Chapter 9:
Joseph Stiglitz and Globalization

     Economics has been driving globalization, especially though the lowering of communication and transportation costs.  But politics has shaped it.  The rules of the game have been largely set by the advanced industrial countries - and particularly by special interests within those countries - and, not surprisingly, they have shaped globalization to further their own interests.  They have not sought to create a fair set of rules, let alone a set of rules that would promote the well-being of those in the poorest countries of the world."

- Joseph E. Stiglitz

Information and markets (segue from Minsky)
Globalization and NeoLiberalism
Global Warming

"Globalization" is a term for the coming together of the world economically, the integration of the world's economies.  It has been described in some places as inevitable but benign, elsewhere as lethal.  Trade between peoples and nations has been around for as long as people could travel, nearly as long as humankind.  As the means of transportation became less expensive and more reliable, trade grew.  Now trade has grown again.  New industrial nations have risen in Asia founded on export.  Trade now includes services as well as goods.  But increased trade is not all that is meant by Globalization.  Also implied is the free flow of capital and the opening and integration of markets.  And while "trade" denotes an exchange, the current phenomenon - at least for the U.S. - is one of borrowing and lending.

The model that describes the gains from trade was developed in the Nineteenth Century by British economist David Ricardo (1772-1823).  It is based on the concept of comparative advantage.  Where one country might have a comparative advantage in wine and another in wool, it benefits both parties to trade.  "Comparative" signifies other than absolute.  For example, if country A can make 8 gallons of wine or raise one sheep and country B can make only 4 gallons of wine per sheep, it doesn't really matter if "A" can make 100 gallons per man and "B" only 20.  The benefit exists to trade sheep (or wool) for wine.  No matter the relative level of prosperity, if we can get more wine by growing sheep and trading wool for it than by growing grapes and producing it ourselves, we are better off to do so.

Ricardo's principle of comparative advantage and win-win from trade has the precision of the hypothetical.  Ricardo's analysis occurred in the historical context of trade between relative equals, but also in the context of the British Empire.  In the hypothetical world of comparative advantage, British Colonialism and Imperialism were conveniently ignored.  The real faces of trade and Globalization both then and now are more apparent if we remember Galbraith's insight, that income is a function of power, not value.  Just as in Ricardo's time, today we witness the domination of one people by another for economic benefit.  Were Ricardo's model accurately reflected today, the well-being of all peoples would improve, general prosperity would improve.  Although the issue is clouded by an enormous increase in the world's population, it is apparent that poverty has expanded and the disparity between rich and poor - nations and individuals - has expanded.   

While the principles of trade remain solid, the practice of Globalization often involves gains based not on comparative advantage, but on control of the exchange.  It is not the vintner nor the shepherd who is better off, but the one who arranges the transport of their goods.  The returns from trade possible for the well-being of the broad society have been captured by the businesses which sponsor the trade, who also dominate the suppliers and control the distribution.

For example, within the United States, Globalization has meant cheap imported manufactures and the loss of manufacturing jobs.  Trade agreements have been a target for the displeasure of labor unions and others because the costs have manifested in lower wages and loss of the manufacturing base, with the related loss of jobs.  The benefits have manifested in higher corporate profits and in lower consumer prices.  The net positive impact of freer trade undoubtedly available in theory is in practice frustrated because the gains have not been widely shared.  The consuming public sees the outsourcing of jobs and objects silently, or at best sporadically, even as it fills the parking lots at Wal-Mart to buy the cheap Chinese goods.

The word "trade" denotes an exchange of goods or commodities.  In this concept, the currency of a country is simply a medium of exchange, eliminating the need for direct barter.  If there is a difference between the values of the traded goods, imports and exports, it means a debt has been incurred.  The "exchange" element of trade is often missing with respect to the U.S. today.  Accompanying Globalization and financing many American purchases, has been an explosion of debt.  China and Japan and others have literally lent the U.S. consumer the wherewithal to buy imports.  The trade deficit itself is nothing other than a measure of this capital inflow in the form of lending.  And this trade deficit has been huge and growing since the late 1970s.

Long-term and chronic trade deficits such as the United States has experienced over the quarter century amounts to a failure of free trade theory.  In that theory, the currency will adjust when trade consistently benefits one side, so that its goods become relatively more expensive and demand balances.  "Trade" means trade of goods for goods through the medium of currency.  The U.S. deficit instead an exchange of foreign goods for U.S. dollars.

