Globalisation and Its Discontents

Joseph Stiglitz (2002)

 1. The promise of global institutions

Globalisation has led to economic development. Trade has allowed prosperity. The developing world is no longer isolated. New foreign firms may have protected state-run industries, but have introduced new technology, increased access to markets and created new industries. Many nations have not witnessed these benefits promised. In the last decade of the 20th century, the number of people living in poverty increased by 100 million, whilst world income increased by an average of 2.5% annually. It has not reduced poverty. Neither has it reduced stability (East Asia, Latin American crises).Russia which shifted to capitalism under guidance of international economic institutions saw increases in poverty.China did it its own way and had reduced poverty. Hypocritically, western states have upheld trade barriers (agriculture) whilst forcing them to be torn down in the rest of the world. Globalisation has improved the ‘terms of trade’ for the west. The intellectual property rights policy (TRIPS) has increased profit for western companies and forced developing nations to pay more; for example AIDS drugs, reducing their ability worldwide. It is the more narrowly defined economic aspects of globalisation that have been the subject of criticism, that have rallied protesters to hit the streets ofSeattle orPrague.

Focus of the book: the Bretton Woods institutions (1944). The IMF was set up to prevent another Great Depression, by putting pressure on countries that were not doing their fair share to maintain international aggregate demand, by allowing their own economies to go into slump and by providing liquidity in the form of loans for countries facing an economic downturn. Created in response to capitalism’s failure. Funded by taxpayers, it is a global public institution. Today the IMF champions market supremacy, only lending money if nations pursue economic policies such as cutting deficits, raising taxes and raising interest rates. Most dramatic changes in the 1980’s – Reagan/Thatcher era. A keen supporter of the neo-liberal agenda, Ann Kreuger became the new IMF president in 1981. During this period the IMF & the WB also became more intertwined. Previously, the WB had only lent money for projects such as roads or dams. It now provided broader support through structural adjustment loans, crucially only with IMF approval. The IMF gained a new arena for power in guiding former Communist countries into market capitalism. The Keynesian ideal upon which the IMF was founded was to prevent crises; following its changed role and pursuit of the ‘Washington Consensus’ it has actually caused many. Developed largely as a response toLatin America’s post-war economic problems, much of which is blamed on excessive state intervention. TheUSandJapanboth developed their economies by selectively protecting certain industries. Rapid liberalisation can have dire consequences and has definitely not produced the rewards in developing nations that were promised. The problem has been exaggerated by expansions to these institutions mandates, as a result of colonialism and then communism. The institutions are not only dominated by the highly industrialised nations, but particularly the financial and commercial interests found within these nations. At the IMF, finance ministers and heads of central banks speak for nations. The leaders within the IMF have come from finance (Robert Rubin, Stan Fischer). Globalisation as it has been practiced, has not lived up to what its advocates promised it would accomplish – or what it can and should do. In some cases it has not even resulted in growth, but when it has, it has not brought benefits to all; the net effect of the policies set by the Washington Consensus has all too often been to benefit the few at the expense of the many, the well-off at the expense of the poor. In many cases commercial interests and values have superseded concern for the environment, democracy, human rights and social justice. We have global governance without global government, where the major global institutions – the World Bank, the IMF and the WTO – and a few players – the finance, commerce and trade ministries, closely linked to certain financial and commercial interests – dominate the scene, but in which many of those affected by their decisions are left almost voiceless.

 2. Broken Promises

The World Bank is dedicated to eradicating poverty, the IMF to maintaining global stability. The World Bank ensures representatives live in the field, unlike the IMF whose powers are dictated fromWashington. The colonial mentality, the ‘white man’s burden’ has persisted.Americawhich unlike it European allies did not have the history of colonialism, blighted its reputation for its all mighty struggle to defeat Communism.

Ethiopia in 1997. President Meles Zenawi involved in a dispute with the IMF. All the macroeconomic indicators upon which the IMF was supposed to act were fine – low inflation, positive economic growth etc. The dispute did not only put at stake the $127 million of IMF money provided through the Enhanced Structural Adjustment Facility, but World Bank support too. The IMF places strong emphasis on inflation. Nations that live beyond their means (spending > tax revenue & foreign aid) create inflationary pressure. However countries can have low inflation and a balanced budget, but a stagnant economy and high unemployment – hardly representative of strong macroeconomic policy. The IMF does not want to provide funding where it will be used ineffectively. WithEthiopia, the evidence suggested this would not be the case (supported by the WB). The IMF suspended its program withEthiopiaas there was a risk that foreign aid (which contributed a considerable amount to gov revenue) may dry up and result in a budgetary deficit. This logic implies nations that receive aid should never spend it. International assistance may actually be more reliable than tax revenue, as it does not fluctuate massively with economic conditions. In factEthiopia’s gov. had designed flexible policy that would help account for possible deviations in revenue. Another issue wasEthiopia’s early repayment on a loan to an American bank, which it had done without IMF approval. It made economic sense to do so, but the IMF was unhappy. They also wanted to liberalise the country’s capital markets and open up the minute banking sector to foreign competition. It wanted to allow interest rates to be set by the market, thus forcing the price of borrowing down – something theUSandEuropedidn’t do until the 1970’s.Ethiopiarejected this and the IMF suspended its programme, relenting after months of lobbying from Stiglitz and his colleagues at the WB. This was symptomatic of the IMF. Refusal to listen to outside advice and making decisions behind closed doors. Expanding way beyond their mandate. Taking a one-size fits all approach. It does not have expertise in development; its original role was focused on stability. Highly educated economists who know the ins and outs of the developing country and much better placed to understand a nation likeEthiopia’s needs. Market fundamentalism does not apply to developing countries where markets work imperfectly, and often it may actually be absent. IMF economists have been content that in the long-run the country will be better off, ignoring short-run disaster. There are alternatives to IMF ideologically driven policy.Botswanais a good example; growth rate of 7.5% (1961-1997). The country received advice in ensuring national unity and policy across all areas (not just finance).

Conditionality of IMF loans – use of specific rules if money to be lent. Used as a policy tool. Aid from the EU, WB etc reliant on IMF approval.

To be continued.