Book Review – ‘Making Globalization Work’ by Joseph Stiglitz

Book Review (1)Rarely does one come across a book that makes such an earnest and urgent call for bringing fairness in this world. One of the biggest agents of wealth creation – ‘Globalization’ has gone wrong because its intended aim of improving the financial wellbeing of everyone on this planet has actually turned into an exercise of huge increment in the prosperity of the rich and the marginalization of already poor. This has created a world of unequal which is now reaching alarming levels bordering on social unrest that some parts of the world have already started to witness. In ‘Making Globalization Work’ Joseph Stiglitz, the Chairman of Council of Economic Advisers in the Clinton Administration, the Chief Economist at World Bank, and the 2001 Economics Noble Prize winner, makes a very passionate and compelling case for reordering the current world order to make Globalization work for all. The book far from just listing down what ails the current system actually offers strong suggestions on how to change things in order to make them work. Coming from an insider to both the administration and the institutions his judgements are hard to miss.

One of the fundamental issues with Globalization today is that, it has become very strongly integrated globally and is generally beyond the control of governments and institutions. For instance, any unfavourable policy or condition change can result in seamless flight of money from one country to the other, leaving the cash depleted country with very little options to balance both the economic and welfare programs simultaneously. This scale of global economic integration obviously hasn’t kept pace with intergovernmental cooperation which is at best only evolving, and this has resulted in the economic forces taking advantage of the differential political settings between countries in order to maximize profits while leaving people in these countries hugely disadvantaged and often at risk of losing their livelihood entirely.

The most advantage is drawn by advanced industrial economies leaving the world in a precarious balance. Lots of current third world human crisis, poverty, and misery can be traced back to some of the wrong and uncontrolled globalization policies that made the poor countries poorer while making the rich countries further richer. Of course within these poor countries some grew very rich but the rest those on the edge became worse. A study found that 59% of the world population is living in countries with growing inequality, with only 5% living in countries with declining inequality. What is shocking is that, this trend of rich getting richer and poor getting poorer holds true even in developed countries. This explains the near stagnation of real wages for low-skilled workers in the US for the past three decades. Today the worry is globalization might be creating rich countries with poor people. There are several ways in which this issue manifests itself today.

First of all, developing countries have very little authority in shaping up policies at the international institutions charged with global economic oversight and therefore these institutions largely ignore the interest of poor nations. At International Monetary Fund (IMF) US has the veto while votes are decided on the basis of economic power – not current power status but the one that was 70 years ago when IMF was established – and even China is highly underrepresented. At the World Bank it is even worse; US have the right to appoint the head, something it has constantly refused to give up despite changes in the world economic order in the last few decades. At these institutions political affiliations rather than real development or banking experience often trumps leadership appointments as seen in the cases of Paul Wolfowitz and Robert MacNamara – both former secretaries of defence associated with discredited wars of Iraq and Vietnam respectively.

Secondly, advanced economies have a tendency to force developing countries into opening up their markets through trade agreements, but they themselves mostly don’t open up and continue protecting their own economies by way of subsidies which they either refuse to discontinue or delay for long periods of time. This is a double whammy for the poor country, first this opens it to cheap exports thereby wiping off local industries – and jobs – which aren’t able to compete anymore with rich world supplies, and secondly the affected country doesn’t even gain foreign market share as it is unable to sell its goods in the heavily subsidized developed country market. Case in point is that of an average European cow which gets a subsidy of $2/day which is the World Bank threshold value for someone to be considered poor and today more than half the people in developing world live on less than that (what an irony, European cow gets more subsidy than what a poor earns in a developing nation).

At such subsidized price levels it is virtually impossible for a developing country to be ever able to sell dairy products into Europe. Furthermore whenever an industry in a poor country works very hard and develops a natural competitive advantage in a particular field advanced economies erect nontariff barriers, such as antidumping duty, to stifle third world competition. Antidumping duty is a levy that can be imposed on a foreign supplier if it is proven that the supplier has entered into unfair trade practice of selling goods below cost to kill competition and gain monopoly. It is very easy to bring such cases to court and discourage poor country suppliers from selling into advanced country markets. For instance US has accused Mexico of dumping tomatoes, Colombia of dumping flowers, Chile of dumping salmon etc. Today, Chilean wine growers worry that should they continue to be successful, California wine growers will demand that US impose dumping duties.