We will deal with questions about the dollar in Part II.  Here we will look at a vision of Globalization from the perspective of one of its most astute critics, then glance at the post-war experience, and finally take on two of the important issues, like immigration and debt cancellation, that are part and parcel of trade.

Washington Consensus

"Globalization," as mentioned, has more meanings than simply increased trade and open markets.  Globalization has also come to mean free capital flows, corporations free from the fetters of governmental interference, and privatization of governmental activities.  These latter meanings are more rightly called the "Washington Consensus," a name derived from the proximity of the headquarters of the International Monetary Fund (IMF), the World Bank and the U.S. Treasury in Washington, D.C.  These institutions have been the economic and financial enforcers of free market capitalism.  (In Part II we analyze the intellectual construction of the Supply Side camps more completely in a chapter entitled Neoliberalism.)

The Washington Consensus is an extreme version of Classical economics which supposes a market answer to virtually every situation.  Joseph E. Stiglitz defined the Washington Consensus in these terms:

     "These policies focus on minimizing the role of government, emphasizing privatization (selling off government enterprises to the private sector), trade and capital market liberalization (eliminating trade barriers and impediments to the free flow of capital), and deregulation (eliminating regulations on the conduct of business).  Government had a role in maintaining macro-stability, but the attention was on price stability rather than on output stability, employment, or growth.  There was a large set of dos and don'ts: do privatize everything, from factories to social security; don't have the government involved in promoting particular industries; do strengthen property rights; don't be corrupt.  Minimizing government meant lowering taxes - but keeping budgets in balance."

Where the policy program of the Washington Consensus has been applied, the results have been grim.  And by reason of the coercion of the IMF and World Bank, it has become the practiced economic regime in too many developing countries.
A recipient of the 2001 Nobel Prize in economics for his work demonstrating the fallacy of market efficiency,  Stiglitz was chief economist to Bill Clinton and later chief economist at the World Bank. His position inside the institutions which foster and promote the Washington Consensus make Stiglitz' two books - Globalization and Its Discontents  and Making Globalization Work authoritative and their judgement all the more telling.

The Washington Consensus has been a recipe for crisis and decline.  In East Asia, those countries like India, China, Malaysia and Vietnam which resisted free capital flows have prospered.  Those who have been persuaded by the IMF and World Bank to allow capital in and out unhindered have been burned.  "Hot money," capital moving in and out of markets looking for microscopic advantages, accounts for literally trillions of dollars per week, far more than the combined reserves of all governments.  Hot money leads directly to instability.  (This and one remedy, the Tobin Tax, is discussed in more detail in Part II.)  In 1997 a run on the Thai currency, the bhat, led to what at the time was called the Asian Currency Meltdown.  Central banks of the affected nations exhausted their reserves in a futile effort to prop up their currencies.  Foreign lenders panicked.  Loans were called in.  Massive bankruptcies ensued.  The banking system went into crisis.  The IMF rode to the rescue - of the foreign lenders.  Large loans and a laundry list of conditions wee offered the affected nations.  The loans effectively shifted the debt from the individual companies to their governments.  The stipulated conditions for these loans are familiar from the Washington Consensus - government spending cuts, tax increases and higher interest rates.

Even more excruciating has been the experience of Russia since the fall of Communism.  During the 1990s, In the first years of the new market economies of the former Soviet Union, the IMF and Treasury prescribed free market "shock therapy" - immediate privatization, opening of capital markets and elimination of price controls.  The result was instant economic trauma - hyperinflation, rampant official looting by so-called oligarchs of the formerly state-owned industries, capital flight, impoverishment of millions.  The new day of prosperity predicted by the Washington Consensus appeared in Russia, as elsewhere, in the form of Depression.  Output fell by one-third from the already spare level of the Communist era.  Pensioners whose stipends were fixed were wiped out by the inflation and left to sell apples in the streets or to starve.  (Life expectancy itself in Russia fell by four years between 1990 and 2000.)  This experience was imitated by other members of the former Soviet Union and eluded only by the few who eluded the therapy,  Slovenia and Poland, for example.

In Africa after freedom from Colonialism in the 1960s many nations experienced a sequence of economic mistakes and misrule which brought as part and parcel large debt, often from arms purchases, often from large inappropriate industrial projects, often from simple graft.  As a condition for financial assistance to deal with this debt, the IMF and World Bank's template demanded structural adjustment policies (with the apt acronym SAP).  SAPs were the familiar strict budgetary and borrowing constraints and privation policies prescribed elsewhere by the Washington Consensus.  In Africa they were completely inappropriate to nascent economies whose ill-educated work forces and primitive infrastructure made them poor competitors for the oft-cited but rarely seen private investment capital.  Population pressures, AIDS, declining agricultural productivity and in some cases continued misrule have left desperate human conditions across the continent.

