Single economic model does not suit whole world
BY JOSEPH STIGLITZ, FORMER CHIEF ECONOMIST OF THE WORLD BANK

24th July 2002


GLOBALISATION today is not working for many of the world's poor. It is not working for much of the environment. It is not working for the stability of the global economy. The transition from communism to a market economy has been so badly managed that, with the exception of China, Vietnam, and a few Eastern European countries, poverty has soared as incomes have plummeted. 

To some, there is an easy answer: abandon globalisation. That is neither feasible nor desirable. 

Globalisation has brought huge benefits - East Asia's success was based on globalisation, especially on the opportunities for trade, and increased access to markets and technology. Globalisation has brought better health, as well as an active global civil society fighting for more democracy and greater social justice. The problem is not with globalisation, but with how it has been managed. 

Part of the problem lies with the international economic institutions, with the IMF, World Bank, and the WTO, which help to set the rules of the game. They have done so in ways that, all too often, have served the interests of the more advanced industrialised countries - and particular interests within those countries - rather than those of the developing world. But it is not just that they have served those interests; too often, they have approached globalisation from particular narrow mind-sets, shaped by a particular vision of the economy and society. 

In public policy debates few argue openly in terms of their own self-interest. Everything is couched in terms of general interest. Assessing how a particular policy is likely to affect the general interest requires a model, a view of how the entire system works. But there is not just one market model. 

There are striking differences between the Japanese version of the market system and the German, Swedish, and American versions. There are several countries with per capita income comparable to that of the United States, but where inequality is lower, poverty is less, and health and other aspects of living standards higher (at least in the judgment of those living there). While the market is at the centre of both the Swedish and American versions of capitalism, government takes on quite different roles. In Sweden, the Government takes on far greater responsibilities promoting social welfare; it continues to provide far better public health, far better unemployment insurance and far better retirement benefits than does the United States. Yet it has been every bit as successful, even in terms of the innovations associated with the "New Economy". 

For many Americans, but not all, the American model has worked well; for most Swedes, the American model is viewed as unacceptable - they believe their model has served them well. For Asians, a variety of Asian models has worked well, and this is true for Malaysia and Korea as well as China and Taiwan, even taking into account the global financial crisis. 

My point, however, is not to try to reconcile these market philosophers or to push my particular conception of the role of government and markets, but to emphasize that there are real disagreements about these issues among even well-trained economists. Some critics jump to the conclusion that economists always disagree, and therefore dismiss whatever economists say. That is wrong. On some issues - like the necessity of countries living within their means, and the dangers of hyperinflation - there is widespread agreement. 

The problem is that the IMF (and sometimes the other international economic organisations) presents as received doctrine propositions and policy recommendations for which there is not widespread agreement; indeed in the case of capital market liberalisation there was scant evidence in support and a massive amount of evidence against. While there is agreement that no economy can succeed under hyperinflation, there is little evidence to suggest that pushing inflation to lower and lower levels yields gains commensurate with the costs. Some economists even think that there are negative benefits from pushing inflation too low. 

The discontent with globalisation arises not just from economics seeming to be pushed over everything else, but because a particular view of economics - market fundamentalism - is pushed over all other views. Opposition to globalisation in many parts of the world is not to globalisation per se - to the new sources of funds for growth or to the new export markets - but to the particular set of doctrines, the Washington Consensus policies that the international financial institutions have imposed. And it is not just opposition to the policies themselves, but to the notion that there is a single set of policies that is right. This notion flies in the face both of economics, which emphasises the importance of trade-offs, and of ordinary common sense. We cannot go back on globalisation; it is here to stay. The issue is how can we make it work. 
These are the key reforms that I believe are essential: 

• We must recognise the dangers of capital market liberalisation, and realise that short-term capital flows ("hot money") impose huge costs on a developing economy. 
• We must accept that when private borrowers cannot repay creditors, whether domestic or foreign, it is through bankruptcy, not through IMF-financed bailout of creditors that the problem should be solved. What is required is bankruptcy reform that recognises the special nature of bankruptcies that arise out of macroeconomic disturbance; a bankruptcy provision that expedites restructuring under existing management. Trying to impose more creditor-friendly bankruptcy reforms, taking no note of the special features of macroinduced bankruptcies, is not the answer. This means that the IMF cannot play the central role. The IMF is a major creditor, and it is dominated by the creditor countries. A bankruptcy system in which the creditor or his representative is also the bankruptcy judgment will never be accepted as fair. 
• There should be less reliance on bailouts. Big bailouts have failed so frequently, with the money either going to ensure that Western creditors got paid back more than they otherwise would, or that exchange rates were maintained at overvalued levels longer than they otherwise would have been (allowing the rich inside the country to get more of their money out at more favourable terms, but leaving the country more indebted). 
• Improved banking regulation, in the developed and the less developed countries alike, would bring to an end bad lending practices. 
• Countries around the world face enormous risk from the volatility of exchange rates. While the problem is clear, the solution is not. Experts - including those at the IMF - have vacillated in the kinds of exchange-rate systems they have advocated. Developing countries have to learn to manage the risks, probably by buying insurance against these fluctuations in the international capital markets. Unfortunately, today the countries can only buy insurance for short-run fluctuations in the international capital markets. It would therefore make sense for the developed countries and the international financial institutions to provide loans to the developing countries that mitigate the risks, eg, by having the creditors absorb the risks of large real interest fluctuations. 
• Part of the risk management is enhancing the capabilities of the vulnerable within the country to absorb risks. Most developing countries have weak safety nets, including a lack of unemployment insurance programmes. International assistance will be essential if the developing countries are to make the substantial strides in improving their safety nets. 
• A better response to crises will balance the concerns of workers and small businesses with the concerns of creditors. Responses to future financial crises will have to be placed within a social and political context. Apart from the devastation of the riots that happen when crises are mismanaged, capital will not be attracted to countries facing social and political turmoil, and no government, except the most repressive, can control such turmoil, especially when policies are perceived to have been imposed from outside. 

Most important, there needs to be a return to basic economic principles. 
Rather than focusing on ephemeral investor psychology, on the unpredictability of confidence, the IMF needs to return to its original mandate of providing funds to restore aggregate demand in countries facing an economic recession. 

Countries in the developing world repeatedly ask why, when the United States faces a downturn, does it argue for expansionary fiscal and monetary policy, and yet when they face a downturn, just the opposite is insisted upon. 

As the United States went into a recession in 2001, the debate was not whether there should be a stimulus package, but its design. The same thinking should have applied to Russia and the countries of East Asia. 

Globalisation and its Discontents by Joseph Stiglitz is published by Allen Lane on July 4 at £16.99. To buy the paperback for £8.49 plus 99p postage and packing contact The Times Bookshop on 0870-160 8080.