Globalization and Its Discontents

Better Roads to the Market: Globalization and Its Discontents

Pam Botterill

One of the main points that Stiglitz tries to cover in this chapter is a comparison of market growth of two key countries: China and Russia. And the two main areas of comparison are the themes called "shock therapy" and "gradualist policies".

The IMF acknowledged developing countries might feel more pain in the short run, but would be more successful in the long run. Reformers claim that the problem with liberalization was not that it was too fast, but that it was not fast enough, so too with privatization.

Shock Therapy

Put the emphasis on what developing countries have in common.

Protect concerns of creditors.

Reduce inflation.

Establish conditions under which economies will be likely to grow, and poverty to decline, on their own.

More pain in the short term, more successful in the long run.

The Hare Versus Gradualism

Put the emphasis on how each situation is different.

Acknowledge concerns of the poor.

Fight poverty and promote economic growth directly.

Less pain in the short run, greater social and political stability, and faster growth in the long run.

The Tortoise

The main themes Stiglitz points out include

what happens when people lack the key information that bears on the decisions they have to make;
or when markets for important kinds of transactions are inadequate or don’t exist;
or when standard economic thinking takes for granted elements that are absent or flawed?

The implications of all of these absences or flaws is that free markets, left to their own devices, do not necessarily deliver the positive outcomes claimed for them by textbook economic reasoning. Free markets require that people have full information, can trade in complete and efficient markets, and can depend on satisfactory legal and other institutions.

What Stiglitz considers to be more important than economic efficiency is that the consequences of market growth must also be socially acceptable if they are to endure. In order to sustain the development, all of society must share in the benefits.

The other piece that Stigliz considered to be a positive strategy was the Two-Tier Price System that China incorporated. The system introduced a "quota" of production that farmers would have been expected to produce under the old command-and-control system. These were paid for under the old prices. Then, any excess production over the old levels was paid using the "free market" prices.

Most important, the Chinese gradualist approach avoided the pitfall of rampant inflation that had marked the shock therapies of Russia. (183)

A recent article in The Harbour City Star titled "Changes in global economy change views on Free Trade" raises the question "whether the case for free trade made two centuries ago is undermined by the changes now evident in the modern global economy." The article goes on to discuss how the original concept of free trade was based on the principle of "comparative advantage": each nation having its own specialty that it would then trade with other nations. It was believed that if each country focused on its own strength then productivity would go up; with each country focusing on its strengths, the overall productivity would be high and "every nation would share part of a bigger global economic pie."

The current practise of the multi-national corporations is in direct conflict with this concept. They are taking their needs to the various countries instead of seeing what those countries' strengths are and building on them. Of course, this concept was originally brought forward at a time when the various goods being produced were not easily moved to other countries. What the Internet has done is make even the higher paid positions easily exported to Third World countries.

The two examples used in the article are:

A New York securities firm has plans to replace 800 of its American software engineers earning $150,000 per year, with an equally competent team in India earning $20,000 per year.
Within 5 years, the number of radiologists in this country is expected to decline significantly. Technology has made it possible for MRI. data to be transmitted over the Internet to Asian radiologists. This data will be diagnosed by capable radiologists at a small fraction of the previous cost.

Maybe this is what needs to happen--for the $150,000 per year jobs to start disappearing--since the elimination of the "middle class" manufacturing positions has happened with limited opposition from those in favour of globalization.

This leads into one of the main criticisms that Stiglitz has with the IMF. Not that the IMF could have made better predictions, but that its vision was too narrow: it focused only on the economics--and a limited economic model at that. Once again, it was the "cookie cutter" model of looking at things, rather than finding a way to include the needs of the individual countries that it was working with. One attribute of the success cases is that they are "homegrown," designed by people within each country, sensitive to the needs and concerns of their country.(186)

Stiglitz’s argument is as much about the policies the IMF doesn’t recommend as the ones it does:

Stabilization is on the agenda; job creation is off.
Taxation and its adverse effects are on the agenda; land reforms are off.
There is money to bail out banks but not to pay for improved education and health services, let alone to bail out workers who are thrown out of their jobs as a result of the IMF’s macroeconomic mismanagement.

Russia's Road to the Future

So, what does this mean for counties like Russia? The main thing that Stiglitz believes needs to be addressed by Russia is to stop further pillage, to attract legitimate investors by creating a rule of law and, more broadly, create an attractive business climate. (189)

Even in the heyday of high oil prices, Russia was barely able to balance its budget. Growth appears to be slowing and will only succeed if Russia creates an investment-friendly environment. There is one factor that is essential for establishing a good business climate: political and social stability.

And finally, Russia must collect taxes. Russia still has access to natural resource business, and revenues and output in this are in principal easily monitored. Those who owe money to the banks must be made to pay their debts. And all of this is predicated on there being a relatively honest government in place.

IMF loans to Russia were harmful. It was not only that these loans and the policy decisions behind them have left the country more indebted and impoverished, and maintained exchange rates at high levels that squelched the economy; they were also intended to maintain the existing groups in power, as corrupt as they were. To the extent that the IMF and its supporters succeeded in this deliberate intervention in the political life of the country, they arguably set back a deeper reform agenda that went beyond creating a particular, narrow vision of a market economy as opposed to the creation of a vibrant democracy.

Democratic Accountability and its Failures

We placed our bets on favoured leaders and pushed particular strategies of transition. Some of those leaders have turned out to be incompetent, others corrupt, and some both.

Some of those policies have turned out to be wrong, others to have been corrupt, and some both.

It makes no sense to say that the policies were right, and simply not implemented well.

Policies must be designed not for how they might be implemented in an ideal world but for how they will be implemented in the world in which we live. (194)

Works Cited

Schumer, Charles & Paul Craig Roberts. (2004, January 17). Changes in global economy change views on Free Trade. The Harbour City Star, p. A6.(Link to a scan of the article.)

Stiglitz, Joseph. Globalization and Its Discontents. New York: Norton, 2003