Globalization: Its Saboteurs and Its Chicken Littles
The word "globalization" provokes both excitement and fear. The excitement has sold millions of Tom Friedman books and turned a drab annual business conference, the World Economic Forum, into one of the hottest events of the year. It is front-and-center in recent tensions between the U.S. and China, and makes the European Union’s economic crisis a concern for the whole world.
Should we fear or embrace globalization?
Many in the popular media – most famously Friedman in his book The World is Flat – argue that globalization is changing the world so rapidly that you must accept it or get out of the way. But two scholars from Columbia University present a more sober analysis. Joseph Stiglitz, Columbia’s Nobel-Prize-winning economist, argues that the problems with globalization owe largely to misguided efforts of international regulators, while Columbia business school professor Bruce Greenwald has called fears about globalization vastly overblown.
Greenwald’s 2009 book, “globalization: n. the irrational fear that someone in China will take your job,” which he co-authored with Judd Kahn, an investment manager, shares a common message with Stiglitz’s 2002 tome, “Globalization and Its Discontents” – we have nothing to fear from globalization but the globalizers themselves.
Stiglitz warns that globalization can have dangerous effects when international capital flows are unfettered. The resulting crises, he argues, are actually made worse by the global agencies set up to ameliorate them. He believes that global institutions, specifically the International Monetary Fund (IMF) – with ideological as well as financial support from the U.S. Treasury Department – tamper with globalization’s crises in damaging ways.
Greenwald and Kahn, on the other hand, say that – because most economic growth stems from local factors – many concerns about globalization are unwarranted. At the same time, they argue, its potential benefits are overstated as well.
Stiglitz and Greenwald are long-time comrades-in-arms who have collaborated on influential research, and Greenwald figures prominently in the acknowledgements section of Stiglitz’s book. On the front cover of his book with Kahn, Greenwald touts an endorsement by Stiglitz.
Hence, we might expect the two to produce books about globalization that sound similar notes; each economist, however, has chosen to focus on a very different aspect of the phenomenon. Each approach warrants further exploration.
Globalization and its saboteurs
Stiglitz’s book might better have been titled, “Globalization and Its Saboteurs,” because that is what it is really about.
Stiglitz does not believe globalization is inherently a bad thing. “Opposition to globalization,” he says, “is not to globalization per se – to the new sources of funds for growth or to the new export markets – but to the particular set of doctrines, the Washington Consensus policies, that the international financial institutions have imposed.” These Washington Consensus policies that are often imposed on developing countries include, most prominently, fiscal austerity, privatization, and market liberalization.
“The Washington Consensus policies,” according to Stiglitz, “are based on a simplistic model of the market economy, the competitive equilibrium model, in which Adam Smith's invisible hand works, and works perfectly.” This is what Stiglitz refers to as “market fundamentalism,” a term that has since been widely adopted, especially after the global financial crisis of 2007-2009 (GFC).
Stiglitz is not shy about pointing the finger of blame. He points directly, forcefully, and repeatedly, at the IMF and its supporters in the U.S. Treasury Department. The IMF’s job is to lend to national economies that have trouble when hit by financial crises. Like any lender, when the IMF lends, it imposes conditions on the borrower. Now, it’s important to realize just how influential the IMF is in the realm of international lending. Because other major lenders tend to look to the IMF’s approval – or lack thereof – when considering their loans to a country, the country often has almost no bargaining power and little choice but to agree to IMF demands for fiscal austerity, which can increase poverty, hunger and unrest.
Stiglitz identifies by name some alleged culprits in the IMF and the Treasury; often, they are the same names that have recently been criticized for supporting policies that fostered the GFC, such as Robert Rubin and Lawrence Summers.
Shock therapy vs. gradualism
Stiglitz’s indictment of these players was very convincing. In fact, given that he wrote in 2002, we would do well to take more than passing note of the similarities of his criticisms to those that have followed the GFC and, more recently, the eurozone’s troubles.
Virtually exactly the same argument is taking place. The debate is between two schools of thought in macroeconomics. One school adheres to the theories of John Maynard Keynes, who believed injection of government funds was needed in economic crises to supplement weakened aggregate demand. The opposing school, adhering to an evolved – and many would say, revisionist – version of the theories of Adam Smith, believes the only intervention needed is by forces outside national governments, to prevail on those governments to confine themselves to merely preserving market freedoms.
In his 2002 book, Stiglitz threw in his lot with other Keynesians when it came to the two most recent global financial crises of the day: (1) the Asian financial crisis – sometimes called “the Asian flu” – that hit countries like Thailand and Indonesia in 1997 and (2) the post-Communist economic downturns in the 1990s, in Russia and other former Soviet bloc nations.
The argument in these cases, as Stiglitz articulates it, arose between “shock therapists” and “gradualists.”
Shock therapists believed that certain central features of market economies needed to be put in place immediately and abruptly, no matter whether other trappings that should accompany them are yet in place. The shock therapists, according to Stiglitz, believed that in post-Communist Russia it was urgent to create private property rights, in any way possible; “once private property rights were established, all else would follow naturally – including the institutions and the kinds of legal structures that make market economies work.” They believed that “privatization, no matter how implemented, would lead to a political demand for the institutions that govern private property.”
Gradualists, on the other hand, believed it was necessary, as part of the process, to also put the other institutions in place, gradually but simultaneously, in a carefully sequenced manner. In the ex-Communist countries, shock therapists placed privatization above all other considerations, ignoring – according to Stiglitz – the fact that competition is needed at the same time for an efficient market economy to emerge.
Hence, privatization without anti-trust laws would merely allow the former state owners to be replaced by, or to mutate into, monopolists in the private sector – but now they would have an incentive to strip assets and move the proceeds out of the country (easy because of the IMF’s preference for eliminating cross-border capital controls). That, Stiglitz said, is what happened in Russia.