Globalization and Its Discontents

This section offers a brief overview of the author’s professional career and explains why he has authored Globalization and Its Discontents. It begins with Joseph Stiglitz’s professional move from academia to policy making: He served as a chair to the Council of Economic Advisers under President Bill Clinton in 1993 and then worked as the senior vice president of the World Bank between 1997 and 2000. Stiglitz believes this was an interesting period for global economic development: He inherited several legacies of the organization—such as the transition to market economies for countries of the ex-Soviet bloc in the previous decade—and witnessed the Asian financial crisis of 1997.

However, Stiglitz also realized that globalization—the process of bringing countries closer together by removing barriers to trade—was far from perfect. The international organizations in charge of moderating it, such as the World Bank and especially the International Monetary Fund (IMF), proposed inadequate programs that failed to help developing countries grow equitably. The poor, in particular, often did not reap the benefits of globalization at all, despite it being potentially a force for good. With proper regulation, globalization allows for a greater and more efficient exchange of goods, resources, and information. It encourages integration and cooperation between countries, and it can even encourage the flow of peoples across borders.

However, the IMF and other regulatory institutions have failed to forge globalization into a tool for alleviating poverty. This is because the Fund is ultimately pursuing an ideology of market fundamentalism, and its actions are affected by this goal. Its presidents are not voted in but selected, mostly from among experts in the financial community in developed countries, even though the organization’s mandate is supposed to maintain international economic stability for all. As a result, there is a strong incentive to keep its operations opaque to the public and protect its own interests. Existing asymmetries of information between developing countries and developed countries are exacerbated by this lack of transparency.

Stiglitz believes that his time as a researcher and lecturer in academia has familiarized him with such biases: He firmly believes in privatization and liberalization, but he is also concerned with other indices that can affect economic growth, including unemployment rates, access to information, equitable distribution of wealth, and competition. His time in policy, however, taught him that oftentimes, decision makers do not have access to relevant information before being asked to make decisions. Combined with the possibility that institution leaders might intentionally pursue policies that best protect their own interests, much of decision-making is based on dogma and bad economics (xiii). This is the case for the IMF.

Since alternative options are not considered and developing countries have no say on who leads the IMF, Stiglitz ultimately finds this process to be profoundly antidemocratic. Given the amount of power it holds over the economic development of others, Stiglitz wishes that its policies would reflect a “basic sense of decency and social justice” (xv). His purpose for writing this book is to shed light on some of these ongoing issues, thereby taking the first step toward greater transparency.

Although Stiglitz does not elaborate on his own economic stance, he does provide some examples of topics he has previously researched, including bankruptcy, corporate governance, access to information, and privatization. These foreshadow themes that will be explored in greater depth in following chapters. The author also shares his personal ideologies: He believes in equitable growth, in globalization, in encouraging competition, in gradual liberalization, and in imperfect markets. His position is similar to Keynesian economics, which argues that markets are not entirely self-regulatory and that government must become involved to maintain aggregate demand to avoid a steeper or longer recession. Although Stiglitz does not explicitly talk about Keynesian economics in the Preface, he will discuss it in greater depth in later chapters.

The Preface provides a general introduction to Stiglitz’s professional background and intentions in writing Globalization and Its Discontents. It foreshadows some of his key criticisms he levies against the IMF in future chapters: its ideological rigidness, its lack of transparency, and the antidemocratic process through which its leaders are selected. Although he does not immediately propose solutions to these dilemmas, he emphasizes that change must be made within these organizations—globalization is an inevitable process, and it can only be a positive force with adequate regulation. In the following chapters, Stiglitz will explore in turn the ideological and structural shortcomings of the IMF, emphasizing its mistakes and proposing alternate solutions to correct them.

Chapter 1 begins with a description of the 1999 protests against the International Monetary Fund (IMF), the World Bank (WB), and the World Trade Organization (WTO) in Seattle. The movement grew, and various places in developed countries saw people take to the streets. These protests opened the debate on the desirability of globalization—defined as the introduction of a market economy to other parts of the world—as a means to alleviate poverty and develop a more equitable global economy. Ironically, people in developing countries have long been protesting institutions like the IMF and the WTO for being unfair and imperialistic, but their voices were not heard internationally until people in the developed world began demonstrating too.

In theory, globalization promises a greater and more efficient exchange of goods and services between countries by eliminating trade barriers, thereby allowing for mutual enrichment. It indeed can have profoundly beneficial effects. For example, exporting products allowed parts of Asia to develop. Greater freedom to trade allows for better access to knowledge, ends isolation, and encourages greater mutual solidarity and cooperation.

Although this process can theoretically alleviate poverty, increase economic growth, and improve standards of living, Stiglitz notices that in practice, globalization does not actually achieve the goal of distributing wealth equitably: Almost 100 million people have fallen below the poverty line during the same time that the world income increased by 2.5% (5). Chapter 1 is dedicated to analyzing the causes of this discrepancy. Why is theory so far off from reality? The author highlights two main causes, both having to do with the imperfection of the IMF and other international regulatory institutions in charge of managing globalization.

