Globalism’s Discontents

1. Globalism’s Discontents Joseph Stiglitz, Ch. 24, pp. 208 – 215 (Excerpted from Stiglitz, “Globalism’s Discontents,” The American Prospect, 13:1, January 1-14, 2002)

2. Basic argument • Countries that have managed globalization on their own, such as in East Asia, reaped benefits, and ensured they were equitably shared • They controlled terms on which they engaged with global economy • Countries that have GL managed by IMF and other international economic institutions did not perform as well • They were duped bymarket fundamentalism

3. East Asian countries have benefited most from GL • rejected Washington Consensus • took active roles in managing the economy • e.g., South Korea steel industry • only after deregulation, under pressure from the US Treasury and IMF, did problems occur • "Asia Financial Crisis" (1997-98) – which was actually global – was caused by the rapid liberalization of financial & capital markets

4. Adverse effects of GL caused by financial liberalization • Adverse effects of GL trace back to international financial institutions, esp the IMF • Most adverse effects caused by liberalization of financial & capital markets • "hot money" pours into country  fuels speculative real estate booms & sudden busts  rapid exit of foreign investment/capital •  paternalism, new form of old colonial mentality, "We in the North know best, follow our advice and you'll prosper" • Then "blame the victim" if they fail

5. Lessons of Crisis • Historical pattern: capital inflows & outflows largely not due to factors inside a country, but to external/global factors • Liberalization of capital markets has not resulted in growth, only increased volatility • when crisis strikes, the lack of labor mobility – in contrast to capital mobility – leaves workers to suffer the consequences of rapid capital outflow from a country

6. (Even Worse) Lessons of Crisis 3) Cash-strapped countries that must now borrow money from abroad, must set aside reserves equal to short-term loans, typically in the form of US Treasury bills, are essentially forced to lend $ to the US, at low interest rates • US dollar is the most widely held reserve currency in world today, said to have "reserve currency status“ • e.g., today highly-indebted Greece must agree to severe austerity measures in order to secure necessary short-term loans 4) There’s a high opportunity cost of the reserves: money could be better spent on national social priorities

7. The US Dollar • All banks, when they lend money, are supposed to set aside reserves in case the loan goes bad • US has been the dominant reserve currency since the post-WWII establishment of Bretton Woods system (the system that created IMF/World Bank) • US dollar as reserve currency • US $ is the most widely held reserve currency in the world today. • Throughout the last decade, an average of 2/3s of the total allocated foreign exchange reserves of countries have been in U.S. dollars • For this reason, the U.S. dollar is said to have "reserve-currency status," making it somewhat easier for the United States to run higher trade deficits with greatly postponed economic impact •  Demonstrates advantages to the US economy, but also how interconnected the US economy is with the global economy

8. Trade liberalization – as promoted by the IMF • While the case for trade liberalization – when properly done – is compelling, the way it's been pushed by the IMF has been "far more problematic" • The IMF's structural adjustment programs (designed to reassure global investors) make job creation almost impossible • they typically raise interest rates, out of excessive worry about inflation • high interest rates discourage job and business creation • in practice, IMF-managed trade liberalization, rather than moving workers from low-productivity jobs to high-productivity ones, moves them from low-productivity jobs to unemployment • rather than enhanced growth, the effect is increased poverty • Even worse, the unfair trade-liberalization agenda forces poor countries to compete with highly subsidized American and European agriculture

9. The Costs of Volatility • Capital-market liberalization is inevitably accompanied by huge volatility, and this volatility impedes growth and increases poverty • High volatility increases the likelihood of recessions – and the poor always bear the brunt of such downturns • And even in rich countries, there's little safety net for the self-employed and people in the rural sector • To “balance budgets” and reassure investors there are typically further cuts to safety nets, since countries are reluctant to tax capital and risk “capital flight” • Thus, IMF doctrines inevitably lead to an increase in tax burdens on the poor and middle classes

10. The Governance of Globalization • In current process of globalization, we have a system of "global governance without global government" • International institutions like the World Trade Organization, the IMF, the World Bank, and others provide an ad hoc system of global governance, but it entirely lacks democratic accountability

11. Governance through Ideology • Contrast between how economic decisions are made inside the US and how they're made in the international economic institutions • US economic officials, including the Treasury Secretary, are part of an administration that must face Congress and the democratic electorate • "In the international arena, only the voices of the financial community are heard" (213) • "Ideology enabled IMF officials not only to ignore the absence of benefits but also to overlook the evidence of the huge costs imposed on countries" (213)

12. An Unfair Trade Agenda • The trade liberalization agenda has been set by the North, or more accurately, by special interests in the North • Consequently, disproportionate gains have accrued to advanced industrialized countries, and in some cases the less-developed countries have actually been worse off

13. Results of the WTO Uruguay Round (1994) • US and Europe gained, but sub-Saharan Africa, the poorest region, lost by about 2% due to terms-of-trade effects: • African markets were opened to manufactured goods from industrialized countries, but US/European markets were not opened to the agricultural goods in which poor countries have a comparative advantage • Trade agreements did not eliminate US/European subsidies to agriculture that make it so hard for developing countries to compete • subsidy: a form of financial assistance paid to a business or economic sector • Trade negotiations in service industries prioritized financial services, industries in which Wall Street and the U.S. have a comparative advantage, rather than construction and maritime services

14. Uruguay Negotiations on Intellectual-Property Rights • Protection of intellectual property rights was also prioritized, including patent protections for drug manufacturers, which make access to life-saving drugs such as AIDS medicines more difficult • Encourages "biopiracy," which involves international drug companies patenting traditional medicines