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Gloomy About Globalization

1.

Making Globalization Work is the third of Joseph Stiglitz’s popular, and populist, books.1 Like Jeffrey Sachs, Stiglitz is an economist turned preacher, one of a new breed of secular evangelists produced by the fall of communism. Stiglitz wants to stop rich countries from exploiting poor countries without damaging the springs of wealth-creation. In that sense he is a classic social democrat. His missionary fervor, though, is very American. “Saving the Planet,” one of this new book’s chapter headings, could have been its title.

Stiglitz is in favor of globalization—which he defines as “the closer economic integration of the countries of the world.” He criticizes the ways it has been done. The “rules of the game,” he writes, have been largely set by US corporate interests. Trade agreements have made the poorest worse off and condemned thousands to death through AIDS. Multinational corporations have stripped poor countries of their natural resources and left environmental devastation. Western banks have burdened poor countries with unsustainable debt.

Much of this is well said. Although it is not new, it bears repeating. But the main problem at present is not how to make globalization fairer for poor countries. It is how to make it less volatile; and to remove the threat it poses for poor and middle-income people in rich countries—those voters who have the power to derail it. Anti-globalization sentiment is a rich-country phenomenon. It is rather bizarre, therefore, to write a book about making globalization work that pays so little attention to the concerns of people in rich countries.

This is the more regrettable because Stiglitz’s technical work, for which he got a Nobel Prize in economics, is about market failures typical of developed economies. The “Shapiro-Stiglitz” model explains why wages cannot be sufficiently flexible to maintain continuous full employment—an insight that could have been profitably applied to the effects of low-wage competition from East Asia. But, as in his other writings on globalization, Stiglitz has been primarily influenced by his experience as chief economist of the World Bank in the 1990s. This convinced him that Washington-inspired policies to promote economic development in poor countries were, in fact, hindering it. He was particularly outraged by the response of the International Monetary Fund during the East Asian meltdown in 1997–1998, which, he said, through its poorly conceived bailout efforts, turned slowdowns into recessions, and recessions into depressions. His public criticisms are said to have led to his removal from the World Bank in 2000 at the behest of then US Treasury Secretary Lawrence Summers. This book expands on his earlier criticism of Western development policies and proposes social-democratic alternatives.

2.

In Stiglitz’s view, postwar trade regimes—GATT, WTO, NAFTA—have been heavily weighted in favor of the rich countries—by which he means primarily the United States, Europe, and Japan. These countries have used their greater knowledge and economic power to out-bargain poor countries. The rich countries have forced liberalization of trade—first in industrial goods, then in skilled services—on poor countries, while retaining their own agricultural subsidies, and non-tariff barriers (in the form of environmental standards) that punish poor-country exporters. There is no lack of evidence for these claims.

Stiglitz proposes a new principle for international trade agreements: reciprocity among equals, but differentiation between countries in different stages of development. Rich countries, he argues, should open up their markets to poor ones without demanding reciprocal access to poor countries and without imposing their own labor or environmental standards on those countries. Poor countries should be allowed to keep tariffs. Rich countries, whether in Europe or North America, should phase out agricultural subsidies. They should encourage the immigration of unskilled labor. They should refrain from making bilateral trade agreements, which allow special interests to operate in the dark. True enough, he concedes, all this might lead to job losses in rich countries, but these should be compensated by “better adjustment assistance, stronger safety nets, and better macro-economic management” as well as “more investment in technology and education.” In view of the political obstacles to such a compensatory program, this is a remarkably cavalier treatment of the biggest worry facing rich-country workers, to which I shall return.

Stiglitz vigorously attacks TRIPs—“trade-related aspects of intellectual property rights.” TRIPs, he argues, have “imposed on the entire world the dominant intellectual property regime in the United States and Europe, as it is today.” New drugs could save millions of lives in poor countries, but they are unaffordable because they are protected by patents that allow the drug companies to charge monopoly prices for a period of twenty years or more. By including patent protection in the World Trade Organization, he writes, American and European negotiators signed a “death warrant for thousands of people in the poorest countries of the world.” Pharmaceutical companies should be forced to sell life-preserving drugs to poor countries at near cost—or face compulsory licensing of generic drugs that can be produced by, and traded between, developing countries. Stiglitz also wants to give poor countries reverse protection against what he calls drug companies’ “bio-piracy”—exploitation of the traditional plant-based medicines of poor countries without paying for them.

Stiglitz raises the interesting question of whether, or how much, patent protection is needed as a spur to innovation, and in what fields. There is a case for arguing that such protection rewards trivial innovations, and slows down more fundamental ones by erecting barriers to entry into the market. It is also true that AIDS has shrunk life expectancy in southern African countries like Botswana, Kenya, Zimbabwe, Malawi, and South Africa. However, Stiglitz is wrong to single out TRIPs as the main obstacle to the use of antiretroviral drugs. As he recognizes, Brazil, another AIDS-ravaged country, simply disregarded the TRIPs regime and started manufacturing antiretroviral drugs on its own. In South Africa, by contrast, Health Minister Manto Tshabalala-Msimang denounced the drug nevirapine—used to prevent the transmission of HIV from mother to child—as “poison” to South Africa’s women.2

Stiglitz claims that rich countries also rob the poor of their natural resources. Resource exploitation is the quickest way for a country to grow, provided the resources aren’t stolen. However, natural resources are exhaustible, so unless an economy expands beyond its natural resource base, its capital runs down even as its income grows. Governments can mitigate this outcome by various technical devices such as the establishment of “sovereign wealth funds” that “save” part of the resources for future generations. But such remedies, Stiglitz argues, are made more difficult because multinational companies combine with corrupt domestic dictators to rob the populations of resource-rich countries of the wealth that could be theirs.

