that mould the WTO’s TRIPs (Trade Related Intellectual Property) regime. But when summarizing his criticism, Stiglitz complains that the basic flaw is that TRIPs “attempts to impose a single standard for intellectual property law on the world”. There is a similar complaint both about the power of American corporate interests and about the “one size fits all” approach of the IMF.
In the course of offering his prescriptions, Stiglitz again and again emphasizes that there cannot be any simple cookie-cutter or one-size-fits-all remedies. This is at the heart of his critique of institutions such as the IMF, which allegedly offer such simplistic solutions. But there is a deep contradiction at the heart of his proffered solutions, which require a more tailor-made approach. Who is the tailor? The more complicated remedies become, the less they are really subject to democratic oversight, and the more they can be moulded by special interests. Trade law has become so complex because it begins with the premiss – which Stiglitz endorses – that some interventions are needed to stop abusive or damaging trade practices. Once that premiss is accepted, a whole industry cranks up to influence the process, with the resulting prevalence of the big corporate interests that much of the book attacks. A better solution might really be a general one-size-fits-all liberalization, which would not permit of exceptions and hence would shut out the abusive interests.
There is another oddity about Stiglitz’s demand for more democratic accountability. It is striking that his critique of a democracy, the United States, for opening itself to massive corporate pressure, is especially severe; while the countries that have solutions that Stiglitz admires – Mahathir bin Mohamad’s Malaysia or the People’s Republic of China – are more authoritarian. The logic of the argument calls for a benevolent but authoritarian hegemon.
In the middle of his exposition, Stiglitz offers the observation that “Capital markets are highly imperfect, with interest rates in developing countries at a much higher level that those with which even the best of entrepreneurs in the developed world could cope”. It is not clear that any of the policy prescriptions he goes on to offer addresses this fundamental problem. His preference is to control capital flows, because of their potentially destructive effects. In this sense, his book, like the previous one, is shaped by his interpretation of the 1997–8 Asian financial and economic crisis.
Stiglitz’s colleague from Columbia University, Frederic S. Mishkin, has produced a very different and more optimistic account of globalization, in which he traces very precisely how financial institutions make markets operate more efficiently. He agrees with Stiglitz that a very rapid opening of a country to capital flows may produce bad consequences, and wisely recommends that countries adopt a “sequencing”, in which they pursue domestic reforms before they open their external accounts. But Mishkin also acknowledges that the appropriate domestic reforms may be blocked by vested interests, and that a financial crisis has the not unwelcome side-effect of sweeping away those blockages and preparing the way for a more thoroughgoing liberalization. The conclusion Mishkin draws is precisely the opposite one to that of Stiglitz: that financial globalization is likely to create incentives that will lead to a more efficient allocation of resources, and consequently reduce the high level of interest rates in poor countries and emerging markets. Consequently, these economies will graduate from dependence on international financial institutions and grow. Institutional reform is then pushed by inbuilt incentives, which no longer require Stiglitz’s benevolent world authoritarianism.
Frederic Mishkin’s much more focused reform proposals, which involve an appropriate international institutional framework for further liberalization, appear as an effective retort to Joseph Stiglitz’s grandiose schemes for an untransparent and unworkable reordering of the international system. Reading the two books side by side shows how very much alive the debate about globalization still is.
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Harold James is Marie Curie Professor of History at the European University Institute, and the author of The Roman Predicament, published this year, and The End of Globalization, 2001.
