Global is at Ion and Its Discontents - 1,2,8-2003

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Globalisation and its discontents joseph stiglitz

Globalisation - the closer integration of the countries and peoples of the world which has been

brought about by the enormous reduction of costs of transportation and communication, and the

breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and (to a

lesser extent) people across borders. Globalization has been accompanied by the creation of newinstitutions that have joined with existing ones to work across borders (ILO decent work;

WTO; World Health Organisationetc.).

1. The promise of global institutions

- Protests against globalisation, although not new, have risen even in developed countries

at present great concern that globalisation is not making life better for those most in

need of its promised benefits

- *NAFTA 1992 USA + Canada + Mexico North American Free Trade Area

- Benefits until now:

o International trade export driven internal economic growth

o Reducing isolation antiglobalisation protests are made possible

o International treaties international land mines treaty

o Foreign aid education, disease containment etc.

- Haves vs. have-nots! increasing poverty and instability

- People living in poverty + 100 mil in the same period with an increase in the total world

income by 2.5% annually!! Africa after decolonisation

- Crises in Asia and Latin America

- Hypocrisy of the western countries forcing poor states to lower their trade barriers, but

kept up their own

- The eighth agreement the Uruguay Round 86-95 led to GATT transforming into

WTO.

o Strengthening the intellectual property rights still, not balanced properly

reflecting more the benefits of producers rather than consumers (developing

states)


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- Unsuccessful globalisation projects imposed poor countries to repay the western Banks

loans, caused environmental destruction, unemployment, social dissolution

increasingly vehement.

- Inability of the developing countries to modify the rules of the agreements

conditionality vs. national sovereignty menace to democracy in itself.

Three main institutions governing globalisation: IMF, WTO and World Bank

- IMF + World Bank 1944, results of the Breton Woods UN Monetary and Financial

Conference finance the rebuilding of Europe (especially WB whose original name was

International Bank for Reconstruction and Development) and avoiding another global

depression like the one in the 1930s (IMF)

- IMF mainly stimulate the aggregate demand and provide loans to countries in difficulty

o Need for collective action at the global level foreconomic stability (IMF)

o Need for collective action at the global level forpolitical stability (UN)

o Public institution founded on money from the tax-payers, accountable to

ministries of finance and central banks across the world USA single veto power

- Most dramatic change in the IMF and WB 1980s Ronald Reagan + Margaret

Thatcher the free market ideology in US and UKthe Washington Consensus

- 1990s the fall of communism new arena for IMF & WB transitional economies

o Division of labour:

IMF macroeconomics budget deficits, loans, inflation..etc.

WB structural issues financial institutions, labour markets, trade

policies...etc.

- The two institutions could have provided countries with alternative perspectives on some

of the challenges of development and transition, and in doing so they might have

strengthened democratic processes. But they were both driven by the collective will of

the G-7 (US, Jap., Ger., Canada, Fr., It. & UK) no democratic debate on alternative

strategies.

- The IMF failed in its mission to provide global economic stability and did not support

properly the transitional economies premature market liberalization + imperialistic

conditional rules for loans + going above WBs attribution.


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WTO needed to govern international trade relations

WTO does not set rules itself forum for international trade negotiations

- Although the original purposes of the IMF, WB, WTO were generally well-founded, they

gradually evolved into unproductive and even harmful policies imposed upon stateswithout previous pre-testing, and even after proofs of disfunctionality blanket

protectionism or rapid trade liberalisation has often led to the adverse effects especially

for the developing countries that lowering their trade barriers, could not compete with the

largely subsidised products from abroad no safety nets crisis and depression.

- The fall of communism extreme extension of the IMF mandate states looking for help

or approval had to follow the IMF prescriptions which were most of the times mistaken

- Sequencing order of the reform occurrence most important for successful ec.

Programmes.

The underlying problems

o governance who takes decisions? wealthiest, industrialised countries the

institutions are not representative for the nations they serve.

o Who speaks for the country trade ministers or finance ministers different

purposes.

For the developing countries the system run by the IMF is taxation without

representation.

Lack of a global government to watch over the process of globalisation and hold

accountable international organisations.

Present system global governance without global government those affected by

decisions are voiceless.

2. Broken Promises

- WB eradicating poverty vs. IMF maintaining global stability

- Modern economics is similar to modern warfare removing physical contact one

imposes policies without confronting with their direct consequences and with the ones

affected by them (specific to IMF only one representantive in each country vs. WB

teams, some even living in the specific country)


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- Colonial mind-frame the white mens burden that developed countries know whats

best for developing countries still persists.

o Ethiopia and the struggle between power politics and poverty

- Wrong general purpose of IMF a country like Argentina with double-digit rate ofunemployment for years, but with a balanced budget and relative low inflation is

considered OK; but a country like Ethiopia, after fights with communist guerrillas, being

in a full process of reconstruction, with actually no inflation, falling prices and economic

growth but with a questionable budgetary position is left unassisted when in most need.

