BYJOSEPH STIGLITZGlobalisation and ItsDiscontents“Globalisation itself is neither good or bad. It has the power to doenormous good especially for those who adopt it at their own pacesand under their own terms; it has been enormous benefits like thosecountries in East Asia” (Stiglitz 2001, p.30)Review: Shishir Nigam, Narayanan Palani
Chapter 1: The Promise of Global Institutes• Globalisation has following promises: a reduce ofsenses of isolation, foreign aids, eliminate tradebarriers, reducing poverty etc.• Despite its immense benefits, globalisation has becomecontroversial NOT only in developing countries but alsoin developed countries e.g. what happened in Seattlemeeting of WTO in 1999. Why is it as such?• Whilst Globalisation has great promises especially fordeveloping countries, it miserably fails to deliver in otherareas. A wider gap between the Haves and the Have-Nots
Chapter 1: The Promise of Global Institutes (Cont’d)• Developing countries view globalisation as a vehicle fordeveloped countries to take advantage of them throughglobal institutes e.g. IMF and WTO, and the World Bank• For example, trade liberalisation has been insisted byIMF whilst the developed countries already have ‘safetynet’ put in place to benefit their exported goods. Withthe help of the ‘free trade’ agreement, those goods areforced into developing countries to compete with thedomestically-made ones, which jeopardise their alreadyvolatile economy and domestic trade.
Chapter 1: The Promise of Global Institutes (Cont’d)• Unlike an evolution that happened in the US in the 19thcentury, globalisation today has been managed by asystems called “global governance without globalgovernment”.• Those global institutes such as WTO, IMF and the WorldBank are dominated by a few players and left those who aremostly affected left almost voiceless• Last but not the least, globalisation can be reshaped to allowALL countries to have voice in the systems. Then,globalisation could help create a global economy in whichgrowth is sustainable and less volatile and more importantlythe benefits are more equitably shared.
Chapter2: Broken PromisesIMFWorld BankGoal: our dream is the worldwithout the povertyGoal: to maintain global stabilityMethodology: interpretevist; staffspermanently lives in developingcountries, mostly in the country side,to understand and lay out strategyto achieve the goalMethodology: positivist; one-size-fitsall attitude and market must knowbestIn 1997, Stiglitz started his job as a chief economist and senior vicepresident of the World Bank. The above picture depicted his perceptions onthe 2 international institutions that are fundamentally different in beliefs andapproaches . In his opinion, IMF establish major obstacles f0r developingcountries to diminish poverty problems.
Chapter2: Broken PromisesThe case of aid suspension between IMF and Ethiopiademonstrates strong disagreements between Stiglitzand IMF as shown below:1. Criteria to lend money especially how to spend foreign aid: IMFsuspended it program with Ethiopia who had a good macro-framework due to some unsound reasons. IMF encouragedEthiopia government NOT to spend the aid fund on facilities asthey are supposed to. In so doing, they will have good figures onbalance sheet.2. Early loan repayment: IMF requested Ethiopia, a sovereigncountry, to ask their permission to repay the loan early due to thefact that Ethiopia did not want to pay a high interest rate anylonger.
