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Gloomy About Globalization

However, accumulation of reserves earns less interest income for central banks than alternative uses of such funds, and exposes them to large capital losses should the reserve currency depreciate against the home currency—as has been the case with the US dollar. Stiglitz rightly emphasizes the staggering “opportunity costs”—the alternative opportunities foregone—to developing countries of maintaining such high reserves. US Treasury bills earn only 1–2 percent as against the 10–15 percent that could be earned in high-return domestic projects.

To overcome these flaws, Stiglitz reworks a proposal put forward in the 1960s for the IMF to issue a new international reserve currency called “special drawing rights” (SDR), which he calls “global greenbacks.” The creation of a special reserve currency, he argues, would make it less necessary for countries to accumulate dollar reserves, and “would do more to make globalization work than any other [initiative].” It is not obvious why this should be so. It may help the heavily indebted sub-Saharan African countries—though at the risk of making them SDR addicts—but it would do nothing to prevent excessive reserve accumulation by countries like China, Japan, and Russia.

Although Stiglitz also mentions with approval John Maynard Keynes’s 1941 proposal to penalize excessive reserve accumulation, he does not follow it up. Keynes’s proposed Clearing Bank would have required countries whose trading accounts were persistently in surplus to revalue their currencies as well as to pay interest on their “excess” deposits. The object of these measures was to give incentives to creditor countries to spend their surpluses, not hoard them.3 This suggestion, which was never adopted, cuts more directly at the root of excessive reserve accumulation than simply expanding the volume of “global greenbacks.”

The book concludes with hints of new solutions. Stiglitz wants to “minimize the damage” corporations do to society and “maximize their net contribution,” and to this end he proposes five measures: strengthen corporate social responsibility, prevent monopolies or cartels, increase the scope of liability for environmental damage, make possible class action suits at a global level, and create WTO rules against unfair competition and bribery.

Beyond this, all global institutions need to be democratized. In rich countries (although not recently in the US) governments have intervened to redress inequality of power and wealth; but these same countries have unleashed an almost unregulated free market on the rest of the world. Stiglitz recognizes that poor government in poor countries is partly responsible for keeping them poor; but he also argues that corporate interests are largely to blame for poor government. By weakening the nation-state, they weaken the ability of governments to respond to the problems they create. What is needed, Stiglitz argues, is democratic global institutions analogous to those that exist in national jurisdictions. “Governance—problems in the way decisions get made in the international arena—are at the heart of the failures of globalization.”

Stiglitz proposes ten procedural and ten substantive commandments to be the basis of a new “global contract.” The first ten are aimed at increasing the representation and power of poor and small countries in global organizations. The next ten would enshrine a great many commitments by developed countries to developing ones, including support for democracy:

I remain hopeful that the world will sooner or later—and hopefully sooner—turn to the task of creating a fairer, pro-development trade regime. Demands for this by those in the developing world will only grow louder with time.The conscience and self-interest of the developed world will eventually respond.


What view is one to take of these arguments? I have pointed out some of Stiglitz’s useful analyses and proposals; the mystery to me is how such a fine economist could write such an unsatisfying book. Its main flaws seem to me to be the following:

First, Stiglitz greatly underestimates the extent to which globalization, imperfect as it is, is helping people in poor countries. Already, it has lifted hundreds of millions of people out of poverty. Stiglitz finds a world “replete with failures.” Typical is his remark that although 250 million Indians have improved their standard of living “immensely” in the last two decades, 800 million haven’t—a good example of his failure to give progress its due. Or: “The sad truth…is that outside of China, poverty in the developing world has increased over the past two decades.” The World Bank puts it differently: “By the frugal $1 a day standard we find that there were 1.1 billion poor in 2001—about 400m fewer than 20 years previously.” Stiglitz believes that the increase in poverty outside China qualifies the progress made in poverty reduction. But 400 million fewer people living in extreme poverty is a happy, not a sad, truth, whether it happens in China or anywhere else.

He also underplays the gain achieved outside China. It is true that the number of very poor outside China rose slightly. Stiglitz cites the figure of 877 million in the developing world in 2001 living on less than $1 a day, an increase of 3 percent over 1981. What he fails to mention is that the total population of these countries increased by 20 percent over this period, so that while there is a slightly higher number of very poor people in the developing world today, they represent, proportionally, a decline from 32 percent to 21 percent of the overall population.

Stiglitz also ignores the fact that the number of those living on between $1 and $2 a day rose about as much as the number of people living on under $1 a day fell. Nor does he mention the World Bank estimate that if global poverty continues to fall at the rate it did between 1981 and 2001, the reduction will almost certainly be sufficient to meet the UN Millennium Development Goal of halving the proportion of people living on less than $1 a day by 2015.4 A different observer might see the glass half full rather than half empty.

