Globalization and its Discontents

Summary of Joseph E. Stiglitz’s Book

The origin of all problems is the way globalization has been managed, rather than
globalization per se. Pro-globalization policies have the potential of doing a lot of good, if
undertaken properly and if they incorporate the characteristics of each individual country.
Countries should embrace globalization on their own terms, taking into account their own
history, culture, and traditions. However, if poorly designed pro-globalization policies are
likely to be costly. They will increase instability, make countries more vulnerable to external
shocks, reduce growth, and increase poverty.

The problem, according to Stiglitz, is that globalization has not been pushed carefully, or
fairly. On the contrary, liberalization policies have been implemented too fast, in the wrong
order, and often-using inadequate economic analysis. Therefore, he argues, we now face
terrible results, including increases in destitution and social conflict, and generalized
frustration. The culprits are the IMF and its ‘‘market fundamentalists,’’ the ‘‘Washington
Consensus,’’ and the US Treasury.

Stiglitz believes that in the early 1990s, the IMF, the World Bank and the US Treasury
launched a conspiracy of sorts to run worldwide economic reform—this is the infamous
‘‘Washington Consensus.’’ This view, however, is overly simplistic and ignores the evolution
of reform thinking during the last two decades. In the 1980s and early 1990s, policy makers
in many developing nations were moving faster than the multilaterals or the Treasury. In
Argentina, Chile, and Mexico, for example, the reforms were the result of a ‘‘national
consensus’’ that was more imaginative, daring and far-reaching than anything bureaucrats in
Washington were willing to accept at that time. It is well known, for example, that the IMF
was initially critical of Chile’s social security reform, it opposed Argentina’s currency board,
and it was highly skeptical of Mexico’s trade-opening strategy during the mid-1980s. If
anything, the original emphasis on how to undertake economic reform came from a group of
developing countries’ economists, many of them from Latin America, and not from the ranks
of the multilaterals.

Three interrelated policy issues are at the center of Stiglitz’s criticism of globalization.
 1. In designing reform packages during the 1990s, crucial aspects of the sequencing and
pace of reform were ignored. As a result, in many countries, reform was implemented
too fast—Stiglitz prefers gradualism—and in the wrong order.
2. Advocating (and imposing) capital account liberalization was a huge mistake.
3. The IMF response to crises, and in particular to the East Asian crisis, was a disaster
that made things worse rather than better. In particular, imposing fiscal austerity and
raising interest rates were terrible mistakes that cost the East Asian countries several
points in terms of growth.

Not surprisingly, given his theoretical writings during the last 35 years, Stiglitz frames his
criticism around the insights of the theory of asymmetric information. Stiglitz claims that if
things had been done differently, the outcome in terms of social conditions would have been
significantly better.

Stiglitz repeatedly argues that for economic liberalization to succeed, it is essential that
reform be implemented at the right speed and in the right sequence. In the early 1980s, the
World Bank became particularly interested in understanding issues related to sequencing and
speed of reform. Papers were commissioned, conferences were organized, and different
country experiences were explored. As a result of the discussion surrounding this work, a
consensus of sorts developed on the sequencing and speed of reform. The most important
elements of this consensus included:

1. trade liberalization should be gradual and buttressed with substantial foreign aid;
2. an effort should be made to minimize the unemployment consequences of reform;
3. in countries with very high inflation, fiscal imbalances should be dealt with very early
on in the reform process;
4. financial reform requires the creation of modern supervisory and regulatory agencies;
and
5. the capital account should be liberalized at the very end of the process, and only once
the economy has been able to expand successfully its export sector.

Of course, not everyone agreed with all of these recommendations, but most people did. In
particular, people at the IMF did not object to these general principles.

Sometime during the early 1990s, this received wisdom on sequencing and speed began to be
challenged. Increasingly, people in Washington began to call for simultaneous and very fast
reforms. Many argued that politically, this was the only way to move forward. Otherwise, the
argument went; reform opponents would successfully block liberalization efforts. In 1992,
and in response to what was perceived as US pressure to lift controls on international capital
movements, Yung Chul Park from Korea University organized a conference on capital
account liberalization. Most participants agreed that following an appropriate sequencing was
vital for the success of liberalization. There was also broad support for the idea that a
premature opening of the capital account could entail serious danger for the country in
question.

At the 1992 Seoul conference on capital liberalization, one of the few dissenters was the late
Manuel Guitian, then a senior official at the IMF, who argued in favor of moving quickly
towards capital account convertibility. Yet, in stark contrast to Stiglitz’s characterization of
the IMF leadership, there was no dogma or arrogance in Guitian’s position. He listened to
others’ arguments, provided counter-arguments, and carefully listened to the counter counter-
arguments.

Starting in 1995, more and more countries began to relax their controls on capital mobility. In
doing this, however, they tended to follow different strategies and paths. While some
countries only relaxed bank lending, others only allowed long-term capital movements, and
yet others—such as Chile—used market-based mechanisms to slow down the rate at which
capital was flowing into the economy. Many countries, however, did not need any prodding
from the IMF or the US to open their capital account. Indonesia and Mexico—just to mention
two important cases—had a long tradition of free capital mobility, and never had any
intention of following a different policy.

Stiglitz is particularly critical of the way in which the IMF handled the East Asian crisis. In
his view, major mistakes included

(1) closing down, in the middle of a financial panic, a number of banks in Indonesia;
(2) bailing out private and mostly foreign creditors;
(3) not allowing the imposition of capital controls on outflows; and
(4) imposing tight fiscal policies and high interest rates.

He claims that the experiences of China and India, two countries that did not suffer a crisis,
and of Malaysia, which did not follow the IMF’s advice, and recovered quickly—support his
views.
Stiglitz’s most severe criticism refers to the IMF’s fiscal and interest rate policies. He argues
that the East Asian crisis called for expansionary and not, as the IMF insisted, contractionary
fiscal policies. In his view, by imposing fiscal retrenchment, the IMF made a serious
recession even deeper. Worse yet, the IMF-mandated increases in interest rates generated a
string of bankruptcies that deepened the confidence crisis and further contributed to the
slowdown.

Stiglitz has confidence on the ability of governments to do the right thing, and he exaggerates
greatly the extent of market failures. The agenda should be to improve institutions and
incentives; to promote competition and efficiency; to implement policies that raise
productivity; to truly help the poor and the destitute; to put an end to corruption and abuse;
and to make sure that globalization becomes a fair process, where the industrial countries also
dismantle their protective barriers.