Latin America, which as Stiglitz says, "embraced the Washington Consensus policies more wholeheartedly than any other region" has suffered in measure.   Previous to 1980, the region nurtured development by protecting its domestic industry with high tariffs.  This strategy of import substitution was pioneered by the Western industrial democracies and has been used extensively in the Asian success stories (although with more subtlety and government assistance).

The high interest policies of the United States in 1980 infected loans in Latin America.  Debt service ballooned and triggered the default of several of the largest economies - Mexico, Brazil, Argentina - and others.  In an attempt to staunch inflation and find a way out of the depression resulting from the debt crisis, Latin America embraced the minimalist government and strict austerity of the Washington Consensus.  Early success soon wilted.  Self-congratulation at the World Bank and IMF and commendations from their free market apologists faded some time later. The 1980s in Latin America was lost to the debt crisis and its mismanagement.  The 1990s offered only pallid growth.  The North American Free Trade Agreement (NAFTA), a further "open market" trade agreement effected in 1994, has proven no more fertile, and has led instead to the current immigration crisis, discussed later in this chapter.

The Successes

The Asian success stories are China, India, South Korea, Japan, Malaysia, Singapore.  These are the countries which have avoided the minimalist, market-knows-best, free capital movement approach.  The governments of these nations have directed development, protected infant industries with tariffs, and ensured widespread sharing of prosperity and liberal access to education.  In an earlier time, Japan was also a success story.  The original postwar successes were Europe, and of course, the United States of America.  All of these employed similar policies, but policies very unlike those imposed by the Washington Consensus.  We now take a closer look.

The Marshall Plan - A Success

Just as when the New Dealers applied Keynesian programs out of political imperative, the most successful development and trade plan in history rose out of political imperative.  The New Deal addressed the human needs of Depression, but was also an answer to the domestic rise of Fascism and Communism, two competitor economic schemes which seemed to be working when market capitalism was not.  As Galbraith said, "The Keynesian Revolution occurred at the moment in history when other change had made it indispensable."

Postwar trade began with American economic dominance.  The industrial plant of Europe and Japan had been destroyed, and that of Russia was struggling under a nascent arms race.  European production facilities and farms had been decimated.  Communism was alive and present in every country.  (The Social Democratic parties in Europe today are, in fact, direct descendants of a non-revolutionary Marxism.)  Entire populations were hungry and jobless.  The American answer was the Marshall Plan, named for its organizer, twice Time's Man of the Year, the "Great Man" as Truman called him, General George C. Marshall.

The Marshall Plan rebuilt Europe through loans and grants.  But although the economy and infrastructure of Europe lay in shambles, an educated and skilled work force remained.  Local planners and the indigenous leaders of hundreds of European communities organized the rebuilding and European labor executed it.  This meant employment for the unemployed and a society reorganized around peaceful economic enterprises.  It also meant immense good will toward Americans and dynamic new markets for American goods.

While the view of the American public was decidedly more open in the early 1950s than in the protectionist 1930s, fear of a return to Depression was still alive.  In order to implement the Marshall Plan, the Truman Administration had to overcome resistance from many, led by Republicans, who believed the operation to be more than the nation could afford.  The recently validated and popularly respected Keynesian Demand Side economics was decisive.
Because of the resurrection of Europe as a trading partner and market for American goods, the Marshall Plan was a great source of prosperity in subsequent decades, too, perhaps surpassed only by the GI bill in terms of practical economic benefit.

Today the prosperity of Western Europe and Scandinavia is high.  The standard of living for most approaches or exceeds that of the U.S.  Did Europe employ the free market fundamentalism advocated by the Washington Consensus?  Quite the contrary.  Government has been intimately involved with every part of these economies, not leaving the private sector to develop in directions prescribed only by free market winds.  Taxes have been significantly higher than even in the United States, primarily for purposes of funding social and health benefits.  Public construction of infrastructure and operation of industry is common.  Only the United Kingdom beginning with the Thatcher era has employed a minimalist government scheme.

Because of its postwar dominance, the trade balance of the United States was invariably in surplus between the end of the war and the mid-1970s, as American manufactures, equipment and agricultural products remade the world.  The industrial plant of Europe and Japan was rebuilt, but the products of their new industry were generally inferior.  Fiat, meant "Fix it again, Tony."  Japanese-made meant cheap and undependable.  Even with the oil supply shocks and price spikes during the 1970s, the U.S. maintained its trade surplus.