Where Stiglitz accepts that progress has happened, he denies that it can be attributed to the current way globalization is occurring. His method is to show that countries that rejected the free-market mantra known as the “Washington consensus” did better than countries that followed it. For example, East Asian governments, such as Japan, Taiwan, and South Korea, invested in industries with high growth potential, encouraged their populations to save, limited imports that undercut their agriculture and manufacturing, and (in the case of China and India) restricted short-term capital flows.

Such interventions may or may not have contributed to their “miracles.” But surely much more important were the acts of domestic liberalization of the economy: for China the decollectivization of agriculture and introduction of the “household responsibility system” in the late 1970s; for India, the deregulation of much production, investment, and foreign trade in the 1990s. Above all, the “export-led growth” of East Asia depended crucially on the opening up of foreign, especially Western, markets through bilateral deals and successive rounds of tariff reductions.

Globalization, however imperfect, does often work for the poor. Despite its universal message, Stiglitz’s book is mainly about making it work for sub-Saharan Africa, where the problem is in large part endemically bad government. As we have recently seen, even “successful” African states like Kenya and Nigeria can collapse into chaos at a moment’s notice.

Second, Stiglitz underestimates the extent to which poor countries are responsible for sustaining their own poverty. He shirks the key question: Why, over time, did some countries get rich and others stay poor? His implicit, quasi-Marxist answer is that it was because the rich exploited the poor. An alternative, and to my mind superior, approach, pioneered by Douglass North, is that countries now rich developed institutions superior to those of countries that stayed poor, and that the gap in economic development between different parts of the world had already emerged by the eighteenth century.5

As North tells it, economic growth requires the equalization of the private and social rate of return—entrepreneurs have to be able to receive the benefit which their enterprise confers on society if enterprise is to take place. This requires governments to create and maintain private-property rights. The establishment of a robust private-property regime was the outstanding institutional contribution to the West’s economic development.

Stiglitz wants to do the reverse for poor countries. The emphasis of his book is on the damage multinational corporations do, and he wants them to reduce this damage by forcing them to pay for it, that is, by limiting their property rights in poor countries. This is a defensible position if one believes that the social value of entrepreneurship has declined. This may be the case in already developed countries, though if one looks at the revolutionary effects wrought by the development of cell phones and Internet corporations like Google, one may doubt it. But the one place it is surely not true is in the developing world, which requires more entrepreneurship, not less. Although Stiglitz recognizes the importance of good domestic institutions for economic success, the focus of his book is too resolutely on the external sources of failure. This fuels the natural tendency of the unsuccessful to claim they are victims of the successful.

Third, Stiglitz ignores the harm globalization does to developed countries. This is, above all, a threat to the jobs and wages of their workers, so far largely to the unskilled, but spreading to the skilled as well. Average real wages in America have been stagnant for twenty or more years, even as the economy has boomed. Stiglitz recognizes that globalization is pulling up unskilled wages in China and depressing them in the US and that the depressing effect is faster than the pulling-up effect. He rejects protectionism, but, as we have seen, all he can offer is continued retraining and improvements in skills to fit American workers for life in a competitive global economy. But this is an inadequate answer. Practically all kinds of employment that do not require physical presence can now be offshored. According to Alan Blinder, this amounts to 22–29 percent of all US jobs.6 There can be too much competition.

Fourth, Stiglitz underestimates the danger of financial instability. We are currently living through a graphic demonstration of the volatility of an economic system dominated by financial markets. Globalization both increases the likelihood of financial crises and reduces the ability of governments to deal with them. Following the East Asian crisis of 1997– 1998 and the Argentinian default of 2002, it became conventional to say that financial shocks were confined to developing countries with their “immature” financial markets, but that in the West we had discovered the secret of markets that don’t crash.

This so-called wisdom is now being turned on its head. Lawrence Summers is one of a growing number of economists who believe that the sub-prime credit crisis is more likely than not to drag America—and much of the rest of the world, which depends on American consumption—into recession.7 Financial instability has a good claim to be the chief flaw in the system of global capitalism, and far more potentially destructive of it than most of the dangers highlighted in Stiglitz’s book.

Finally, Stiglitz ignores the malign nexus between global current account imbalances—as exemplified by the huge American trade deficit—free capital movements, and the loss of American jobs. It is not just a matter of free trade exposing American companies to the healthy blast of competition from lower-paid labor in East Asia. It is the fact that today’s exchange-rate arrangements allow huge current account imbalances to persist. This creates a problem of “super-competitiveness”—competition driven by wages kept artificially low, as in China today—by an undervalued exchange rate.

This could not have happened in the past. Under the classic gold-standard regime, a deficit country like the United States would have been forced to curtail its living standard in order to regain competitiveness. In the present nonsystem, it can live for years beyond its means, at the sacrifice of its competitiveness. This is because the dollar is the world’s main reserve currency. America is in the happy position of being able to write IOUs for purchases of goods and services that destroy American jobs.