The first cause for this uneven growth is Western hypocrisy: Institutions like the IMF push for developing countries to eliminate their trade barriers, but whenever that threatens their domestic protection, they put up their own barriers, thereby creating an unequal trading situation. The second cause is unequal agreements: Developed countries in the West fight to implement regulations that allow them to reap a disproportionate share of the benefits of globalization. For example, the 1994 Uruguay Rounds prevented developing countries such as India and Brazil from mass producing life-saving drugs under the guise of this being a violation of the intellectual properties of the Western companies that had previously been in charge of producing them.

Stiglitz provides a brief overview of the discrepancy between the IMF’s original mandate and its current practices. Ideologically, it was first based on the Keynesian idea that markets are imperfect and need proper regulation, especially at the global level. Thus, to maintain global aggregate demand, the Fund was to lend capital to countries in need. However, since the late 1970s, it has begun championing the opposite—it now pushes relentlessly for unregulated free trade, which is an inflexible ideological stance. Keynesian principles focus on maintaining global aggregate demand to regulate the economy, but the Fund now only offers aid when countries prove they can cut deficits and raise taxes to balance their macroeconomic budget while increasing their interest rates to incentivize paybacks. These actions, however, contract instead of expand the economy by reducing buying power and diminishing aggregate demand.

One key problem with the IMF is that it is operated mainly by developed countries; thus, it naturally reflects its interests rather than those of the developing countries it is trying to help. Additionally, its presidents and senior chairs are not elected through a democratic process. Thus, decisions are made by finance ministers, central bank governors, and trade ministers, who are each aligned with their local constituencies, such as the financial and business communities. Stiglitz describes this as “taxation without representation” for the ordinary taxpayer (20).

The fundamental cause for the IMF’s shift from its original mandate to its current ideological defense of market fundamentalism happened in the late 1970s and early 1980s. It is the result of the free-market ideology championed by Ronald Reagan in the US and Margaret Thatcher in the UK (See: Background). In that same decade, the IMF, World Bank, and US Treasury devised a plan called the “Washington Consensus,” the goal of which is to encourage widespread capital market liberalization, despite having no evidence of its effectiveness as a means to entice economic growth.

For example, the US and Japan developed their economies by selectively protecting some of their industries. There is no reason to believe that market liberalization should be the only correct solution for developing countries. In sum, the IMF’s mission shifted from doing solid economic research before devising policy to championing free-market ideology at every turn.

This focus on liberalization and management of inflation was in part developed as a response to the economic inflation that occurred in Latin American countries in the 1980s. However, it was expanded to apply to the rest of the world, with little regard to the fact that economic stagnation elsewhere does not mirror the circumstances of Latin America.

In comparison, the WTO is also a product of the 1947 Bretton Woods agreement, though it was only firmly established in 1995. The WTO is tasked with governing international trade relations by helping prevent the abuse of unequal tariffs between countries, which would enable one party to enrich itself at the expense of its neighbors. This is one of the root causes for the spread of economic depressions across regions or even across the globe. The WTO was supposed to provide forums for countries to negotiate trade agreements with each other, after which it was tasked to help enforce them.

However, the IMF’s operation increasingly encroached upon the WTO’s, leading Stiglitz to call this phenomenon “global governance without global government” (21). He concludes that globalization must be reshaped so that it properly reflects the voices of the people it is meant to protect and so growth can be distributed in an equitable manner.

This chapter is incredibly dense in information—as it alludes both to Stiglitz’s insider knowledge of these international institutions and to international economic events in the 1970s, 1980s, and 1990s—but its central argument is very simple: Globalization has been unsuccessful because the international institutions that manage it, including the IMF, have not upheld their original mandate. They were established and given resources to correct instances of market failure, but their ideals have changed drastically since the late 1970s and early 1980s. As a result, they no longer regulate the global economy based on empirical data, but on a rigid ideological dogma: that of market fundamentalism. This shift has, in turn, caused developing countries—who are dependent on these organizations for economic growth—to receive the short end of the stick. In some cases, globalization has even had the opposite effect of growth.

Overall, globalization has increased poverty and income disparity between the lower and upper classes. Stiglitz blames the IMF and WTO for deviating from their original mandate, instead defending the private interests of their managers and of the financial community. This first chapter lists the major points of critique Stiglitz levies against the IMF, which will set the stage for further analysis in the coming chapters. It also points out that globalization is inevitable and, for the first time, discusses the theme of why it is important to forge globalization into a force for good through The Necessity of Regulation.

Chapter 2 begins with a defense of the World Bank, the organization for which Stiglitz worked between 1997 and early 2000. He compares the organization’s history and current direction to that of the IMF. There is a key difference in their mandates, which he noticed upon first visiting the premises of the World Bank’s headquarters in Washington, DC: Whereas the IMF is tasked with maintaining global aggregate demand to help mitigate the spread of economic downturns, the World Bank dreams of “a world without poverty” (23).