Chapter2: Broken PromisesThe case in Ethiopia demonstrates strong disagreementsbetween Stiglitz and IMF as shown below (Cont’d)3. Financial market liberalisation. IMF wanted Ethiopian to open itscountries for western banks and divide its largest bank into severalpieces. Ethiopia refused to do so its fear of repeating what Kenya hadexperienced when it followed IMF advices.At the end, Stiglitz had to use his resources, time and efforts, to lobbypeople in IMF and the World Bank to reinstate the aid program toEthiopia.“Such organisations (IMF) are opaque rather thantransparent, and not only does far too little informationradiate from inside to the outside world, perhaps even lessinformation from outside is able to penetrate theorganisation”. (Stiglitz 2001, p.33)
Chapter2: Broken PromisesStiglitz provides criticisms of how IMF should improve:1. IMF Conditionality• The economists basic notion of fungibility e.g. the fund thatmeant for one project was spent on another project• Some conditions imposed on developing countries are simplywrong e.g. financial market liberalisation in Kenya• Some conditions imposed on made the country politicallyunsustainable e.g. Corruption problem was a reason IMFceased lending program with Kenya but not Russia• The lending decisions were political2. Lack of transparency during the process and IMF perception of“rights to know” for the public3. Inadequate participation of the poor countries
Chapter2: Broken PromisesStiglitz identifies several reasons of failure of IMF (cont’d):4. Unfairness of treatments between the rich and poor countries e.g.adherence to article 45. IMF should consult widely within a country as it makes itsassessments and designs its programs6. IMF initial reports that each country has to fill reflects the one-size-fit-all attitudes.“The international institutions have thus escaped the kind of directaccountability that we expect of public institutions in moderndemocracies. The time has come to grade the internationaleconomic institutions performance and to look at some of thoseprograms “ (Stiglitz 2001, p.52)
Chapter3: Freedom to Choose?Fiscal Austerity, Privatisation and Liberalization are the 3 pillars of WashingtonConsensus advice. IMF and the World Bank also deploy them as criteria for gradingsystems of countries. Foreign Investment is also a key of globalisation. The problemwas that many of these policies became ends in themselves and are pushed too fastand too far.Privatisation: Governments, often times, spend too much time and effortsdoing things that should NOT be doing, such as running airlines and runningrailways systems, rather than providing spending necessary supports andfundamental policies to monitor and control those industries. However,privatisation could miserably fail when:• Privatization is implemented too fast and too far without policies orregulations to provide essential services which eventually causes marketfailure• Corruption; without the appropriate legal structure and market institutions,the new owners might have an incentive to strip assets rather than usethem as a basis for expanding industry.
Chapter3: Freedom to Choose?Liberalisation failure:• So far, in developing countries experience an opposite result thatthis mechanism has intended. It forces domestic businesses toclose down once trade barriers are eliminated and markets indeveloping countries have strong competitions flooded into.Markets in developing countries desperately require two importantskills to survive; capital and entrepreneurship.• To survive this invasion, governments in the developing countrieshave to open itself gradually and systematically e.g. China spentmore than 20 years to gradually open itself up to the globalmarket• Hypocrisy of developed countries and inequalities between thedeveloped and developing countries.
Chapter3: Freedom to Choose?Foreign Investment: it’s a new part of globlisation thatresulted from liberalisation, privatisation and macro-stability. It promises growth, accessibility to knowledgeand expertise for a local community and an access tosources of finance. However, it could, yet again, resultotherwise.•Local businesses are closed down because they cannotcompete with such strong competitors e.g. Wal*Mart•Foreign investors do not attempt to improve the workingconditions for local community e.g. financial markets inArgentina and Bolivia•Governments of developing countries are pushed tofavour those foreign investors e.g. an investment inIndonesia
Chapter3: Freedom to Choose?1. Trade liberalisation + high interest rate = job destruction and unemploymentcreation2. Financial market liberalisation without regulatory structure = economicinstability3. Privatisation without competition policies and oversight to ensure that themonopoly are not abused = HIGHER price for consumers4. Fiscal austerity is pursued blindly = higher unemployment rate and shreddingof social contract.In Short: Freedom to choose is when countries can considerthe alternatives which strategy, priorities should they adoptthrough democratic political processes with their ownpacing and sequencing. International intuitions shouldonly play a role of information provider so that thosecountries can make a judgment on their own knowing theconsequences.