- The logic of IMF was that if Ethiopia built schools and hospitals from the loan money,

when the loan dries up, the state would not be able to administer those facilities anymore.

o Despite this fact, Ethiopia had clear policies of returning the loan and a well-

founded macro-economy; but most of all Ethiopia felt this as an infringement

upon its sovereignty, it was IMFs procedures that summed up to a new form of

colonialism.

- Moreover, IMF wanted Ethiopia to open its financial markets to western competition and

divide its central bank into several pieces premature liberalisation that would have led

to disaster for Ethiopia (Kenya did that 14 bank failures in 2 years) it resisted the

IMF policy no loan from the IMF, but tripled income from WB

- IMF was confusing ends with means only in the 1970s did the US and Europe

liberalised their markets as an end of their policies. + IMF did not consult any other

experts on the matter suspecting that power politics and special interests in Ethiopia were

influencing policies and conduct.

- Later on, assistance was restored when IMF was confronted with the facts irrespective of

their economic dogma.

- Developing countries rise different questions during crises: markets are absent or impare;

cultural dissensions...etc.

- The training of the IMF staff is mainly based on ideal economic models where

demand=supply, therefore there should be no unemployment unless voluntarily chosen.

- Time spent in countries (3 weeks) is not enough for a perfect understanding of the

contingency in order to formulate valid policies, but IMF wants a central role in shaping

policies! ideology driven activity market fundamentalism.

- in the long run it will be better ignore the primary effects of their policies


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- Alternatives case of Botswana advising from the Ford Foundation and several

meetings and seminars. Its success was preserved through a crisis, without appeal to

loans.

- IMF as Keynes designed it theoretically would finance deficits in order to forestall

recession and hardship. As it is now, the IMF promotes fiscal austerity and approvesfunds only to countries that comply with its economic policies.

- Just as there has been a shift in the balance of military power, there has been a shift in the

intellectual balance of power developing countries are not helpless anymore; they

have trained specialists

- States seeking for IMF help are usually in desperate need of funds, but if they disagree

with the imposed policies they risk:

o To be deemed as gone off track for not understanding the IMF policies

o To receive bad publicity regarding their markets, scaring the investors

o Not to have their policies approved by the IMF no debt relief great leverage

for IMF.

- No chance to disagree in public with the IMF. Little chance to change its dogma.

- The conditionality of the IMF loans practically turns the loans into policy tools and

detracts from the countrys ability to address the central pressing problems.

- Conditionality does not work for several reasons:

o Loans free up money for other projects than those stipulated by IMF

(fungibility)

o Wrong conditions Kenya and East Asia adverse effects of policies

o Unsustainable policies imposed

o One-size-fits-all-reports

o Engendering hostility on the imposed reforms

- IMF should consult widely within a country:

o For more accurate information from people within

o In order to reach a consensus on the proposed policies, which would assure a

commitment toward their implementation


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- WB replacing conditionality with selectivity rewarding countries with good records of

well implemented funds the country should be put in the drivers seat!

- participatory poverty assessment the country itself teams up the WB and the IMF

theoretically. Practically, IMF behaved as if WB was allowed to participate (as its

subordinate), but not the country too!

- 1966 Freedom of Information Act not respected by the IMF total lack of

transparency; the public may sometimes have a say in decision-making, but it does not

know what the IMF is really doing.

8. The IMFs Other Agenda

- What the financial community views as good for the global economy is good for the

global economy and should be done IMFs view on policies :D.

- Keynes: identified a set of market failures and considered that by putting pressure oncountries to maintain their economy at full employment, and by providing liquidity for

those countries facing downturns that could not afford and expansionary increase in

government expenditures,global aggregate demandcould be sustained.

The market failure theory of governmental action why markets go wrong and why

collective action is fit.

- While IMF is still imposing expansionary policies on developing countries, it has not

articulated a coherent theory of market failure to justify its existence and actions.

- Exchange rates market a zero sum game for speculators whatever one loses, the other

one wins IMFs intervention in Brazil, poring $50 billion to stabilise the exchange rate

is practically money lost to the speculators who are kept in business by the IMF

- The sum of all deficits in the world must add up to the sum of all surpluses.

- Crises appear when a country having a deficit keeps borrowing money without solving

the problem. It spends more on imports than it gets from exports. When institutions

financing the deficit (i.e. the gap between imports and exports) stop providing money, the

state has to adjust or ends up in a crisis.

- Bankruptcy or moral hazard are as well serious causes for crises where IMFs policies

lack consistency IMF bails out debtors and re-establishes them, minimizing the need

to buy insurance, encouraging therefore a lack of responsibility, a moral hazard that

keeps the cycle going.


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Global is at Ion and Its Discontents - 1,2,8-2003