Waves of globalizationof increased interaction between formerly separate societies and economieshave occurred since the dawn of civilization. These waves have typically been sponsored by a dominant power, and they have benefited from the certainty of law and the reliability of property rights associated with that power. Until the European discoveries of the fifteenth and sixteenth centuries, the power may have been dominant only in a region of the world, as the Roman empire was in the Mediterranean, the Han empire in China, and Ashokas empire in India. The regional empires were necessary precursors of the full globalization of the last five hundred years.
It is not going too far to say that modern civilization would be unimaginable without globalization. Globalization is about the specialization of certain localities, towns, cities, and eventually nations and continents on those types of production where they have a comparative advantage; it leads to the growth of trade patterns and money flows based on this specialization and to vast increases in economic efficiency. The advance towards greater prosperity is also towards more complex, interesting, and cultured ways of life.
Globalization has come in waves; it has not been delivered in one long, upward curve. In some periods the process went into reverse. These were periods when contacts between different societies became less frequent and more problematic, and often were so difficult as to lead to violence or war. They were characterized by contractions in the flows of trade and money between societies, and by declining living standards. These were dark ages, such as the dark age in the Eastern Mediterranean after the collapse of the cosmopolitan Late Bronze age from 1200 BC to 800 BC, the dark age in Europe after the breakdown of the Roman empire from 400 AD to 700 or 800 AD, and the dark age across much of Asia (including, for example, the area now occupied by Iraq) after the Mongol invasions of the thirteenth century.
The last dark age was between 1914 and 1945. The nineteenth century had seen a vast expansion of trade and increased financial linkages between nations under the aegis of a small number of European empires, notably the British empire, as well as a North American boom as the recently created United States of America extended its frontier westwards. All the usual benign consequences had followed, clearly substantiating the case for a stable international rule of law to support the free flow of goods, money, capital, and people across borders. But that lesson had not been understood across Europe or, at least, not understood by the intellectual leaders in every European society. Between 1914 and 1945, liberalism and internationalism lost ground to communism and fascism at the political level, while in economic policy free trade was in retreat before isolationism in the United States, bilateralism in Europe, and protectionism all round the world. Nations discriminated against each other in payments and trade, and smaller nations were forced to join blocs to ensure that they were not victimized by powerful, bullying neighbors. As in other dark ages, rivalry between nations led to war. The Second World War from 1939 to 1945 was the most destructive of all time.
Towards the end of the Second World War the two leading victorious powers in the free worldthe United States and Britainarranged a small number of high-level meetings to create institutions which would forge a stable international rule of law. The underlying agenda was simple. The two powers would try to end trade and payments discrimination between nations and to promote multilateral institutions whose task would be to ensure that the citizens of small nations would benefit from international economic interaction to the same extent as the citizens of large nations. These institutionsthe United Nations, the General Agreement on Tariffs and Trade (now refurbished as the World Trade Organization), the International Monetary Fund, and the World Bankhave survived for over fifty years.
They have been an astonishing success. No major war between significant powers has occurred since 1945, while world output per head has increased on average by about three percent a year. Three percent a year may not sound much, but over five decades compound interest translates that into a rise of over four times and over a century into a rise of almost twenty times. The second half of the twentieth century provided an overwhelming proof that globalization is economically beneficial; it confirmed the message provided by the advance of civilization over the previous ten millennia, that societies become wealthier the more that they interact with each other under a stable international order.
To criticize globalization from an economic perspective is therefore daring, even perverse. Despite the title of his recent book, Globalization and its Discontents, Professor Joseph Stiglitz is not quite so quixotic. Stiglitz, the winner of the Nobel economics prize in 2001, acknowledges that Globalization has helped hundreds of millions of people attain higher standards of living, beyond what they, or most economists, thought imaginable but a short while ago. But he has harsh words for the World Bank and the World Trade Organization, and he savages the IMF. In fact, Globalization and its Discontents is not exactly a book about globalization. Instead it is a highly personal denunciation of the IMF, set within an extended critique of the Washington consensus. (The Washington consensus is the set of attitudes and prescriptions adopted by the IMF and the World Bank in the 1980s and 1990s in their dealings with developing nations. Its recommendations were the free market, privatization, and openness to international trade and finance.)