THE EAST ASIA CRISIS: How IMF Policies Brought the World tothe Verge of a Global MeltdownChapter 4
Chapter 4: The East Asia Crisis• Crisis in Asia in 1997, due to a rapid financial and capitalliberalisation started in Thailand, was felt all over the world andsome countries still feel it in years to come such as Indonesia.Since the IMF was founded particularly to avert the crisis, itshould reconsider its role and its strategy to providerecommendation and supports.• Yet, IMF blamed it on Asian’s institutions that they were rottenand corrupt whilst those countries especially China hasmiraculously established itself as an economic power and itsgrowth has surged compare to 30 years ago• Stiglitz identified 2 patterns of the crises; self-fulfilling prophecyand speculative attacks. IMF also had patterns to solve theidentified crises but failed miserably.• Stiglitz along with many governments in developing countriesshare the same view that IMF itself is part of the problem
Chapter 4: The East Asia CrisisHow IMF and US Treasury led to the crisis•Liberalisations policies were pushed to the market though there was littleevidence that growth would have been generated•IMF insisted Thailand to lift their regulations to control real-estate speculation asthey believe that “market must know best”•Similar crisis also happened in Korea led by US Treasury forcing Koreangovernment to accept liberalisation too fast and too far before the safety net wasestablishedAfter the crisis happened, IMF still failed to provide the remedybecause:•Austere fiscal policy made the recession far worse then it needed to be•The failure to recognise the important interactions among the policies pursued indifferent countries•IMF forced banks in Asia to increase the interest rate up to 25% which resulted incontraction of the economy in the region during the crisis e.g. Korea andIndonesia.•IMF policies did not accommodate the restructuring of both financial sectors andcorporates e.g. forced to close down banks and tighten loans
Chapter 4: The East Asia CrisisAfter the crisis happened, IMF still failed to provide the remedybecause (Cont’d):•Last not not the least mistake of IMF is the risk in social and politicalturmoil due to its excessively contractionary monetary and fiscal policiese.g. in Indonesia•After the crisis happened, those countries who shut doors to IMF policies,such as Malaysia and China, had gotten away from falling into therecession whilst those countries who was a good pupil like Thailand hadsuffered the recession for several years. Korea who smartly chose IMFpolicies to adopt handsomely recovered from the recession whilstdeveloped itself as today’s forefront runner in global economy.•Explanation to the failure; IMF cannot accept its own mistakes andconspiracy belief that it helped to open the gateway for western investorsto make money
Chapter 4: The East Asia CrisisAn Alternative to IMF mistakes proposed by Stiglitz•Is to implement the policy and operate the market as if it was atfully employment whilst conducting a financial restructuring and adebt restructuring and allowing the financial flow like Koreangovernment did.In sum, what happened in East Asia helps to present the discontentin developing countries towards international institution anddeveloped countries. Additionally, IMF should reconsider its strategyand plan to provide aids to developing countries. What happened inRussia in the 1990’s which will be discussed in the next chaptershall demonstrate more clearly.
Chapter 5: Who Lost RussiaWhen USSR collapsed and Russia was reformed, IMF and Westernleaders claimed that the matter would have been far worse withouttheir supports. However, the current circumstance in Russia is nowdisastrous (p.135). There are challenges and opportunities of thetransition for Russia as follows:Challenges OpportunitiesMarket revolution ignored knowledge inhistory, economics or society thathappened prior to the reform.Not just an economic reform but thewhole social structure reformThe move from one price systems tomarket price systemRussia can put a high level of educationinto good use for the New EconomyAn appropriate speed of the reform“shock therapy” and “gradualist”A replacement of decentralised systems tocentralised systemsMilitary budget was reduced tosupposedly improve quality of lives of thepeople in Russia
Chapter 5: Who Lost RussiaReform Story•3 pillars for the reform were identified; Liberalisation, Stabilisation and arapid Privatisation. Nevertheless, the strategy did not work as indicated bya shrunken GDP post 1989.•Russia followed IMF advices quite closely but the result was quite theopposite to that IMF predicted. Fund flow poured out of the country ratherthan pouring in by foreign investors so Russia had to borrow more fromIMF and thus became more indebted•Privatisation happened without a good plan to support so the governmentgave away its valuable state asset away.•To make the matter worse, IMF encouraged Russian government toborrow more in US dollars which eventually devalue its own currency,Ruble.•IMF also convinced the World Bank to lend more of money despite strongopposes due to its corruption problems, an efficient governance within thecountry. Predictably, the rescue miserably failed
