Upside Down World


On Globalization and its Discontents

Book Reviews by Rafi Rom


Upside Down World

Globalization and Its Discontents
Joseph E. Stiglitz
W.W. Norton/2002/$24.95

George Soros on Globalization
George Soros
Public Affairs/2002/$20

The Elusive Quest for Growth: Economists’ Adventures and
Misadventures in the Tropics

William Easterly
MIT Press/2001/$17.95

During his trip to Ethiopia in March of 1997, the Nobel Prize-winning economist Joseph
Stiglitz first noticed the gap between the mandate of the International Monetary Fund
(IMF) and its practices. To Stiglitz, at the time chief economist for the World Bank,
Ethiopia was a model developing country. “Not only did Ethiopia have a sound macroeconomic
framework but the World Bank had direct evidence of the competence of the
government and its commitment to the poor.” Yet the IMF, citing trumped up worries
about Ethiopia’s “budgetary position” (their concern was the nation’s conventional
reliance on international assistance), suspended its aid program, putting the people
already worn down from decades of famine and political turmoil in great jeopardy. To
make matters worse, one of the IMF’s stipulations to reinstate the loans was for Ethiopia
to “liberalize” its small and very primitive banking system by dividing the nation’s largest
bank into even tinier pieces, making any competition between Ethiopia’s bank network
and major international banks nearly impossible. At this point,Stiglitz and otherWorld
Bankers intervened, and pressed the IMF to restore the assistance and drop its demands.
“I would like to think that my efforts helped Ethiopia,” he writes.

In Globalization and Its Discontents, Stiglitz uses similar examples (although not
always with such self-aggrandizing happy endings) as a powerful indictment of IMF
71 policies gone rancid.“Founded on the belief that markets often worked badly,” he
writes,the IMF “now champions market supremacy with ideological fervor.” He
explains economic policies toward various countries in Africa, Latin America, and
East Asia. The source of their problems is the same, whether he’s analyzing Morocco’s
struggling farming communities or Russia’s catastrophic transition to capitalism: the
IMF. And in the middle o f his economic tour of the globe,Stiglitz also endorses elements
of the counter-globalization movement. He even offers some feasible policy

Drawing from his years at the World Bank and the White House during the Clinton
administration, Stiglitz lambasts what he calls “the Washington Consensus”—the
political and business elite crafting policies in developed nations that disproportionably
affect developing ones. The IMF, along with the U.S. Treasury Department, currently
led by Paul O’Neill,takes most of the heat for what Stiglitz sees as a blind
acceptance of free markets. He contends that their policies of speedy privatization
and liberalization fail to take into account any of the nuances of economic theory
developed over the last few decades, and do nothing to improve the standing of the
2.8 billion people (45 percent of the world’s population) who live on less than two
dollars a day. Instead, all the Washington Consensus does is push its rampant liberalization
long before countries establish a stable market economy, a widely accepted
prerequisite for “free trade policies” to have any success.

Stiglitz dedicates three chapters of his book to two of the biggest economic failure s
of the last decade : East Asia and Russia . He blames Thailand ’s and other East Asian
countries’ losses of billions of dollars in capital outflows during those three turbulent
years of the Asian financial crisis on the Washington Consensus’s premature push for
liberalizing the financial or capital markets . After 30 years of stable growth, “capital
market liberalization made the developing countries subject to both the rational and
irrational whims of the investorcommunity.”When assistance to East Asian countries
did arrive from the IMF, the loans , strapped with stringent conditions, essentially
bailed out foreign investors who immediately pulled out after receiving payment.

Ironically, as Stiglitz puts it, the incredible number of stringent policies forced on
Russia by the Washington Consensus led to Russia’s economic down fall. By pushing for rampant liberalization in Russia before it could even be called a market economy, the
major international economic players severely hampered Russia’s transition to capitalism . This is not surprising, since one World Bank survey of transitional economies (like Russia and the other Soviet republics) found “that privatization, in the absence of the institutional infrastructure (like corporate governance), had no positive effect on growth .” By the numbers, the IMF’s versi on of capitalism worsened Russia’s economic stance . Ru s s i a’s GDP in 2000 is two thirds less than it was in 1989. Using the already low two - dollar- a - day standard , 23.8 percent of Russia lived in poverty in 1998, compared to only 2 percent in 1989. The only ones who benefited were the elites who had power under the former regime and siphoned money from the IMF in the incredibly corrupt environment that market liberalization fostered. Stiglitz, horrified, tells his readers how one IMF employee called Russia’s economic transition a success because of BMW traffic jams and designer clothes stores—failing to see that the majority of the society did not even have the bare essentials . For Stiglitz , the lesson learned from what he slyly calls “the Bolshevik approach to market reform” is that radical market restructuring without change in social hierarchies simply made matters even worse .