There is no doubt that some criticism is needed. A recurrent problem with globalization is that its economic efficiencies have been gained only at the expense of clashes between the cultures of different societies. Cultures diverge not only in the palpable artefacts of architecture, painting, and sculpture, but also in terms of the kind of business morality that they support. As economies become more advanced, the financial system tends to grow faster than output as a whole. At a superficial level financial systems are about assets and liabilities, and loans and deposits; at a further remove they are about credit and trust, and so about business honesty and personal integrity; and finally they rely on systems of morality which support honesty and integrity. Every effective financial system depends on a vast substructure of quasi-ethical and largely non-legal understandings between the participants. This substructure is often nurtured by religion and a common way of life, and it may take generations to form.
The main purpose of the IMF has been to encourage free payments between the peoples of different nations. (Contrary to Stiglitzs assertions in the first chapter and some of its Articles of Association, the IMF has never really had the job of stabilizing fluctuations in world economic activity.) As a condition of granting credit to countries in financial trouble, it typically requires governments to ease restrictions on international payments. Sometimes this expands into a larger program of market opening of the type favored by the Washington consensus. These programs have two standard elementstrade liberalization, including the elimination of import quotas and the reduction of tariffs; and financial liberalization. Although usually centered on the removal of exchange controls, financial liberalization may also require local and inefficient financial markets to abandon their small-minded and restrictive ways of doing business; they must instead integrate with the international banking system and ac- cept competition from large multinational groups.
A common pattern has been found in the Washington consensus programs. Trade liberalization has had positive results and been relatively easy to implement. But financial liberalization has proved difficult. Too often the results have been disappointing, and sometimes they have been unsatisfactory or simply disastrous. For example, financial liberalization may rapidlytoo rapidlytransform an economy with low interest rates and a severe shortage of bank credit into one with sky-high interest rates and readily available bank credit. The suddenness of the change is accompanied by misdirection of bank credit into wasteful or even speculative activities. In the end these prove to have low or negative returns, and borrowers cannot pay the interest charges. Loans go sour and the banking system goes bust. The financial liberalizationunlike the trade liberalizationis a failure.
To repeat, criticism is needed. Stiglitz would appear to be ideally qualified to write it. He was chief economist at the World Bank from 1997 to 2000, and his Nobel-prize-winning work was concerned with problems of information flow (so-called information asymmetries) in the banking system. Unhappily, Globalization and its Discontents is a great disappointment. The text is not structured as a consecutive argument, in which the points made in one chapter flow logically into the argument of the next and the conclusions in the final chapter build on all the previous chapters. Instead the book is a ramshackle polemic with inconsistencies between its different parts. Even worse, much of it is written at the level of anecdote and gossip, and at no point does it advance beyond loose generalizations.
The slovenliness of the argument is demonstrated most simply by contrasting the messages from different chapters. For most of the book Stiglitz condemns the IMF for the extent of its intervention in the domestic policies of its client nations. For example, in a footnote to chapter two he says that the desirability of central bank independence is a matter of controversy, so that the Washington consensus view (i.e., that independent central banks are a good thing) should not be imposed on [a] country. Butin the discussion on the Russian crisis in 1997 and 1998he claims credit for urging stronger competition policies and advocating better laws on corporate governance, in order to prevent privatization from becoming organized stealing by the Russian elite. Stiglitz is almost certainly right that competition and the rule of law need to be strengthened in Russia, but for the IMF and the World Bank to insist on them would be a drastic encroachment on national sovereignty. Does Stiglitz believe in heavy intervention by the Washington institutions to change national laws or does he oppose such intervention? It just is not clear. He gives every impression of making up his mind as he goes along.
