Globalization and its discontents in 2004

Joseph E. Stiglitz, Professor of Economics, Columbia University, Project Syndicate

The year 2003 was in many ways a disaster for globalization. America and its "coalition" of the willing went to war in Iraq without the support of the UN, and the World Trade Organization meeting at Cancun -- which was supposed to provide the impetus for a successful conclusion of the Development Round of trade negotiations -- ended in failure. 2004 will almost surely be better, for political globalization as well as for the global economy. But don't look for a banner year.

The events in Iraq demonstrate the failure of democratic processes at the international level -- and the need to strengthen them. The Bush administration's approach to the war in Iraq and its aftermath has been marked by the same unilateralism shown by its rejection of the Kyoto protocol and the International Criminal Court.

In each instance, when the world's collective decision differed from what America wanted, President Bush insisted that America get its way. Whether the U.S. government deliberately lied to the world about the existence of Iraqi weapons of mass destruction or got carried away by its own rhetoric is less important than the lesson to be learned: It is dangerous to put excessive power in the hands of a few.

But the U.S. is finally realizing that even a superpower cannot ensure security in a country occupied by force. It might have been able to win over the Iraqi people in the early months of the occupation, but by now its cumulative mistakes may have doomed the campaign for hearts and minds to failure. America has also come to recognize the need to forgive Iraq's debts, which will require rapprochement and cooperation with traditional U.S. allies that opposed the war.

These developments hold out the hope that the U.S. will adopt a more multilateral approach to foreign policy in 2004. But the Bush administration's exclusion of creditor countries like France, Germany, and Russia from Iraqi reconstruction contracts undermines this hope.

At the same time, if America's "shock therapy" approach to reconstruction -- quick economic liberalization and privatization -- is carried out, higher unemployment and greater resentment are likely to follow. "Shock therapy" is a strategy that has repeatedly failed. In 2004 the world could well learn again the risks of relying excessively on the ideology or leadership of a single country. Iraq will suffer the most, but the consequences will almost certainly be felt widely.

The WTO talks in Cancun represented the other major failure of globalization in 2003. The U.S. and Europe reneged on their promise that this would be a round of trade negotiations designed to improve the plight of developing countries. Indeed, they failed to redress the imbalances of earlier rounds of trade talks that had made the poorest regions of the world worse off.

The U.S. and Europe not only tried to impose their trade agenda on developing countries; they also continued to insist on their right to subsidize agriculture and raised new demands that would have made lives in developing countries even worse. For the first time, developing countries united, and the talks broke down.

After blaming each other for the breakdown, America and Europe will continue to insist in 2004 that they want to restart the development round. But unless meaningful concessions are made in agriculture, non-tariff barriers, and intellectual property rights, what do developing countries have to gain? Tariffs on industrial goods in the advanced countries are already low enough that developing countries are unlikely to receive many benefits -- and they have much to lose from another unfair trade agreement.

Developing countries are, however, learning some of the West's tricks. In Miami last November, they agreed to a Free Trade Area of the Americas that did not, in fact, provide for free trade, and barely went beyond what had already been agreed within the WTO. In short, it is beginning to look as though any success in the current round of trade talks will be based on agreements without substance.

The pick-up in economic activity in Japan and the U.S. bodes well for the global economy in 2004, as does China's continued strength. Every economic downturn comes to an end, and it is high time for America's economy, which began slumping almost four years ago, to recover.

This could have happened sooner if the Bush administration had supported tax cuts for the poor and middle class, rather than for the rich. The size of the tax cuts that it did promote was so large, however, that it provided some stimulus anyway. But the cost is enormous: A colossal fiscal deficit that jeopardizes future growth.

The counterpart of America's immense fiscal deficit is its yawning trade gap. This twin deficit has taken a severe toll on foreigners' confidence in the fundamental health of the U.S. economy -- and hence on the external value of the dollar. As the euro remains strong relative to the dollar in 2004, America's trade deficit will moderate, but at the cost of making a robust European recovery all the more difficult.

Meanwhile, once recovery has set in, the huge borrowing demands of the U.S. and Europe will almost certainly drive up real interest rates globally, posing new problems for the world's emerging markets. For them it will be just another instance of having to bear the costs of policy mistakes made in the advanced industrial countries, another instance of globalization gone awry.