Joseph E. Stiglitz, 2007, W. W. Norton & Company, New York

Review by Gregory C. Dahl

Joseph Stiglitz’s Making Globalization Work is best viewed against the background of his life’s work. Prof. Stiglitz won the Nobel Prize in economics in 2001 for his path breaking critique of the assumptions underlying the mainstream view that free markets are efficient. In particular, he showed that, because of unequal access to information (“asymmetric information” in the jargon of the profession) and other problems, markets behave in very different ways than had been previously understood, and government intervention could, in theory, improve the outcomes. His insights have gained in importance and influence following the recent catastrophic failures of financial markets, and he speaks with some intellectual authority on these subjects.
However, the independence of mind and self-assurance which enabled him to pursue a fresh and highly controversial view of such a politically important subject as the workings of markets have also marked him out as something of a loner and professional critic. His tenure as Chief Economist of the World Bank was stormy, and his outspoken criticisms and combative personality resulted in his early departure in January 2000. He returned to academic life, at Columbia University, and no doubt prefers the independence of an academic platform.

Drawing on the logic of his theoretical work, Stiglitz has long been a proponent of government intervention and activism to correct economic problems. His 1994 book Whither Socialism is a balanced and thoughtful discussion of the problems of transition from communism to capitalism, in which he argues for a continuing and important role of the state. Of course, the problem with state intervention and control is that governments mess things up too, a problem that Stiglitz generally glosses over.
In 2002, when Stiglitz published Globalization and Its Discontents, in which he attacks the International Monetary Fund (IMF), he hit a gold mine. The book was a huge commercial success, with more than a million copies sold in many languages. In it he plays to the gallery in the role of gadfly critic on a broad range of subjects, often taking extreme positions and oversimplifying in order to make a point that appeals to a disillusioned public but is not, in fact, either sound analysis or constructive. Unfortunately, in this pursuit of populist appeal he has undermined his professional credibility as an economist, at least in areas outside his technical specialization.
Making Globalization Work is somewhat more balanced, and makes an effort at positive suggestions for reform. But it is marred by Stiglitz’s continued playing of his successful tune from Discontents, that the IMF is somehow responsible for many problems in the world. As many observers have noted, governments often find it politically expedient to blame outsiders such as the IMF for the problems they face, which in most cases they have created themselves, although this is like blaming the doctor for one’s illness. The public at large is also often attracted to the idea that powerful and mysterious institutions are somehow exploiting them for evil or self-serving ends. But one would expect a highly-regarded academic who has worked in these institutions to be more objective and to dispel such misconceptions, not amplify them.
Stiglitz states, for example, in relation to the IMF’s handling of the East Asian financial crisis of 1997-98, that “the policies the IMF imposed made the downturns far worse than they would have been otherwise.” (p. 248) He feels the IMF imposed too many costs on the borrowing countries, needlessly adding to the negative impact of the sudden withdrawal of private capital, and that too much was repaid to private lenders. But any IMF program is a balance between official funds available and the need of the country to adjust to its diminished private external financing. At one extreme, if there were no IMF help, a country would be entirely on its own, and very sharp and painful adjustment to the withdrawal of private financing would be required. At the other extreme, if the IMF and other donors were limitlessly generous, they could meet all the financing needs and the crisis country would not require any painful cutbacks in spending or increases in interest rates. Obviously, in real-world situations a balance has to be struck between these extremes, and the effort aims at providing enough official financing coupled with policy actions to restore confidence so that private financing can resume. Official financing is not limitless and it is unrealistic to assume that it is.
Stiglitz’s argument that private creditors should, in principle, pay more of the costs in a financial crisis have more substance, but again the practical problems are enormous. The same issue is at the heart of the current problems the U.S. is facing in trying to save its financial system with public money, and the politics are very tricky. Stiglitz is right that there should be a better international legal framework for the equivalent of a bankruptcy workout for sovereign borrowers (countries), but such a framework doesn’t yet exist and at present all credit is immediately cut off when any default on debt payments occurs. One may not feel that the outcome in the case of the East Asian crisis was as fair or just as one would have liked, but one cannot blame this on the existing institutions acting within their mandates and their available resources, any more than one can blame the police in a country for the existence of broad inequalities and injustices in the society at large.
