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Stiglitz, globalization and development
Tuesday, 25 August 2009 06:29


Joe Stiglitz’s old papers on development economics are worth a good read at this moment of global economic crisis.  He is concerned about the pursuit of market fundamentalist ideologies in association with globalization.  He believes while the benefits of globalization may have been slightly exaggerated, the potential costs have been vastly underestimated.


Thanks to international trade, the demand for a country’s products is no longer constrained to its own markets.  And a country’s producers can have access to the most advanced technology from overseas.  But while developed countries push developing countries to liberalize their trade policies, they maintain protectionist policies for agriculture and resort to non-tariff protection like anti-dumping duties when it suits them.




Developing countries got very little out of the Uruguay Round, partly because they did not commit to much liberalization, but also for other reasons.  The IPR regime was dictated by US and other commercial interests, paying little attention to the concerns of developing countries.  Liberalization of services is celebrated, but it was liberalization of financial services which was on the agenda (a concern to the US), not construction or maritime services which would have been of greater interest to developing countries.


The current round of trade negotiations (the Doha Development Agenda) is supposed to be the “development round” (in contrast to the Uruguay Round), with agriculture being the centre-piece.  But 8 years after it was launched it is still bogged down, in large part because American and European governments refuse substantial reductions in agricultural protection.


Thanks to open capital markets, a country’s investment is no longer constrained to what it can save itself.  Foreign direct investment (FDI) brings with it not only capital, but access to markets and technology.  Where a company makes green-field investments, it creates jobs.  But where a foreign company buys a local firm, it may be able to restructure and modernize it, but it may also resort to asset stripping.


Short-term capital is very different from FDI.  It can expose a country to enormous instability, especially if short term capital is liberalized before FDI or when financial sector regulation is weak.  Capital can rush out as quickly as it can rush in.  Sudden changes in investor sentiment can lead to massive outflows, leaving in its wake economic havoc -- even in countries with moderately strong institutions, but especially in those countries in which the financial sector regulation is weak and safety nets are absent.  Globalization has been accompanied by increased instability, as close to a hundred countries have had crises in the past three decades


Chile, Latin America’s success story, did not fully liberalize its capital markets.  It retained what amounted to a tax on the inflow of short-term capital, a tax which prevented surges into the country, which in turn dampened surges out of the country in the aftermath of the East Asian crisis.  Among the major emerging markets, only those which have not fully deregulated their capital accounts, like India and China, have been spared from financial crises.


This has been particularly the case for governments (sovereign borrowers), as Latin America can testify.  Banks and lenders can often be fair weather friends.  They are only too willing to lend when things are going well.  But they will withdraw their money when the economy turns down.  Countries can be punished not only for mistakes that they have made, but for events like the current global financial crisis for which they have no responsibility.  When the US Federal Reserve Bank hiked interest rates to unprecedented levels in the early 1980s, it threw Latin America into a decade-long tailspin.  And when there is a crisis, the costs are enormous, and may more than offset the initial benefits of borrowing.  Although the globalization of ideas has helped propagate democratic values, the economic instability provoked by economic crises has led to political instability.  Further, international financial markets can undermine democratic processes when they do not like a presidential candidate, as in the case of Lula in Brazil.


International migration is an area of hypocrisy.  Developed countries push developing countries to open their markets for trade and capital.  But developed countries take a much more restrictive approach to labour markets.  Indeed, they readily welcome skilled migrants from developing countries (often contributing to brain drain), but have a much less welcoming approach to unskilled labour.


The globalization of information and knowledge can bring great benefits.  Especially where governments have undertaken active technology policies, it has helped narrow the knowledge gap between developed and less developed countries, a gap that is every bit as important in explaining disparities in income as the gaps in resources.  The rapid spread of knowledge across borders has led to improved health, contributed to the global reduction and in some cases even elimination of diseases.


The globalization of information can also inform developing countries that the policies followed by developed countries are often more heterodox than the policy prescriptions recommended for developing countries.  It can expose developing countries to the rich and lively policy debates that occur in the developed world.


Global civil society has also had some notable successes like the adoption of the Land Mines’ Treaty, and the Jubilee 2000 movement which succeeded in pushing through debt relief for 27 of the poorest countries in the world.  The global environment movement succeeded in putting a halt to most large dam projects.  The globalization of ideas, such as democracy and transparency and women’s rights, has had enormous impacts on political processes throughout the world.


A major concern of Stiglitz is that globalization has been sold by international economic institutions in association with “Washington Consensus” policies which emphasize deregulated markets over government provision, privatization, balanced budgets and open markets across which goods and capital flow freely and flexible exchange rates.  Most countries which followed the market fundamentalist policies of the Washington Consensus have suffered rising poverty, higher levels of instability and insecurity, degradation of the environment and the erosion of indigenous culture.  And even in countries which grew quickly, much of the benefits went to the richest members of society.  East Asia was the most successful region, but it did not follow all the Washington Consensus.


Another concern is that the international rules of globalization have been determined by the advanced industrial countries for the interests of special interest groups.  At the international level there is no real set of checks and balances – finance ministers, central bank governors and trade ministers rule the roost


So, in short, globalization can be a beneficial game, but it is a risky game.  It all depends on how you manage it!





Joseph Stiglitz’s papers on the New Development Economics -- http://www2.gsb.columbia.edu/faculty/jstiglitz/development.cfm


Development Policies in a World of Globalization, by Joseph E. Stiglitz

The Overselling of Globalization, by Joseph E. Stiglitz

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