• Email
  • Single Page
  • Print

Globalization: Stiglitz’s Case

1.

The most pressing economic problem of our time is that so many of what we usually call “developing economies” are, in fact, not developing. It is shocking to most citizens of the industrialized Western democracies to realize that in Uganda, or Ethiopia, or Malawi, neither men nor women can expect to live even to age forty-five. Or that in Sierra Leone 28 percent of all children die before reaching their fifth birthday. Or that in India more than half of all children are malnourished. Or that in Bangladesh just half of the adult men, and fewer than one fourth of adult women, can read and write.1

What is more troubling still, however, is to realize that many if not most of the world’s poorest countries, where very low incomes and incompetent governments combine to create such appalling human tragedy, are making no progress—at least not on the economic front. Of the fifty countries where per capita incomes were lowest in 1990 (on average, just $1,450 per annum in today’s US dollars, even after we allow for the huge differences in the cost of living in those countries and in the US), twenty-three had lower average incomes in 1999 than they did in 1990. And of the twenty-seven that managed to achieve at least some positive growth, the average rate of increase was only 2.7 percent per annum. At that rate it will take them another seventy-nine years to reach the income level now enjoyed by Greece, the poorest member of the European Union.2

This sorry situation stands in sharp contrast to the buoyant optimism, both economic and political, of the early postwar period. The economic historian Alexander Gerschenkron’s classic essay “Economic Backwardness in Historical Perspective” suggested that countries that were far behind the technological frontier of their day enjoyed a great advantage: they could simply imitate what had already proved successful elsewhere, without having to assume either the costs or the risks of innovating on their own. The economist and demographer Simon Kuznets, who went on to win a Nobel Prize, observed that economic inequalities often widen when a country first begins to industrialize, but argued that they then narrow again as development proceeds. Albert Hirschman, an economist and social thinker, put forward the hypothesis that, for a while, at the beginning of a country’s economic development, the tolerance of its citizens for inequality increases, so that the temporary widening that troubled Kuznets need not be an insuperable obstacle. Throughout the countries that had been colonies of the great European empires, the view of the departing powers was that the newly installed democratic institutions and forms they were leaving behind would follow the path of the Western democracies. Political alliances, like the myriad regional pacts established during the Eisenhower-Dulles era (SEATO, CENTO, and all the others), would help cement these gains in place.

Not surprisingly, the contrast between that earlier heady optimism and today’s grimmer reality has led to a serious (and increasingly acrimonious) debate over two closely related questions. What, in retrospect, has caused the failure of so many countries to achieve the advances confidently predicted for them a generation ago? And what should they, and those abroad who sympathize with their plight and seek to help, do now?

Perhaps not since the worldwide depression of the 1930s have so many thinkers attacked a problem from such different perspectives: Have the non-developing economies (to call them that) pursued the wrong domestic policies? Or have they been innocent victims of exploitation by the industrialized world? Is it futile to try to foster economic development without an appropriate social and political infrastructure, including what has come to be called the “rule of law” and perhaps also including political democracy as well? Or do these favorable institutional creations follow only after a sustained improvement in material standards of living is already underway? Would more foreign aid help? Or does direct assistance from abroad only create parallels on a national scale to the “welfare dependency” sometimes alleged in the US, dulling the incentive for countries to undertake difficult but needed reforms? How much blame lies with corruption in the nondeveloping countries’ governments, often including the outright theft by government officials of a large fraction of whatever aid is received? And then there is the most controversial question of all: Is the “culture” of these countries—specifically in contrast to Western culture—simply not conducive to economic success?

One important concrete expression of the optimism with which thinking in the industrialized world addressed the challenge of economic development a generation and more ago, before these painful questions became prominent, was the creation of new multinational institutions to further various aspects of the broader development goal. The United Nations spawned a family of sub-units to this end, most prominently the UN Development Program and the UN Conference on Trade and Development. The Food and Agriculture Organization (founded in 1945, but separately from the UN) and the World Health Organization (1948) had more specific mandates. The International Bank for Reconstruction and Development (commonly called the World Bank), established in 1944 mostly to help rebuild war-torn Europe, soon shifted its attention to the developing world once that task was largely completed.

The International Monetary Fund (the IMF, or sometimes just the Fund) was a latecomer to the development field. Established in tandem with the World Bank in 1944, the IMF’s original mission was to preserve stability in international financial markets by helping countries both to make economic adjustments when they encountered an imbalance of international payments and to maintain the value of their currency in what everyone assumed would be a permanent regime of fixed exchange rates.

