Globalization and Its Discontents is a book of remarkable insight. The author draws upon his experiences as chief economist at the World Bank to explain major events in the global economy of the 1990s. The primary episodes that this book analyzes are the Asian Crisis and Russia’s post Soviet reforms. Empirical analysis by economists typically relies on formal statistics. Professor Stiglitz avoids this in his book, and much to his credit. Written history helps fill out the empirical record and enhances our understanding of economic processes. The author took full advantage of his position to write about important changes in the global economy.
Professor Stiglitz also has much to say about how political factors affected policy at the International Monetary Fund (IMF), the US Treasury and the World Trade Organization. He claims that ideology and bad economics thinly veiled the actions of special interests. Private interests lobbied successfully for alleged privatization and liberalization, resulting in crises. Free market ideologies served as intellectual cover for these interests in efforts to justify alleged misadventures in privatization. Professor Stiglitz claims that experience with these policies refute the case for rapid privatization, and indicate a need for stronger and more open international governance.
The examples in this book do support important theoretical arguments regarding political economy, but not as its author intends. The primary deficiency of this book is in its understanding of Public Choice concepts. Professor Stiglitz refers specifically to rent seeking, which he describes as a theory of “how special interests use tariffs and other protectionist measures to increase their incomes at the expense of others”. He associates this theory with ideological fervor and claims that market failure arguments better explain problems in developing countries. This attitude towards rent seeking is peculiar for two reasons. First, what he describes is more like the collective action problem of Mancur Olson than rent seeking. Second, the author supplies numerous examples of collective action problems in the global economy of the 1990s.
On page 19, Stiglitz asserts that trade ministers and the WTO and finance ministers and central bank governors align themselves with members of the business and financial community. Stiglitz claims that privatization in Russia led to greater rent seeking, which he describes as “briberization”. “Privatization” worked to enrich government ministers rather than to fill treasury coffers. He also mentions a World Bank sponsored and US backed electricity deal in Pakistan, where narrow private interests earned profits from prearranged and exorbitant prices.
Stiglitz also refers to “Trickle Down” economics. This he describes as the notion that economic growth will eventually reach the poor, as the rich spend their increased incomes. Instead, wealth trickled up to members of narrow interests. Stiglitz describes how Boris Yeltsin created a powerful class of oligarchs and businessmen. The IMF loaned billions to Russia, while political elites benefited from special tax privileges and looted public coffers. Local government officials squeezed private firms so hard that they had no incentive to invest. Professor Stiglitz complains that the IMF provided billions to bail out banks, but little in food subsidies to the poor masses. He condemns the Treasury and IMF for its $30 billion deal with Japan. This money went to American and other foreign banks, rather than to help with Japan’s economic situation. He also recounts $23 billion to bail out financial interests during the Asian crisis. This is, as Stiglitz describes it, corporate welfare.
Stiglitz explicitly blames the narrow economic view of the IMF (i.e., its ostensible free market ideology) for opposition to food and other subsidies to the poor. Their “outworn presumption” that markets lead to efficient results caused discontent with globalization. Yet he supplies extensive evidence of IMF willingness to supply subsidies to narrow financial and business interests. What he overlooks are public choice arguments concerning the ability of concentrated interests to gain at the expense of broader interests. Rather than blaming free market ideology, Professor Stiglitz should have considered public choice explanations for how concentrated interests gain at public expense.
Professor Stiglitz argues that markets require perfect competition and perfect information. Since agents in markets lack perfect information and face transaction costs, markets will fail to deliver efficient results, and government can, in principle, improve upon market outcomes. Professor Stiglitz commits the Nirvana Fallacy by assuming that government can, in principle, always improve upon market imperfection. Considering that his book points to many examples of government failure, his failure to avoid this fallacy is particularly odd, however it is a good read for those trying to see the internal perspective of global economics
Contributed by Melange Team