This disparity in their mandates can be seen in the way they conduct affairs. Whereas the World Bank sends economists to developing countries—some of their staff also live there permanently—the IMF only sends one single “resident representative.” Most of their decisions are made in Washington. Due to this difference, Stiglitz spent his time at the World Bank tackling the issue of global poverty. He hoped to accomplish his goal of equitable global growth in three steps: by devising strategies to reduce poverty, by implementing these strategies with the cooperation of local governments, and by advancing the interests of developing nations through fostering cooperation between them and developed countries.

The first lesson Stiglitz learned was that the IMF would be the primary obstacle he would face in the realization of this goal. He learned this lesson in March 1997, one month after his appointment at the World Bank, when he traveled to Ethiopia, the economy of which was in shambles from a deadly famine and internal warfare. Stiglitz met with the new Prime Minister, Meles Zenawi (who defeated Mengistu Haile Mariam’s Marxist regime six years prior), and was committed to rebuilding the country using democratic means and through decentralization. Although these principles aligned with the IMF’s ideology and although Zenawi’s government had solid economic frameworks and statistics, the organization rescinded its funding, citing the Ethiopian government’s unstable budgetary condition as the deal-breaking factor. The IMF judged that the government did not have a stable tax revenue and relied overly much on foreign assistance.

Stiglitz believes this to be extremely flawed logic because capital from international assistance is always more stable than tax revenues, even in developed countries. Furthermore, the funds provided by the IMF are given to be spent on reconstruction and stimulating the economy—they are not supposed to be stored to pad statistics. The IMF’s actions contradict basic economic theories of growth. The reason for this, Stiglitz argues, is to maintain a rigid ideological stance: It is to uphold the principles of market fundamentalism, rather than a practical application of capital.

Ethiopia’s unstable tax revenue was not the only reason for the IMF’s decision to rescind its funding. It also took offense when Ethiopia used its funds to repay a loan early without its consent. Even though it made perfect economic sense to repay the loan early, the Fund did not appreciate their presumption. Stiglitz points out that this is an overextension of the IMF’s power: It should not be concerned with every small economic decision made by the countries it provides aid for. Doing so would be a new form of colonialism since the original mandate for the IMF was simply to support global economic stability, without any claim to development issues (30). The author had to spend considerable effort lobbying within the World Bank to entice the IMF to resume its funding program. In sum, this affair taught him that these international organizations are not transparent and that effecting change, even from within, is incredibly challenging.

The IMF also fails to consider local circumstances, such as market volatility or even the absence of a market in a developing country, in favor of insisting on market fundamentalism. This ideology dictates that supply must meet demand under every circumstance and that the correct path to achieving this is through market liberalization. It has been proven to be a flawed approach because it disregards other indicators that affect growth, such as unemployment rates and inadequate structural frameworks to uphold free markets. Stiglitz cites Botswana as an example of successful economic development, doing the opposite of IMF-prescribed policy: The country achieved economic growth through the cooperation between local leaders and other private and public international institutions. It has avoided working with the Fund since 1981.

Although Stiglitz consents that not all money lent by the IMF was necessarily counterproductive to economic growth, recent evidence of its overall failure sufficiently proves that it is relevant to begin holding it accountable for its decisions. To sum it up, Stiglitz proposes the following six changes to correct the IMF’s current misguided course of action:

1. Economic policies should not be imposed on but owned by countries who seek the IMF’s help.

2. There should be a process of consensus building between the two parties with attempts to negate any existing disparity in negotiating power.

3. Any plans for economic growth should be adapted to the situation of the country rather than devised in-house by IMF using one-size-fits-all strategies.

4. Lending should be predicated upon selectivity rather than conditionality.

5. The IMF should encourage a diverse group to participate and debate matters of policy.

6. The IMF should strive to become more transparent, as it is a public international institution.

In sum, Chapter 2 focuses on analyzing, using a few case studies, the biases of the IMF’s lending policy and The Failures of Market Fundamentalism and IMF Policy. On one hand, the Fund is overly dogmatic; on the other hand, developing countries often do not have the bargaining power to contradict them, even when they are aware that IMF-imposed strategies can be disastrous to their economy. In other words, there is an imbalance in power during negotiations with the IMF. Local officials and their economists can recognize the stringent IMF rules as potentially catastrophic but are afraid to disagree because the IMF has the power to prevent other private or public institutions from investing in their country. The IMF stifles conversation about alternative policies in favor of pursuing its free-market ideology.

Most importantly, this chapter points out that the IMF imposes a conditionality on its lending and oversteps its authority by meddling with domestic policy in the developing countries it tries to help, to the point of negating the utility of the funds it provides. This abuse of power mirrors the imperialistic and even colonial practices of the previous historical period: Given how impoverished this left the continent of Africa, Stiglitz condemns it as ultimately a damaging economic and political model.

An example of this overstepping of authority can be seen in the IMF’s banking policies: While most banks have some measure to entice people to pay their loans, the IMF imposes stringent rules, sometimes hundreds of them, to ensure payback, with no concern of how this might negatively impact investment and spending. In post-Cold War Korea, the Fund’s policy forced the country to privatize its central bank, even though the US pushed back against a similar proposal made by Senator Connie Mack in that same decade. This hypocrisy is the reason why developing countries have lost trust in the institution.