The mind-changing between chapters may reflect Stiglitzs attempts to catch up with events. The early chapters seem to have been written in 1997, the year of the Asian crisis, and in 1998, the year of the Russian crisis. So on page one hundred South Korea is applauded because in the early 1990s it had resisted pressures for capital account liberalization. But the crisis gave the IMF the power to bargain for such liberalization, and it pushed through a conventional Washington consensus program. On page three Stiglitz says that he pleaded with the IMF for a change in policies and pointed out the disaster which would ensue if the current course were to be continued. But on page 202 he concedes that capital started to flow back into Korea and on page 210 that reserves went from essentially zero [in late 1997] to almost $97 billion by July 2001.
Bluntly, Stiglitz got it one hundred percent wrong. In 2002 South Korea co-hosted the World Cup with Japan, and the global media were able to see for themselves whether increased capital market integration between Korea and the rest of the world had led to a disaster. In fact, the economic improvement compared with 1997 has been so dramatic that the rating agencies have begun to talk about South Korea as if it were a fully-fledged industrial nation. Some disaster.
Or, again, compare chapter fivewhich is called Who lost Russia?and page 202which notes that by 2001 Russia was able to borrow from the market, with capital flowing back to the country. If he had gone on to talk about 2002, he might have added that Russia wants to join the World Trade Organization and has become a member of the Group of Eight. The point of chapter five is to allege that the IMF lost Russia. But even by page 202 that looks wrong. If any reader today looks up from the pages of Globalization and its Discontents and directs a side-glance at Newsweek and Time, he would find that after publication Stiglitzs judgment has become ridiculous. Russia has evidently not been lost.
Less important, but even more alarming, than the inconsistencies are the inaccuracies. Stiglitz wears his Keynesian liberalism on his sleeve, and at various points lashes out at the IMFs monetary targets and alleged obsession with inflation. But he apparently thinks that Keyness General Theory was published in 1935. (It was published in 1936.) He also claims that Keynes analyzed market failure and unemployment at the world level, showing why there was a need for global collective action. In fact, Keyness analytical work in the 1930s was almost exclusively about a closed economy, while the internationalism of Bretton Woods owed far more to the American input than the British. In 1943 and 1944 Keyness colleaguesalthough not Keynes to the same degreeroutinely sneered at Cordell Hull, the American Secretary of State. It was Hull and the Americans, not the British Keynesians, who pushed hard for the principles of free trade and non-discrimination between nations in the vital wartime negotiations; and it is the Americanslike the Romans two thousand years ago and the British of the Victorian erawhose dominance has given the world a rule-based peace and exceptional prosperity in the post-war period.
Stiglitz could have written an important and valuable book. He makes some valid points, which deserve an effective presentation. Macroeconomics does have difficulty with banking systems, not only in the developing world but also in the advanced industrial nations, and policy-makers have had difficulty with financial liberalization in developing countries in the last twenty years. There is much still to be learned and much to be taught from what has been learned. Ironically, it is the IMF that has sponsored the most detailed research about financial liberalization, often based upon its own experience of the problems, and progress is being made. (In fact, Stiglitzs own recommendationswith, for example, many references to the need for the correct sequencing of reformsare derivative. They have undoubtedly been influenced by the IMFs extensive publications in this field.)
By demonizing the IMF in this unfortunate book, Stiglitz has given help to the worst type of participant in the public debate on international economic policy. For all their problems (and they have many), the IMF, the World Bank, and the WTO want a world that is more liberal, international, rule-based, and ordered. With apologies to Matthew Arnold, the argument for globalization is also the argument for sweetness and light. The critics of the multilateral institutionswhatever they saywould create a world which is more illiberal, nationalistic, closed, and anarchic, a world more like the 1930s and less like the second half of the twentieth century. It is consistent, although very sad, that a Nobel-prize-winning economist could give a partial blessing to the street protests in Prague, Seattle, Washington, and Genoa on the absurdly vague grounds that they have put the need for reform on the agenda of the developed world. The World Bank must in future exercise great care in the selection of its Chief Economist. If anyone had to choose the worst disaster facing the multilateral institutions today, Stiglitzs book would come near the top of the list.
This article originally appeared in The New Criterion, Volume 21 Number 3, on page 81
Copyright © 2020 The New Criterion | www.newcriterion.com