Then began the presidency of Ronald Reagan.   The loose fiscal policies of the new regime in the White House were countered by tight money policies from the Fed attempting to counter.  The dollar was made dear by restricting its supply (the Monetarist remedy for inflation - see Chapter 4).

One effect of corporate control of the economy that Galbraith noted was the multiplying of the private purchasable goods at the expense of public goods.  This consumer economy meant more cars, refrigerators and men's deodorant, balanced by less infrastructure, lower education, and fewer social services.  The focus on private goods, retail items, tradable goods, was just the mark for Japanese and later Korean and Chinese factories.  The 1980s marked the onset, as so often repeated here, of enormous trade deficits, the decline of American manufacturing, the explosion of public and private debt, and the experience of Globalization.

Globalization on the Ground

The cost of Globalization has been lost jobs.  The benefit has been lower prices.  So long as trade is conducted on terms so favorable to America and includes the indulgence of foreign lenders, there will be little more than pockets of agitation against the costs.  In the developing world, however, the costs of Globalization have been far worse.  Two particular issues are raised here, by way of example: the need for debt cancellation and the immigration problem.  These are treated more completely in later chapters on development challenges and options.

Debt Cancellation.  As we have seen, many nations of the underdeveloped world are staggering under huge debt to the international banks.  The existence of this debt is a moral and economic travesty.  Its cancellation is essential for development to go forward.
Much of this debt is patently illegitimate.  Much of the rest is odious.   "Illegitimate debt" includes that generated by failed projects, many of which were not intended to succeed, and that whose primary purpose was to use the country's treasury to channel money to external consultants and multinationals.  "Odious debt" is that which was contracted primarily to obtain means to oppress the population or to enrich governmental officials.  Creditors are very often conspirators in these activities, but have not been asked to share the responsibility for the consequent debt.

Another section of the debt burden arises from the capitalization of interest.  A 1996 report by the British humanitarian organization Oxfam accused the World Bank and IMF of creating a "bizarre financial circus in which more and more aid was being recycled in the form of debt repayment while the debt stock was increasing."  Thus the debt has grown over time without any additional borrowing or lending of principle.  The extent of this mushrooming problem is not known because of opaque reporting by the World Bank, IMF and other international lending banks.

Debt cancellation has been implemented, but only in flawed forms, with the stipulations of the SAPs for privatizing, budget constricting and exposing domestic markets.  As we will see  in Part II, these are as crippling as the debt itself.  The solutions they offer only perpetuate exploitation.  Some nations spend three times or more on debt service than they spend on education.  Debt and development need to be incurred on behalf of the people and for public purposes, not for the benefit of lenders, private industries, or corrupt officials.  And the Marshall Plan model indicates development is best directed by indigenous business and labor leaders.

NAFTA and Immigration.  The "immigration problem" is popularly seen as a border security or a social fairness issue.  But it is not for cherished dreams of becoming fast food counter clerks or lawn maintenance laborers that people are drawn to making the dangerous crossing into the United States.  It is, rather, economic privation that drives them out of their native countries.  Those who stay behind are often supported by the money sent back home from those who leave.

In the U.S. Labor knows NAFTA as the vehicle that move manufacturing jobs offshore.  In Mexico, they know NAFTA as the end of the farm economy.  The United States demanded under NAFTA an end to subsidies for corn and beans in Mexico.  At the same time price subsidies to the industrial farms of the U.S. were expanded.  The result was a massive dumping of cheap corn into Mexico, reducing prices by 70 percent since 1994.  Farm incomes plummeted and farm families were left with a choice of crossing the border or starving.  Whole villages have become ghost towns.

In the US about 2 percent of us make a living on the farm.  In Mexico it is over 40 percent.  (U.S. price supports do not go to the family farmer, let us be clear.  Eighty-five percent goes to the largest operators.  It is no exaggeration to say that in order to support millionaires we have been led to militarize our borders and have forced the Mexican agrarian economy dissolve. )

The trade regime that allows the imbalance in favor of the U.S. and developed economies was negotiated in the 1990s on the promise that the next round of trade talks would redress these problems and benefit the agricultural economies of the developing world.  The developed world led by the United States reneged on the promise, and the so-called Doha Round of trade talks collapsed.
Many suggest that illegal immigration is encouraged now just for the very purpose of generating downward pressure on wages.  Virtually all agree that Globalization will have the effect of averaging out wages for unskilled workers across the planet.  Both, of course, mean big losses for unskilled Americans.  The effect could be mitigated and immigration pressure reversed if a rational farm policy at home were in place and trade and development assistance policies that encouraged rather than punished agrarian economies abroad were the standard.  In theory everybody can be made better off from trade.  In order for that to happen, however, the gains have to be distributed to everybody.  When corporations control the transactions, no distribution is made, the gains are captured by the corporate sponsor. 

