Globalisation and Its

Discontents

BY
JOSEPH STIGLITZ

“Globalisation itself is neither good or bad. It has the power to do

enormous good especially for those who adopt it at their own paces
and under their own terms; it has been enormous benefits like those
countries in East Asia” (Stiglitz 2001, p.30)
 Chapter 1

THE PROMISE OF GLOBAL INSTITUTES

Chapter 1: The Promise of Global Institutes

• Globalisation has following promises: a reduce of

senses of isolation, foreign aids, eliminate trade
barriers, reducing poverty etc.

• Despite its immense benefits, globalisation has become

controversial NOT only in developing countries but also
in developed countries e.g. what happened in Seattle
meeting of WTO in 1999. Why is it as such?

• Whilst Globalisation has great promises especially for

developing countries, it miserably fails to deliver in other
areas. A wider gap between the Haves and the Have-
Nots
Chapter 1: The Promise of Global Institutes (Cont’d)

• Developing countries view globalisation as a vehicle for

developed countries to take advantage of them through
global institutes e.g. IMF and WTO, and the World Bank

• For example, trade liberalisation has been insisted by

IMF whilst the developed countries already have ‘safety
net’ put in place to benefit their exported goods. With
the help of the ‘free trade’ agreement, those goods are
forced into developing countries to compete with the
domestically-made ones, which jeopardise their already
volatile economy and domestic trade.
Chapter 1: The Promise of Global Institutes (Cont’d)

• Unlike an evolution that happened in the US in the 19 th

century, globalisation today has been managed by a
systems called “global governance without global
government”.

• Those global institutes such as WTO, IMF and the World

Bank are dominated by a few players and left those who are
mostly affected left almost voiceless

• Last but not the least, globalisation can be reshaped to allow

ALL countries to have voice in the systems. Then,
globalisation could help create a global economy in which
growth is sustainable and less volatile and more importantly
the benefits are more equitably shared.
Chapter 2

BROKEN PROMISES
Chapter2: Broken Promises

World Bank IMF

Goal: our dream is the world Goal: to maintain global stability

without the poverty
Methodology: interpretevist; staffs Methodology: positivist; one-size-fits
permanently lives in developing all attitude and market must know
countries, mostly in the country side, best
to understand and lay out strategy
to achieve the goal

In 1997, Stiglitz started his job as a chief economist and senior vice
president of the World Bank. The above picture depicted his perceptions on
the 2 international institutions that are fundamentally different in beliefs and
approaches . In his opinion, IMF establish major obstacles f0r developing
countries to diminish poverty problems.
Chapter2: Broken Promises

The case of aid suspension between IMF and Ethiopia

demonstrates strong disagreements between Stiglitz
and IMF as shown below:
1. Criteria to lend money especially how to spend foreign aid: IMF
suspended it program with Ethiopia who had a good macro-
framework due to some unsound reasons. IMF encouraged
Ethiopia government NOT to spend the aid fund on facilities as
they are supposed to. In so doing, they will have good figures on
balance sheet.
2. Early loan repayment: IMF requested Ethiopia, a sovereign
country, to ask their permission to repay the loan early due to the
fact that Ethiopia did not want to pay a high interest rate any
longer.
Chapter2: Broken Promises

The case in Ethiopia demonstrates strong disagreements

between Stiglitz and IMF as shown below (Cont’d)
3. Financial market liberalisation. IMF wanted Ethiopian to open its
countries for western banks and divide its largest bank into several
pieces. Ethiopia refused to do so its fear of repeating what Kenya had
experienced when it followed IMF advices.
At the end, Stiglitz had to use his resources, time and efforts, to lobby
people in IMF and the World Bank to reinstate the aid program to
Ethiopia.

