SOC 931 Presentation 2

Globalization and Its Discontents

Preface

Joseph Stiglitz worked for President Clinton and then the World Bank.  He does not particularly like globalization and says he “saw firsthand the devastating effect that globalization can have on developing countries” (pg. ix).  He won the Nobel Prize in Economics, so obviously he is primarily an economist.  The book was written right after the September 11 attacks on NYC in 2001 and that is also not long after the Seattle protests at the WTO.

The Promise of Global Institutions

Stiglitz begins by recapping a little of what we already know: globalization has helped increase standards of living; those who dislike globalization aren’t seeing its benefits (e.g. what foreign aid has brought to millions); and there is a growing divide between the rich and poor (pg. 4-5).  The main causes of the latter have been the Western countries constructing political barriers to prevent ag dependent regions from exporting their goods paired with certain rapid outflows of money that left economies (e.g. in Asia and Latin America) with weak banking systems (pg. 6-7).  All the well intended outcomes of globalization have failed (pg. 8).

The IMF and World Bank failed together because they did not collaborate well.  The World Bank went beyond roads and dams and started providing broad-based support in the form of structural adjustment loans but could only do so with IMF approval (pg. 14).  These were supposed to be respectively different enterprises (IMF = global econ stable; World Bank = country’s infrastructure) but they pushed and pulled on each other and sought to powerfully overlap objectives.

Here are two (examples of) mistakes caused by these institutions (IMF/World Bank/US Treasury) with no safety nets in place:

  1. Forcing any country, let alone a developing one, to open itself to cheaper imported goods that will compete with its own products is disastrous
  2. European countries controlled the capital flow of (i.e. placed “capital controls” on) developing countries and certain rapid influxes of capital into these countries, followed by rapid outflow, created market havoc (pg. 17)

“The IMF has made mistakes in all the areas it has been involved in: development, crisis management, and in countries making the transition from communism to capitalism.”  The IMF failed with its pacing and sequencing of programs.  The main problem of the IMF is the ambiguity of its governance and “who decides what they do” (pg. 18).  It’s driven by wealthy industrial countries with commercial and financial interest (pg. 19).  “Policies of the international economic institutions are all too often closely aligned with the commercial and financial interests of those in the advance industrial countries” (pg. 20).

QUESTIONS

Stiglitz ends the chapter by saying we now have “global governance without [a] global government” (pg. 22).  He believes that a couple institutions (WTO / World Bank / IMF) control the economies of the world at almost, if not every, scale.  Do you believe this is true?  Otherwise, you might believe that “the market” controls economies over the globe.  But, who then controls the market(s)?  Who or what might eventually provide this missing global government?
In preface to the second chapter, are the goals of eradicating poverty and maintaining global stability congruent or opposing?  Why or why not?

Broken Promises

In Ethiopia, the IMF was not happy and suspended its program because it worried about Ethiopia’s budgetary position and didn’t like when a country wanted to spend money on something it got aid for (pg. 28).  The IMF thought Ethiopia was unstable and not reliable economically which was paradoxical to the way that the IMF wanted to solve this problem: by opening up Ethiopia’s (super small) banking system to foreign competition.  Ethiopia refused to go along with the IMF’s idea of “strengthening” its economy and therefore the IMF suspended its program.  Stiglitz pretty much claims he saved Ethiopia by convincing the IMF to finally institute the program again.  The main flaw in the IMF approach to Ethiopia was maintaining a “one-size-fits-all” approach (pg. 34) and forgetting about the complexities and variations of financial development within countries

Botswana, a very small African country that became independent in 1966, is an IMF success story mainly because Botswana had adequate outsider advisers (pg. 36-39).  The IMF flexed its muscle and showed how much of a wise enforcer it was when Michel Camdessus stood over an Indonesia official at a bill signing (pg. 40-41).  The IMF then made Korea its puppet by threatening to cut off Korea’s funds (pg. 42).  This imbalance of power (pg. 43) and general bully behavior caused tension between the IMF and its “client” countries.  The concept of withholding money as an act of power and the creation of forceful conditions as a tool and is called “conditionality” (pg. 44).

Question

What are some of the results of conditionality?  Dislike, fear, tumult, distrust of the IMF when their processes fail…  development?  (“While conditionality did engender resentment, it did not succeed in engendering development” pg. 46)

Failure of conditionality caused by:

Another problem with the IMF policies was that it used boilerplate verbiage to draft reports for countries.  The IMF thought that a universal approach could be applied in all instances to all situations.  Another theory the IMF lived by was an allergy to inflation.  Unfortunately, it protected the US so much from inflation that the whole economy experienced a boom (boiling point) in the 1990′s and then fell flat on its face.

For the IMF to work right:

Question

How should the IMF go about determining how to “use the money correctly”?  Consulting the people of the countries; leaving a big portion of control with the governments of developing countries; maintaining a majority of the control at the IMF while making sure it has the right processes and objectives in place…

Freedom to Choose

Three pillars of Washington Consensus advice from 1980′s-1990′s:

The Role of Foreign Investment

The idea is that when developing countries’ markets are privatized/liberalized, foreign companies (e.g. Wal-Mart) with capital can come in and take advantage of those new style free markets and boost the economies with their presence.  As we’ve seen before, this doesn’t work because (a) the pacing is too fast; (b) the new monopolistic company controls the economy and can, for example, raise prices and mess up the economy; and (c) although the company might have a safety net, the country doesn’t, so retraction is disastrous.

Sequencing and Pacing

Trickle-Down Economics

“Trickle Down” is an extremely basic concept (for our purposes) that means when things are working on the top of the economy with the big companies, the growth and prosperity trickles down to the poor.  This theory is usually attributed to Ronald Reagan.  Stiglitz claims a new form, called “trickle down plus” might work if the strategy were to add a focus on issues like female education and health (pg. 80) but admits it did not work (pg. 82).

Priorities and Strategies

Priorities (of the IMF)

Non-Priorities

At the end of chapter three, Stiglitz generalizes that it is not that the big corporations or governments want to take advantage of the poor.  Obviously, big corporations and governments rely on commerce and markets to sustain.    The problem is that of the particular choices of policies that have been implemented that have failed to take into account the systematic effects of the policy.  This leads to the theoretical question: “has reform failed, or has globalization failed?” which Stiglitz points out is an artificial distinction (pg. 86).  Stiglitz offers some examples of alternative strategies: (i) land reform without capital market liberalization; (ii) competition policies before privatization; and (iii) job creation accompanying trade liberalization (pg. 87).  However, if everybody thought the original strategies would work, what makes these new approaches any different?

Glossary

APEC – Asia-Pacific Economic Cooperation

ESAF – Enhanced Structural Adjustment Facility (esp. in Ethiopia)

GATT – General Agreement on Tariffs and Trade

IMF – International Monetary Fund

ILO – International Labor Organization

NAFTA – North American Free Trade Area

UNCTAD – United Nations Conference on Trade and Development

WTO – World Trade Organization

fungibility – (esp. of goods) being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind

vicissitude – a change or variation occurring in the course of something; interchange or alternation, as of states or things; vicissitudes, successive, alternating, or changing phases or conditions, as of life or fortune; ups and downs: They remained friends through the vicissitudes of 40 years; regular change or succession of one state or thing to another; change; mutation; mutability.

Appendix

Assignment Requirements