A large portion of Globalization and Its Discontents examines solutions to the free
market debacle the Washington Consensus has perpetuated. All of Stiglitz’s proposed
reforms “to make globalization work” require a change of governance, like voting
rights and more transparency for policy decisions. The IMF specifically “needs to
return to its original mandate of providing funds to restore aggregate demand in
countries facing an economic recession.” Among other things, he calls for debt forgiveness
and smarter aid policies.One alternative he mentions is the use of SDRs—
Special Drawing Rights—to fund global public goods. SDRs are a unique form of
currency issued solely by the IMF that gain value according to the fluctuating prices
of the four major currencies: the U.S. dollar, the pound, the yen, and the euro.

This alternative is the heart of the more informal book, George Soros on
Globalization, which argues that SDRs could help bolster the public goods market,
such as labor standards, or medical infrastructures that are often pushed to the side in the zealous quest for wealth. Soros does not see imposing mo re regulations as the answer to environmental, labor, and human rights problems, because it would be impossible for developing countries to compete at the international level with more regulations, yet with no additional money. By contrast, Soros writes,“it would be much better to provide resources that would enable poor countries to comply with those requirements on a voluntary basis.”

This proposal draws its weight from the example Soros himself set with his mammoth
NGO, the Open Society Institute (OSI), which Soros personally funds with
over 400 million dollars a year. OSI offers grants for NGOs and individuals in both
developed and developing countries in the hopes of fostering more “open societies”
around the globe. To issue SDRs, Soros proposes the creation of an independent subsidiary
of the IMF (because only the IMF, with 85 percent backing of its member
countries, can issue SDRs) to dole out this funding in a “market-like” environment
between donors and patrons. Soros cleverly contends that by allowing NGOs to compete
in a market-like fashion (where achievement and not profit growth is the quantitative
factor), public goods programs will reach new levels of success.

Although his SDR proposal is thought provoking, the rest of On Globalization usually overlaps with Stiglitz ’s book, which does a clearer job of explaining economic principles . Globalization and Its Discontents, however, also has its flaws. For one , the World Bank comes away from this whole free market mess virtually uncriticized. Nearly every time he men ti ons the bank (wh i ch , u n l i ke the IMF, claims its mandate is to bring about “a world free of poverty”), he praises some study it published that proved IMF policies wrong, or success stories of how its packages helped a developed country.

Several experts have criticized Stiglitz’s selective memory.William Easterly’s
Elusive Quest for Growth was published last year by MIT Press. Easterly, Senior
Advisor of the World Bank’s Development Research Group, may be a former colleague
of Stiglitz, but his focus is vastly different.

Easterly’s method differs significantly from Stiglitz’s. It is both more and less ambitious
in scope . He takes a humbler tone in charting the history of economic policies of
International Financial Institutions (IFIs ) — specifically the World Bank—in promoting
growth. Gone are the dramatic (but nonetheless very appealing) accusations of a
self - proclaimed fly on the wall . Instead, he picks apart trends in growth theory during
the last few decade s. Like Stiglitz, he analyzes adjustment loans. To avert a growth collapse
in the 1990s, “ we thought we had a good solution: aid and lending in developing
countries conditional on their making policy reforms.”

Reading Globalization and Its Discontents often gives the reader the impression
that the IMF acted largely alone in distributing structural adjustment loans, a practice
Stiglitz decries. Yet in Easterly’s book, the IMF is rarely mentioned without the
World Bank. Throughout the 1980s and 1990s, the sister institutions both made hundreds
of loans. In the case of Africa, where each country received an average of six
adjustment loans (it reached as high as 19 in Ghana) Easterly points out that World
Bank predictions of the success of these programs were grossly overestimated.
“Twelve countries received fifteen or moreWorld Bank and IMF adjustment loans
over the fifteen-year period 1980 to 1994. . . . The median per capita g rowth rate for
those twelve countries over that period was zero.”