“Such organisations (IMF) are opaque rather than

transparent, and not only does far too little information
radiate from inside to the outside world, perhaps even less
information from outside is able to penetrate the
organisation”. (Stiglitz 2001, p.33)
Chapter2: Broken Promises

Stiglitz provides criticisms of how IMF should improve:

1. IMF Conditionality
• The economists basic notion of fungibility e.g. the fund that
meant for one project was spent on another project
• Some conditions imposed on developing countries are simply
wrong e.g. financial market liberalisation in Kenya
• Some conditions imposed on made the country politically
unsustainable e.g. Corruption problem was a reason IMF
ceased lending program with Kenya but not Russia
• The lending decisions were political

2. Lack of transparency during the process and IMF perception of

“rights to know” for the public

3. Inadequate participation of the poor countries

Chapter2: Broken Promises

Stiglitz identifies several reasons of failure of IMF (cont’d):

4. Unfairness of treatments between the rich and poor countries e.g.
adherence to article 4

5. IMF should consult widely within a country as it makes its

assessments and designs its programs

6. IMF initial reports that each country has to fill reflects the one-
size-fit-all attitudes.

“The international institutions have thus escaped the kind of direct

accountability that we expect of public institutions in modern
democracies. The time has come to grade the international
economic institution's performance and to look at some of those
programs “ (Stiglitz 2001, p.52)
Chapter 3

FREEDOM TO CHOOSE?
Chapter3: Freedom to Choose?

Fiscal Austerity, Privatisation and Liberalization are the 3 pillars of Washington

Consensus advice. IMF and the World Bank also deploy them as criteria for grading
systems of countries. Foreign Investment is also a key of globalisation. The problem
was that many of these policies became ends in themselves and are pushed too fast
and too far.
Privatisation: Governments, often times, spend too much time and efforts
doing things that should NOT be doing, such as running airlines and running
railways systems, rather than providing spending necessary supports and
fundamental policies to monitor and control those industries. However,
privatisation could miserably fail when:

• Privatization is implemented too fast and too far without policies or

regulations to provide essential services which eventually causes market
failure

• Corruption; without the appropriate legal structure and market institutions,

the new owners might have an incentive to strip assets rather than use
them as a basis for expanding industry.
Chapter3: Freedom to Choose?

Liberalisation failure:
• So far, in developing countries experience an opposite result that
this mechanism has intended. It forces domestic businesses to
close down once trade barriers are eliminated and markets in
developing countries have strong competitions flooded into.
Markets in developing countries desperately require two important
skills to survive; capital and entrepreneurship.

• To survive this invasion, governments in the developing countries

have to open itself gradually and systematically e.g. China spent
more than 20 years to gradually open itself up to the global
market

• Hypocrisy of developed countries and inequalities between the

developed and developing countries.
Chapter3: Freedom to Choose?

Foreign Investment: it’s a new part of globlisation that

resulted from liberalisation, privatisation and macro-
stability. It promises growth, accessibility to knowledge
and expertise for a local community and an access to
sources of finance. However, it could, yet again, result
otherwise.
•Local businesses are closed down because they cannot
compete with such strong competitors e.g. Wal*Mart
•Foreign investors do not attempt to improve the working
conditions for local community e.g. financial markets in
Argentina and Bolivia
•Governments of developing countries are pushed to
favour those foreign investors e.g. an investment in
Indonesia
Chapter3: Freedom to Choose?

1. Trade liberalisation + high interest rate = job destruction and unemployment

creation
2. Financial market liberalisation without regulatory structure = economic
instability
3. Privatisation without competition policies and oversight to ensure that the
monopoly are not abused = HIGHER price for consumers
4. Fiscal austerity is pursued blindly = higher unemployment rate and shredding
of social contract.

In Short: Freedom to choose is when countries can consider

the alternatives which strategy, priorities should they adopt
through democratic political processes with their own
pacing and sequencing. International intuitions should
only play a role of information provider so that those
countries can make a judgment on their own knowing the
consequences.
 Chapter 4

THE EAST ASIA CRISIS: How IMF Policies Brought the World to
the Verge of a Global Meltdown
Chapter 4: The East Asia Crisis

• Crisis in Asia in 1997, due to a rapid financial and capital

liberalisation started in Thailand, was felt all over the world and
some countries still feel it in years to come such as Indonesia.
Since the IMF was founded particularly to avert the crisis, it
should reconsider its role and its strategy to provide
recommendation and supports.
• Yet, IMF blamed it on Asian’s institutions that they were rotten
and corrupt whilst those countries especially China has
miraculously established itself as an economic power and its
growth has surged compare to 30 years ago
• Stiglitz identified 2 patterns of the crises; self-fulfilling prophecy
and speculative attacks. IMF also had patterns to solve the
identified crises but failed miserably.
• Stiglitz along with many governments in developing countries
share the same view that IMF itself is part of the problem
Chapter 4: The East Asia Crisis