Incidentally, Stiglitz would be closer to his area of economic expertise, and on firmer ground, if he criticized the IMF for its advice to Russia and other transition countries in the early 1990s, rather than focusing so much on financial crises and developing countries. If the IMF had listened to his views on privatization, for example, and had considered more carefully the social and economic consequences of concentrating economic ownership in a small number of hands, many current problems in the former Soviet sphere countries might have been avoided.
Another oft-repeated view of Prof. Stiglitz is that global financial institutions, and in particular the IMF, should be more “democratic”, by which he means there should be more political influence over their operations. But most serious commentators feel the effectiveness of these institutions, such as it is (and it is far greater than most UN agencies), is due to the fact that their Boards, which represent all the 185 member countries, are selected by the Ministries of Finance of the member countries, and not by their Ministries of Foreign Affairs—in other words, they are relatively free of political interference. One current proposal for reform of the IMF calls for the abolition of its full-time executive board, giving it greater freedom from political oversight and allowing it to criticize important, rich country members. This, of course, is the opposite of Prof. Stiglitz’s view.
Making Globalization Work covers a lot of other ground, with observations that are apt, if not very original.
For example, in his chapter on reforming the global reserve system, Stiglitz proposes the creation of a new reserve asset to replace the U.S. dollar, but can barely bring himself to mention that his proposal is similar to the already-existing system of Special Drawing Rights (SDRs) created by the IMF. The chief difference is that he proposes that his new “global greenbacks” be issued regularly by some institution other than the IMF and be distributed primarily to poor countries as a means of promoting social justice. Exactly such proposals have been discussed for years in relation to issuance of the IMF’s SDRs. The question of how many SDRs to issue has been one of judging the possible inflationary impact, which would also apply to Prof. Stiglitz’s proposal. And the obstacle to distributing SDRs to poor countries rather than in proportion to a country’s shares in the IMF, as has been done in the past, is not technical but political: the powerful countries of the world have not been in favor. Interestingly, the Governor of the Bank of China (China’s central bank) recently made a similar proposal involving modified SDRs to be issued by the IMF. [1] Given China’s huge holdings of U.S. dollars in their reserves, this proposal is seen as a warning shot to the U.S. not to allow the value of its currency to decline through lax budgetary policies leading to inflation. In any case, it seems unlikely that any real innovation in the reserves system of the world will come about unless there is a big crisis of confidence in the dollar (which, unfortunately, is a real possibility).
Again, as another example, Stiglitz points out quite rightly that many developing countries are not able to strike a fair bargain in their contracts for exports of raw materials when they are dealing with large buyers with far more expertise and bargaining power than they have. Stiglitz proposes that some institution, such as the World Bank, intervene in these situations. In fact, however, the World Bank has for years been offering its member countries free expertise to help them in such negotiations. Going beyond this to create new institutions to regulate markets may be desirable, but is extremely difficult both technically and politically. [2]
In general, Stiglitz is good at describing problems, but is less good at proposing workable solutions. The latter is, of course, much more challenging than the former. It is easy to make grand statements about how badly the world is organized, but much harder to work concretely towards its improvement. The recent statement of the commission on reforms of the international monetary and financial system organized by the United Nations and chaired by Prof. Stiglitz is a good example.[3] It is full of noble sentiments, but unlikely to lead to any concrete action.
[۱] Zhou Xiaochuan, “Reform the International Monetary System,” ۲۳ March 2009, athttp://www.pbc.gov.cn/english//detail.asp?col=6500&ID=178.
[۲] The IMF some years ago tried to set up commodity stabilization funds to lessen some of the adverse effects of wild fluctuations in commodity prices, but the effort proved impractical. No one has since found a solution to this problem.
[۳] “Recommendations by the Commission of Experts of the President of the General Assembly
on reforms of the international monetary and financial system”, ۲۰ March 2009, athttp://www.un.org/ga/president/63/letters/recommendationExperts200309.pdf

 

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