The Washington Consensus and claims for Globalization are easily discredited, both theoretically and by the tragic empirical evidence.  Where it has been tried, it has not worked.  The decline following the free market shock therapy in Russia, the failures (and conditions which led to them) following the Asian currency meltdown, the suffocation of Latin America and Africa, all followed from Washington Consensus prescriptions.  The expansion of the U.S. following the Second World War, the resurrection of Europe and Japan, and the more recent successes in China, India, Singapore, Malaysia, and elsewhere all rejected the same nostrums.  Such policies thrive not by virtue of intellectual consistency or results on the ground, but undoubtedly because they support the Establishment, the Corporate Oligarchy.  In that view and from an American imperial perspective, the impoverishment and dependency of nations is not necessarily a bad thing.  The free market regime of the Washington Consensus has not worked because it cannot work.  Economies do not behave as they are imagined to.  Meanwhile the opportunities latent in the underdeveloped world (cited in later chapters) that could be released by Demand Side policies are foregone, including big new markets for American goods.

An alternative path to development.  Environmental imperative meets global poverty with the program of emerging nations building their economies using green energy and small footprint development.  If new industrial economies follow the old dirty energy path being blazed by China, they will become part of a desperate global end game.  These countries can be the laboratories of sustainable development.  That effort should be assisted and rewarded commensurate to its value.

Invest in economies not plantations.  The supply-side bias has worked no better abroad than it has at home.  In thinking about global development it needs to be abandoned along with its disastrous consequences.  The United States and advanced economies perpetrated a cruel hoax on the developing world when, through the IMF and other institutions, coerced countries into export-based, privatized economies.  But when the U.S. and advanced economies came face-to-face with the same type of economic crisis, they abandoned the prescription of balanced budgets and strict privatization.  Necessarily the credibility of the Western sponsors of the "Washington Consensus," has been destroyed.  Investment that creates the foundations - in roads and schools and clean water - will build economies there as well as here.  Other investment - in factories and plantations - is nearly always a mask for exploitation.  Given an adequate platform, nations can devise their own economic success.

Before everything else, the debt of the Third World ought to be forgiven -- and without the restrictive structural adjustment policies (SAPs) the IMF shackles to them.coerces from these poorer nations, shackles to unworkable economic designs.  A stable representative government that has legitimacy with its people ought to be the only criterion for forgiveness.  Developing nations taken together now spend $13 on debt repayment for every $1 they receive in grants.   This debt is often a legacy of oppressive governments or corrupt lending practices.  Ending it will create immediate demand for products and a means to begin.  Continuing it will continue an injustice that eats at the roots of global prosperity.

Reform trade to protect agrarian economies.  Globalization has unfortunately meant decimation of the agrarian economies of many of the Latin American and African countries.  Agriculture is the dominant industry of most poor nations.  Trade agreements must recognize this and protect agricultural development and diversification. In fact, they most go further, and realize than Agriculture that is not resource- or capital-intensive is in line with the needs of the future, and encourage it. Unfortunately, Globalization has meant simply a new colonialism, in which protection and subsidies are allowed for the wealthy and eliminated from the poor.   The advanced countries could be exporting education, utilities, roads and machinery, rather than eviscerating the earning power of near-subsistence farmers.  Immigration experience demonstrates that , in a very real sense, we will export the means of development and import products or we will import the people.

It is a cruel myth that economic activity is orchestrated by natural laws and revolves in a manner to which governmental policy always amounts to interference, a reduction in efficiency, a distortion.  Economic affairs have evolved to favor the powerful in every society.  When the people are powerful, as in a free democracy, they are favored and the economy does well.  When not, financial rewards cant to the dominant institution or group and economies sputter or stall as social tensions rise.

It is, then, not populations that must bow to the natural laws of an economic galaxy.  Instead the institutions, rules and incentives of the economic galaxy must be ordered to benefit populations.  In our real and present case this may allow the pursuits needed for survival of society.

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