The cluster of remedies Stiglitz proposes—many of them familiar—are designed to ensure that poor countries with abundant natural resources get “full value” for the resources extracted. He advocates, among other reforms, “green” accounting methods that allow for depletion and environmental “externalities” (such as pollution of the air and water), full disclosure of royalty payments, and certification of origin to prevent trade in resources like diamonds from Sierra Leone from being used to finance violent domestic conflicts. Foreign aid to poor countries should be reduced by the amount of the internal “theft” of resources by governments or foreign corporations. These measures recognize the importance of changing the incentives of home governments in their dealings with multinational corporations. Stiglitz ignores, however, the problem of the incentives faced by such governments in dealing with their own populations. What method of choosing rulers minimizes the tendency to corruption?

Stiglitz’s preferred mechanism for slowing down CO2 emissions is a carbon tax. All countries should impose a tax on carbon emissions at rates reflecting the emissions they generate. The tax would be set high enough to yield the reductions envisaged by the Kyoto agreement of 1997, without having to set national targets. This is sensible enough, given the premise that climate change is mainly the result of CO2 emissions.

The chapter on debt is the best in the book. Stiglitz writes:

Developing countries borrow too much—or are lent too much—and in ways which force them to bear most or all of the risk of subsequent increases in interest rates, fluctuations in the exchange rate, or decreases in income.

As a result developing countries are often burdened with debt they can’t service. Stiglitz’s solution is in two parts: these countries “should borrow less—much less—than they have in the past”; and the world has to agree on an “orderly way of restructuring and reducing debt.”

Stiglitz’s approach to debt reform has become mainstream wisdom, though action lags some way behind. There is widespread agreement that assistance to poor countries should mainly be in the form of grants, not loans, since loans are unlikely to be repaid; that highly indebted poor countries should borrow very conservatively in their own currencies; that taxes and restrictions may need to be placed on the short-term capital flows by which foreign investors seek quick returns and may equally quickly pull out their money. As of July 2005, twenty-eight highly indebted poor countries had been given $56 billion in debt relief. At Gleneagles in June 2005, the G8 agreed to offer 100 percent relief for the poorest eighteen countries, fourteen in Africa.

There is increasing agreement that countries should not be made to repay “odious debt”—debt incurred by previously corrupt or repressive rulers which generally went straight into their bank accounts—and growing support for debt restructuring by means of a “super Chapter 11,” or international bankruptcy code. What rightly gives conservatives pause is the new international bureaucracies required to administer these rules. Stiglitz proposes the establishment of an “International Credit Court” to decide how much “odious debt” countries need to repay as well as an International Bankruptcy Agency to restructure sovereign debt. For someone so alert to the possibility that producers will capture governmental institutions, Stiglitz is surprisingly optimistic about the potential of these bodies to right the wrongs he describes.

Stiglitz next turns to the global monetary system. Here the big problem has been accumulation of foreign exchange reserves—mainly dollars—by developing countries. Between 2001 and 2005, Japan, China, South Korea, Singapore, Malaysia, Thailand, Indonesia, and the Philippines doubled their total reserves from $1 trillion to $2.3 trillion, with China as the superstar. China’s per capita income is less than $1,500 a year, of which the equivalent of $799 is held in reserves. For developing countries as a whole, foreign exchange reserves rose from 6–8 percent of GDP during the 1970s and 1980s to 30 percent of GDP by 2004. By the end of 2006, developing country reserves were expected to reach $3.35 trillion.

Developing countries hold such high reserves of foreign exchange to insure themselves against destabilizing runs on their domestic currencies and to avoid the intrusive IMF supervision that befell the countries caught in the East Asian crisis of 1997–1998. East Asian countries also keep their own currencies undervalued to promote their countries’ exports. Countries use their reserves to buy American Treasury bills. This enables the US to consume more than it produces, to the tune of nearly 7 percent of its GDP.

  1. 1

    The two previous ones were Globalization and Its Discontents (Norton, 2002) reviewed in these pages by Benjamin M. Friedman, August 15, 2002; and The Roaring Nineties (Norton, 2003), reviewed in these pages by William D. Nordhaus, January 15, 2004.

  2. 2

    Stephen Lewis, UN Special Envoy for HIV/AIDS in Africa, said on August 18, 2006, that “South Africa is the unkindest cut of all. It is the only country in Africa…whose government is still obtuse, dilatory and negligent about rolling out treatment. It is the only country in Africa whose government continues to propound theories more worthy of a lunatic fringe than of a concerned and compassionate state.” See www.kaisernetwork.org/health_cast/uploaded_files/Lewis Closing Speech.pdf.

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