Chapter 5: Who Lost RussiaThe Failed TransitionThere are signs that the reform as closely advised by the IMF hasfailed;•A significant decline in GDP•A shorter life span (around 3 years shorter)•The increase in poverty and inequalityStiglitz identifies area where IMF failed to provide legitimate advicesto help the transition in Russia:•Inflation- policies that result in a contraction.•Privatisation- too fast and too far•The social context- IMF policies failed to appreciate the socialcontext of the transition economies (they focus too much on inflationand macroeconomics)•Speed of the reform: shock therapy treatment versus gradualist•The Bolshevik approach to market reform
Unfair Fair Trade Laws and OtherUnfair Fair Trade Laws and OtherMischiefMischiefChapter 6
• The IMF is a political institution. The 1998 bailout wasdictated by a concern to maintain Boris Yeltsin, an ex-communist.• Russia has joined free markets since 2000.• The problems with the reform strategy and the Yeltsingovernment became clearer, when they agreed the conditionsof loan agreements.• Many critics worried about the pressure from the IMF forrapid privatization.• This cause huge inequality through the corrupt privatizationprocess.Chapter 6: Unfair Trade Laws and Other Mischiefs
• The United States supports free trade, and impose fair tradelaws, but known outside the United States as ‘unfair tradelaws’.• These laws will protect below cost of selling product fromforeign rival through dumping duties but U.S. proved it withlittle evidence.• Aluminum and uranium case – Russia would not be able tosell its goods in the U.S. because it was suppressed byAmerican firms who accused Russia of dumping goods.• With a trade restriction would generate excess profit and riseto further source of corruption.Chapter 6: Unfair Trade Laws and Other Mischiefs
• The failure of reform strategies in Russia have becomeincreasingly evident. Meanwhile China and Poland employedalternative strategies.• China and Poland pursued a gradualist policy of privatization,trying to build up the basic institutions of a market economysuch as banks and legal systems.• Moreover, Poland gave importance of democracy for reforms,keep unemployment low, and adjust pensions for inflation.Chapter 7: Better Roads to the Market
• China’s reform began in agriculture, and moved fromcollective system to individual system of production.• Foreign firms were invited to participate in joint venture.• Monetary policy and financial institutions facilitated thecreation of new enterprises and jobs as well as maintain socialstability.• Key attribute of the success is that they are ‘homegrown’designed by people, sensitive to the needs and concerns oftheir country.Chapter 7: Better Roads to the Market
The IMFThe IMF’s Other Agenda’s Other AgendaChapter 8
• Today’s IMF loose intellectual coherency by settingintervening in the market. IMF forged policies which weakenand allow problems to play out.• Thailand’s real estate and stock market bubble. IMF pouredbillion of dollars into the market, speculators gain profitcoming from government, supported by the IMF.• The crisis of trade deficit can affect the long term investmentif a country has borrowed short term.Chapter 8: the IMF’s Other Agendas
• Business firms who could not repay their loans, they go tobankruptcy just in the case of real estate bubble burst inThailand.• Therefore, IMF programs provide funds for governments tobail out Western creditors but this strategy caused moralhazard problem by taking less care in screening ‘free’insurance.• Even worse, the bail out cannot insure foreign exchangevolatility.Chapter 8: the IMF’s Other Agendas
• IMF believed that raising interest rate would lead to astronger exchange rate but in real life is not, it hurt morefirms by raising interest rate or the fall in the exchange rate.• IMF has objectives that are often in conflict with each other,one is enhancing global stability and ensuring that there arefunds for countries facing a threat of recession. It is alsopursuing the interest of the financial community.• IMF emphasis on getting creditors repaid rather than helpingdomestic business.Chapter 8: the IMF’s Other Agendas
• The world is complicated, workers worry about jobs andwages, they see interest rates as inducing an economicslowdown this mean unemployment.• There is not just one market model.• Swedish model that government takes responsibility on socialwelfare, provide better public health, unemploymentinsurance, and retirement benefits.Chapter 9: the Way Ahead
• International financial system should be reformed by resistingsuch large externalities, interventions.• Trying to impose more creditor-friendly bankruptcy reforms.• Giving less reliance on bailouts.• Improving banking regulation such as bad lending practices,and export of instability.• Improving risk management such as volatility of exchangerates.Chapter 9: the Way Ahead
• Improving safety nets such as unemployment insuranceprograms.• Improving response to crisis.• The developing countries require not only that aid be given ina way that helps their development but small amount ofmoney could be promoted in health and literacy.Chapter 9: the Way Ahead
• Reforming WTO will require more balanced trade agenda,and more balanced in treating concerns, like environment.• Today globalization can be forced for good; democracy andcivil society have changed, political movements have led todebt relief, people attain higher standards of living, seekingnew markets for their exports and welcome foreigninvestment.• International institution should work in the way that is achange in governance, a change in voting right, and becometransparencyChapter 9: the Way Ahead