The system suits both sides. Americans get to consume hundreds of millions of dollars more a year than they earn, while East Asian workers supply them with $700 billion worth of goods and services they would otherwise have produced themselves. Since this irrational arrangement is the only means human wisdom has so far devised to avoid a global depression, it is understandable that there should be a conspiracy of policymakers to keep it going. But it cannot go on and on.

First, there is the same flaw that brought down the Bretton Woods system in 1971, namely that the growing indebtedness of the reserve currency country causes the holders of that currency to lose confidence in it. This has started to happen. Since 2000 the dollar has depreciated by 70 percent against a trade-weighted basket of currencies. “Managed” depreciation could easily become a collapse.

Second, there is bound to be a protectionist backlash as soon as Ross Perot’s “sucking sound” of outsourcing becomes too deafening. If trade is to be left safely free, there has to be an agreement on exchange-rate rules between the dominant powers, including rules about capital movements. If that agreement is absent, it will not be allowed to stay free. The lack of attention to these interlinked problems in a book on how to make globalization work is its most palpable flaw.

It is hard to say how far Stiglitz was diverted from this line of inquiry by his theoretical commitments, since most of the theoretical action takes place off-page. Stiglitz’s Nobel Prize was for work on the economics of risk and information. Markets subject to “asymmetric information”—a situation in which information is unequally distributed between parties to a transaction—and other imperfections do not function as perfect competition models suggest, and need to be “corrected.”

However valid in its own terms, this is the perspective of a microeconomist, whereas the main problems of globalization, I suggest, lie in its uncontrolled macroeconomy. I find more congenial, and more relevant, the relatively permissive attitude with regard to the so-called market failures displayed by the great twentieth-century economists Keynes and Friedrich Hayek and their greater concern with the problem of securing macroeconomic stability, differently though they set about it. They understood that uncertainty and the disappointment of expectation were inherent, not contingent, features of economic life. In Keynes’s economics, a loss of confidence, whatever its causes, leads to an increase in “liquidity preference,” or flight from investment into money. As Keynes put it, the price of parting with money goes up. This is happening today. The credit crunch in the United States and the excess accumulation of reserves in East Asia are signs of an increase in liquidity preference. The need is not to search for new and ingenious ways to make markets marginally more efficient, but to provide a macroeconomic environment that reduces the chances of the financial shocks that cause the flight into money.

A year ago, few outside a small circle of experts had even heard of the collateralized debt instruments (CDIs) or the structured investment vehicles (SIVs) whose defaults have recently been dragging down the American economy. It is a perfect example of how a financial storm can suddenly come up out of nowhere, destroying all those sophisticated, pseudo-scientific techniques of “averaging” risk by which rational people try to convince themselves that the world is more predictable than it can ever be.

My final criticism is that Stiglitz’s book is carelessly written. Stiglitz was—and perhaps still is—an outstanding economic theorist. But he has been producing big, loosely argued books. The laudable aim behind them is to inform a broader audience about economic policies that could make the world a better place, certainly with better lives for the poor, and such advocacy has its place in moving people to action. But he lacks the eloquence, urgency, and passion of the preacher, while he has too often abandoned the rigor of the scientist. In my view, he has not yet found a style suitable to the popular exposition of his economic ideas.

The reader should be aware of my own biases. I am so allergic to the muddling of analysis and preaching that I find it hard to do a book like this justice. So let me say that it has many good qualities, and much forceful argument. And there is a certain moral grandeur in someone who seeks to cure the world of “its sick, its lame, and its halt,” however halting his own prose.8


Gloomy About Globalization’ June 12, 2008

  1. 3

    For a stimulating contemporary version of Keynes’s ideas on international financial architecture, see Paul Davidson, John Maynard Keynes (Palgrave Macmillan, 2007).

  2. 4

    For the best discussion of these issues, see Shaohua Chen and Martin Ravallion, “How Have the World’s Poorest Fared Since the Early 1980s?,” The World Bank Research Observer, Vol. 19, No. 2 (Fall 2004), pp. 141–169.

  3. 5

    See Douglass C. North and Robert P. Thomas, The Rise of the Western World: A New Economic History (Cambridge University Press, 1973).

  4. 6

    Alan S. Blinder, “How Many US Jobs Might be Offshorable?,” Working Paper No. 142 (March 2007), Center for Economic Policy Studies, Princeton University. Vladimir Masch has produced a plan for “compensated free trade” to “control globalization, save American jobs, prevent trade wars, stop predatory trading, and impose financial discipline on our Micawberish country.” See “A Radical Plan to Manage Globalization,” www.businessweek.com, February 14, 2007.

  5. 7

    Lawrence Summers, “Wake Up to the Dangers of a Deepening Crisis,” Financial Times, November 25, 2007. Stiglitz’s views on the current US crisis can be found in “How to Stop the Downturn,” Op-Ed in The New York Times, January 23, 2008.

  6. 8

    I would like to thank Paul Davidson, Emily Farchy, Vijay Joshi, and Vladimir Masch for their helpful comments on my first draft.

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