How IMF and US Treasury led to the crisis

•Liberalisations policies were pushed to the market though there was little
evidence that growth would have been generated
•IMF insisted Thailand to lift their regulations to control real-estate speculation as
they believe that “market must know best”
•Similar crisis also happened in Korea led by US Treasury forcing Korean
government to accept liberalisation too fast and too far before the safety net was
established
After the crisis happened, IMF still failed to provide the remedy
because:
•Austere fiscal policy made the recession far worse then it needed to be
•The failure to recognise the important interactions among the policies pursued in
different countries
•IMF forced banks in Asia to increase the interest rate up to 25% which resulted in
contraction of the economy in the region during the crisis e.g. Korea and
Indonesia.
•IMF policies did not accommodate the restructuring of both financial sectors and
corporates e.g. forced to close down banks and tighten loans
Chapter 4: The East Asia Crisis

After the crisis happened, IMF still failed to provide the remedy
because (Cont’d):
•Last not not the least mistake of IMF is the risk in social and political
turmoil due to its excessively contractionary monetary and fiscal policies
e.g. in Indonesia
•After the crisis happened, those countries who shut doors to IMF policies,
such as Malaysia and China, had gotten away from falling into the
recession whilst those countries who was a good pupil like Thailand had
suffered the recession for several years. Korea who smartly chose IMF
policies to adopt handsomely recovered from the recession whilst
developed itself as today’s forefront runner in global economy.
•Explanation to the failure; IMF cannot accept its own mistakes and
conspiracy belief that it helped to open the gateway for western investors
to make money
Chapter 4: The East Asia Crisis

An Alternative to IMF mistakes proposed by Stiglitz

•Is to implement the policy and operate the market as if it was at
fully employment whilst conducting a financial restructuring and a
debt restructuring and allowing the financial flow like Korean
government did.

In sum, what happened in East Asia helps to present the discontent

in developing countries towards international institution and
developed countries. Additionally, IMF should reconsider its strategy
and plan to provide aids to developing countries. What happened in
Russia in the 1990’s which will be discussed in the next chapter
shall demonstrate more clearly.
Chapter 5

WHO LOST RUSSIA?

Chapter 5: Who Lost Russia

When USSR collapsed and Russia was reformed, IMF and Western
leaders claimed that the matter would have been far worse without
their supports. However, the current circumstance in Russia is now
disastrous (p.135). There are challenges and opportunities of the
transition for Russia as follows:
Challenges Opportunities
Market revolution ignored knowledge in Not just an economic reform but the
history, economics or society that whole social structure reform
happened prior to the reform.
The move from one price systems to Russia can put a high level of education
market price system into good use for the New Economy
An appropriate speed of the reform A replacement of decentralised systems to
“shock therapy” and “gradualist” centralised systems
Military budget was reduced to
supposedly improve quality of lives of the
people in Russia
Chapter 5: Who Lost Russia

Reform Story
•3 pillars for the reform were identified; Liberalisation, Stabilisation and a
rapid Privatisation. Nevertheless, the strategy did not work as indicated by
a shrunken GDP post 1989.
•Russia followed IMF advices quite closely but the result was quite the
opposite to that IMF predicted. Fund flow poured out of the country rather
than pouring in by foreign investors so Russia had to borrow more from
IMF and thus became more indebted
•Privatisation happened without a good plan to support so the government
gave away its valuable state asset away.
•To make the matter worse, IMF encouraged Russian government to
borrow more in US dollars which eventually devalue its own currency,
Ruble.
•IMF also convinced the World Bank to lend more of money despite strong
opposes due to its corruption problems, an efficient governance within the
country. Predictably, the rescue miserably failed
Chapter 5: Who Lost Russia

The Failed Transition

There are signs that the reform as closely advised by the IMF has
failed;
•A significant decline in GDP
•A shorter life span (around 3 years shorter)
•The increase in poverty and inequality

Stiglitz identifies area where IMF failed to provide legitimate advices

to help the transition in Russia:
•Inflation- policies that result in a contraction.
•Privatisation- too fast and too far
•The social context- IMF policies failed to appreciate the social
context of the transition economies (they focus too much on inflation
and macroeconomics)
•Speed of the reform: shock therapy treatment versus gradualist
•The Bolshevik approach to market reform
 Chapter 6