Easterly differs from Stiglitz on many other issues as well. For instance, Stiglitz
sees debt forgiveness as a positive step, whereas Easterly argues it is yet another misplaced
effort for propelling growth. In the end, despite his shortcomings, Stiglitz’s
argument is stronger. Although Easterly often is more thought provoking, his
approach toward addressing the ills of capitalism through the lens of “growth” is seriously
limited, which often leads to some questionable arguments. For instance,
Easterly debunks the traditional belief that education leads to growth.

His viewpoint reaches a level of near blindness in his most ag gravating chapter,
“Cash for Condoms,” where he rejects the use of contraceptives in the context of
population control to promote growth:

All of this focus on aid for contraceptives implies that the free market left to itself
would not supply enough contraceptives to meet demand. The “150 million couples” who “still have an unmet need for contraception” would stop having babies if only aid-financed condoms were available to them. But a condom is just like any other good that the free market can supply, like a can of Coca-Cola .We don’t have any aid programs to 150 million couples who have an unmet need for Coca-Cola .

Easterly then “begs the question of how free markets fail to supply a cheap good that
should be in hot demand if 150 million couples have an unmet need for contraception.”
And once one puts his argument in the context of other pressing factors, such as the
AIDS crisis, his statements reach new levels of what he accuses his opponents of: “a
splendid bit of illogic.” How, in a chapter on population growth and control, can anyone
not mention the fact that some countries, like South Africa,have populations where one
quarter of the adults are HIV positive? That the rapid spread of HIV in developing countries—
proven by countless governmental, nongovernmental, and UN studies to be effectively
containable through access to contraceptives and education—would have anything
but a catastrophic impact on growth is unimaginable.

In Globalization and Its Discontents, Stiglitz’s depiction of the IMF as a b enevolent
but flawed institution raises important questions about responsibility and accountability
of international organizations. This is now more relevant than ever because of
the rash of first-world corrupt capitalists destabilizing the market. Even after Stiglitz
writes, “today’s IMF has,in my judgment, not articulated a coherent theory of market
failure that would justify its own existence,” he shrugs off these actions simply as
benevolence gone awry:

The IMF never wanted to harm the poor and believed that the policies it advocated
would eventually benefit them; it believed in trickle-down economics and,
again, did not want to look too closely at evidence that might suggest otherwise.
It believed that the discipline of the markets would help poor countries grow, and
therefore it believed that keeping in good stead with capital markets was the first
order of importance.

But if you were to believe Stiglitz’s initial proposition that these policies have consistently
been proved wrong both in theory and in practice, it really raise doubts about whether
these supposedly smart policy-making elites “had no idea” that what they were doing was
morally wrong and perhaps even illegal. Time after time, he demonstrates how influential
politicians, corporate executives, and economists push for plans purely for “special
interests.” For instance, Treasury Secretary Paul O’Neill lobbied for a global aluminum
cartel while he headed Alcoa, even though such an alliance violates all domestic U.S.
antitrust laws. And does it even matter what the declared “intent” of someone is when
their actions cause widespread systematic harm, as Stiglitz demonstrates the IMF did
across the globe? Further, the “intent” of an institution whose actions cause systematic
harm, seems irrelevant.

Many recent articles about Joseph Stiglitz label him as a leading spokesperson for
what has been unfairly dubbed by the media, intellectuals, and politicians alike as the
“antiglobalization” movement. He certainly is not. (His “forced” removal from his
position at the World Bank does not make him any more antiestablishment.) He has
massive credibility among the political and economic elite in Washington, even if he
consistently derides them. Stiglitz, despite his criticism of his friends at the White
House and the IMF, still has faith in the current power structure, albeit, after a few
changes to make it more accountable. Although his lucid analyses of the last two
decades of economic policy conveniently prove the point of many protesters, a large
portion of this movement believes that even if rational policies, such as the ones
Stiglitz proposes, exist, they will never be implemented by the political elite that
Stiglitz himself belongs to.

Globalization and Its Discontents should be required reading for all those who think
they are being clever in dismissing criticism from protesters of globalization as offering no pragmatic alternative s — because he offers plenty of them, from strengthening international bankruptcy policies to improving safety nets for unemployment.

The same goes for the protesters as well. Stiglitz has a knack for explaining complex
economic principles without patronizing his readers. The demonstrators across
the globe who protest the IMF,World Bank, orWorld Trade Organization without
knowing the significant differences between these entities or the policies that they
hope to implement, could use a little of the knowledge offered in this concise book.
Globalization and Its Discontentswill arm any person who yearns for some sort of
“better world” with the ammunition necessary for a more serious debate.

This review was previously published in Bard Politik and is here with the permission of the author.

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