By the early 1970s, however, the fixed exchange rate system proved untenable, and floating rates of one kind or another became the norm. Moreover, as the Western European economies gained strength while, at the same time, more and more developing countries entered the international trading and financial economy, it was increasingly the developing countries that ran into balance of payments problems or difficulties over their currencies and therefore turned to the IMF for assistance. As a result, over time the IMF became increasingly involved in the business of economic development. And as development has faltered in many countries—including many in which the IMF has played a significant part—the IMF’s policies and actions have increasingly moved to the center of an ongoing, intense debate over who or what to blame for the failures of the past and what to do differently in the future.

Joseph E. Stiglitz, in Globalization and Its Discontents, offers his views both of what has gone wrong and of what to do differently. But the main focus of his book is who to blame. According to Stiglitz, the story of failed development does have a villain, and the villain is truly detestable: the villain is the IMF.

2.

Joseph Stiglitz is a Nobel Prize–winning economist, and he deserves to be. Over a long career, he has made incisive and highly valued contributions to the explanation of an astonishingly broad range of economic phenomena, including taxes, interest rates, consumer behavior, corporate finance, and much else. Especially among econ-omists who are still of active working age, he ranks as a titan of the field. In recent years Stiglitz has also been an active participant in economic policymaking, first as a member and then as chairman of the US Council of Economic Advisers (in the Clinton administration), and then, from 1997 to 2000, as chief economist of the World Bank. As the numerous examples and personal recollections in this book make clear, his information and his impressions are in many cases firsthand.

In Globalization and Its Discontents Stiglitz bases his argument for different economic policies squarely on the themes that his decades of theoretical work have emphasized: namely, what happens when people lack the key information that bears on the decisions they have to make, or when markets for important kinds of transactions are inadequate or don’t exist, or when other institutions that standard economic thinking takes for granted are absent or flawed.

The implication of each of these absences or flaws is that free markets, left to their own devices, do not necessarily deliver the positive outcomes claimed for them by textbook economic reasoning that assumes that people have full information, can trade in complete and efficient markets, and can depend on satisfactory legal and other institutions. As Stiglitz nicely puts the point, “Recent advances in economic theory”—he is in part referring to his own work—“have shown that whenever information is imperfect and markets incomplete, which is to say always, and especially in developing countries, then the invisible hand works most imperfectly.”

As a result, Stiglitz continues, governments can improve the outcome by well-chosen interventions. (Whether any given government will actually choose its interventions well is another matter.) At the level of national economies, when families and firms seek to buy too little compared to what the economy can produce, governments can fight recessions and depressions by using expansionary monetary and fiscal policies to spur the demand for goods and services. At the microeconomic level, governments can regulate banks and other financial institutions to keep them sound. They can also use tax policy to steer investment into more productive industries and trade policies to allow new industries to mature to the point at which they can survive foreign competition. And governments can use a variety of devices, ranging from job creation to manpower training to welfare assistance, to put unemployed labor back to work and, at the same time, cushion the human hardship deriving from what—importantly, according to the theory of incomplete information, or markets, or institutions—is no one’s fault.

Stiglitz complains that the IMF has done great damage through the economic policies it has prescribed that countries must follow in order to qualify for IMF loans, or for loans from banks and other private-sector lenders that look to the IMF to indicate whether a borrower is creditworthy. The organization and its officials, he argues, have ignored the implications of incomplete information, inadequate markets, and unworkable institutions—all of which are especially characteristic of newly developing countries. As a result, Stiglitz argues, time and again the IMF has called for policies that conform to textbook economics but do not make sense for the countries to which the IMF is recommending them. Stiglitz seeks to show that the consequences of these misguided policies have been disastrous, not just according to abstract statistical measures but in real human suffering, in the countries that have followed them.

Most of the specific policies that Stiglitz criticizes will be familiar to anyone who has paid even modest attention to the recent economic turmoil in the developing world (which for this purpose includes the former Soviet Union and the former Soviet satellite countries that are now unwinding their decades of Communist misrule):

  1. 1

    Data from the 1999/2000 World Development Report, Table 2.

  2. 2

    These are my calculations based on data in the 2001 World Development Indicators; 1999 is the latest year for which full data are available. Some countries that are presumably poor enough to be in the “lowest-income fifty”—for example, Afghanistan—are excluded because per capita income data are not available for them.

  • Email
  • Single Page
  • Print