This casts a pall over free trade for a developing country firm and deters it from entering the developed world markets, which is exactly the opposite of the original intent of trade agreements between developed and developing countries that is to provide them access to each other’s markets. In the end the trade agreement results in developed country selling their subsidized goods in the developing country and killing the infant industry and impacting lives of millions living on the margins whereas the developing country doesn’t even gain market, ending up supporting the economy of the developed nation rather than it being the other way round.

The shocking story is that, even in the rich country it is rich who gets the benefit of such trade agreements not the poor. For example the super big farmer, generally part of a corporate group, is the one who gains through trade agreements as the number of small family farmer is fast shrinking because the way agriculture has become mechanized it is now unviable for small farmers to do agricultural activities alone so they all end up selling their farms to big corporate. And, it is these large agricultural companies that influence the trade policies by lobbying with the governments. So, the loser on both sides – developed and developing – is the poor.

There is an ethical angle in this as well. Developed world pharmaceutical companies have for very long time fought hard not to let generic – which cost a fraction of the original – AIDS drugs, to be manufactured in the developing markets. The cost of imported drugs can often be crippling for a poor in the third world African country and can mean the difference between life and death, but the rich world pharmaceutical companies have consistently resisted moves to issue licenses to generic manufacturers in all trade treaties while continuing to book supernormal profits from AIDS drugs sales. The irony is, if this issue is put on vote in both developed and developing country the overwhelming majority will vote against the drug companies’ stand, but the trade treaties didn’t!

Finally, the poor countries are generally new developing democracies and when they get funded by the IMF or World Bank stringent conditions are imposed on them – such as rapid privatization, deregulation, and downscaling of government interventions – and this to a large extent indirectly takes away their sovereignty and independence to do things as a democratic country. With these agreements the poor country government has very little control over its own economy or the way it can manipulate or drive it, so even if the governments are elected by the people they largely end of serving these international institutions’ diktats which runs contrary to the poor country’s welfare. Eventually, the democratic institutions in the poor country are undermined due to these interventions and in the process they are left poorer. Latin America and Africa are prime examples of such interventions and their spectacular failures.

Joseph’s strength is his ability to turn the highly technical subject of economics into a very understandable and readable one, however at times despite his caution the subject does get a bit technical and might require some of us to research in order to follow his train of thoughts. Also, several ideas have been stated a few times making them slightly repetitive, however for someone nudging global economic institutions to take urgent corrective actions this isn’t entirely a fault, as he is trying to drive home his message by way of reinforcing it.

The book while highly insightful raises several moral and disturbing questions all along and also highlights the role of vested interests in the developed world in driving the global economic agenda to their advantage and clearly not being concerned with either the poor in their own country or in the developing world, making them both poorer in the process. Of course hope is round the corner, for instance Joseph calls for Debt restructuring for heavily indebted countries leading up to their debt forgiveness as generally these debt issues arise due to fluctuations in the Foreign Exchange Rate or in the interest rates over which poor countries lose complete control after agreeing to the IMF or World Bank interventions. This was observed in the case of Argentina debt crisis years ago, and we saw the same thing being played out in the Greek debt crisis last month.

Greece lost its ability to devalue its currency (its original currency – Drachma – was disbanded and replaced by common European Union (EU) currency of ‘Euro’ since 2001) and print more of it to control inflation as it is now under a unified Euro that is printed in Germany and circulation controlled by the European Union (EU). So, Greece had no option but to threaten default on its debt as huge unemployment and cuts on spending had taken their toll on the nation. Defaults such as these by poor countries might become more common in future if the world continues to think only about the developed countries’ welfare. Secondly, the recent launch of the ‘New Development Bank’ catering to the needs of the developing BRICS countries only is another example of how the developing world is responding to the decline in their trust in the way current global economic institutions have been managing the world economy, which so far seem to have served only a select few in the developed nations. These are encouraging signs that a better and fairer world is possible and people have started taking some action towards it.

Joseph Stiglitz

Nobel prize-winning economist, Joseph Stiglitz .

Joseph E. Stiglitz was born in Gary, Indiana in 1943. He is an American economist and a professor at Columbia University. He was Chairman of President Bill Clinton’s Council of Economic Advisers and served as Senior Vice President and Chief Economist of the World Bank. Stiglitz is the 4th most influential economist in the world today. He is the author of several books and his work focuses on income distribution, asset risk management, corporate governance, and international trade.

This book is available in many formats. So go ahead and read it!

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