Unfair Fair Trade Laws and Other

Mischief
Chapter 6: Unfair Trade Laws and Other Mischiefs

• The IMF is a political institution. The 1998 bailout was dictated

by a concern to maintain Boris Yeltsin, an ex-communist.
• Russia has joined free markets since 2000.
• The problems with the reform strategy and the Yeltsin
government became clearer, when they agreed the conditions of
loan agreements.
• Many critics worried about the pressure from the IMF for rapid
privatization.
• This cause huge inequality through the corrupt privatization
process.
Chapter 6: Unfair Trade Laws and Other Mischiefs

• The United States supports free trade, and impose fair trade
laws, but known outside the United States as ‘unfair trade laws’.
• These laws will protect below cost of selling product from
foreign rival through dumping duties but U.S. proved it with
little evidence.
• Aluminum and uranium case – Russia would not be able to sell
its goods in the U.S. because it was suppressed by American
firms who accused Russia of dumping goods.
• With a trade restriction would generate excess profit and rise to
further source of corruption.
 Chapter 7

Better Roads to
the Market
Chapter 7: Better Roads to the Market

• The failure of reform strategies in Russia have become

increasingly evident. Meanwhile China and Poland employed
alternative strategies.

• China and Poland pursued a gradualist policy of privatization,

trying to build up the basic institutions of a market economy
such as banks and legal systems.

• Moreover, Poland gave importance of democracy for reforms,

keep unemployment low, and adjust pensions for inflation.
Chapter 7: Better Roads to the Market

• China’s reform began in agriculture, and moved from collective

system to individual system of production.

• Foreign firms were invited to participate in joint venture.

• Monetary policy and financial institutions facilitated the creation of

new enterprises and jobs as well as maintain social stability.

• Key attribute of the success is that they are ‘homegrown’ designed

by people, sensitive to the needs and concerns of their country.
 Chapter 8

The IMF’s Other Agenda

Chapter 8: the IMF’s Other Agendas

• Today’s IMF loose intellectual coherency by setting

intervening in the market. IMF forged policies which weaken
and allow problems to play out.

• Thailand’s real estate and stock market bubble. IMF poured

billion of dollars into the market, speculators gain profit
coming from government, supported by the IMF.

• The crisis of trade deficit can affect the long term investment
if a country has borrowed short term.
Chapter 8: the IMF’s Other Agendas

• Business firms who could not repay their loans, they go to

bankruptcy just in the case of real estate bubble burst in
Thailand.

• Therefore, IMF programs provide funds for governments to bail

out Western creditors but this strategy caused moral hazard
problem by taking less care in screening ‘free’ insurance.

• Even worse, the bail out cannot insure foreign exchange

volatility.
Chapter 8: the IMF’s Other Agendas

• IMF believed that raising interest rate would lead to a stronger

exchange rate but in real life is not, it hurt more firms by raising
interest rate or the fall in the exchange rate.

• IMF has objectives that are often in conflict with each other, one is
enhancing global stability and ensuring that there are funds for
countries facing a threat of recession. It is also pursuing the
interest of the financial community.

• IMF emphasis on getting creditors repaid rather than helping

domestic business.
 Chapter 9

The Way Ahead

Chapter 9: the Way Ahead

• The world is complicated, workers worry about jobs and

wages, they see interest rates as inducing an economic
slowdown this mean unemployment.

• There is not just one market model.

• Swedish model that government takes responsibility on social

welfare, provide better public health, unemployment
insurance, and retirement benefits.
Chapter 9: the Way Ahead

• International financial system should be reformed by resisting such

large externalities, interventions.

• Trying to impose more creditor-friendly bankruptcy reforms.

• Giving less reliance on bailouts.

• Improving banking regulation such as bad lending practices, and export

of instability.

• Improving risk management such as volatility of exchange rates.

Chapter 9: the Way Ahead

• Improving safety nets such as unemployment insurance

programs.

• Improving response to crisis.

• The developing countries require not only that aid be given in

a way that helps their development but small amount of
money could be promoted in health and literacy.
Chapter 9: the Way Ahead

• Reforming WTO will require more balanced trade agenda, and

more balanced in treating concerns, like environment.

• Today globalization can be forced for good; democracy and civil

society have changed, political movements have led to debt
relief, people attain higher standards of living, seeking new
markets for their exports and welcome foreign investment.

• International institution should work in the way that is a change

in governance, a change in voting right, and become transparency