We have to make globalization work for all

Joseph Stiglitz, Professor of Economics and Finance, Columbia University Yale Center for the Study of Globalization, New Haven

As recently as the 1990s, globalization was still viewed with enormous optimism. "Globalization American-style" was to bring unprecedented prosperity to all countries in the world. Flows of capital had increased six-fold. There were new trade agreements that were being heralded as introducing a new era, and economists talked about what these would do for jobs, for prosperity in the U.S. But by the end of the decade, all of a sudden globalization appeared to look quite different. The WTO meeting in Seattle was supposed to open up a new set of trade negotiations. Instead of a new round, there were unprecedented riots -- on a scale the U.S. had not seen in 20 years. If trade agreements were bringing prosperity to developing countries, they did not seem to know it.

There were some very good reasons for much of this unhappiness. A study done by the World Bank pointed out that the poorest region in the world -- Sub-Saharan Africa -- was actually worse off by about 2-3 percent than before. But even before the study was released, it was evident that there were a large number of problems. Most visibly, there was crisis in East Asia, followed by the global financial crisis of 1998.

On the other hand, globalization did have some successes, particularly in the initial growth of East Asia. In the preceding three decades, countries like Korea saw their per capita incomes increase eight-fold. Poverty was almost eliminated, literacy had become universal, health standards had been improved, life expectancy had increased -- all these gains were based on globalization.

But this "globalization" was very much defined in their own terms. The growth of these countries was based on export-led growth and absorbing knowledge (particularly technology) from the most advanced industrial countries. The Asian example proves that when globalization is properly managed, it can bring enormous benefits, bringing not only economic growth but even well- distributed growth. But when it is not well managed, when it is not done selectively, it can have very adverse effects.

The end of the Cold War opened up new opportunities to try to create a new, global economic order -- a global economic order that was based more on a set of principles, on ideology, on ideas of social justice. The world had the chance to set up a level playing field. We missed that opportunity. I think most people -- policy makers, academics and most of the public alike -- did not have a clear enough vision of what we wanted or what should have been created.

But the commercial and financial interests did have a vision of what they wanted. They wanted to seize this new opportunity to expand -- to create a world that would open up new markets for themselves, for the corporations of the advanced industrial countries. And they used the U.S. government to advance that perspective. So what happened was that the U.S. -- and Europe participated in this to some extent -- used its economic power, its position as the sole economic and military superpower. It used its position to create a set of policies, in the area of trade in particular, that were grossly unfair. And we are now reaping some of the consequences.

The economics behind the inequities are fairly easy to understand. Asymmetries were incorporated into trade agreements, so that the developed countries could demand that the developing countries take away their trade subsidies, take away their trade barriers, all for the goods in which the industrialized nations had a comparative advantage. And then developed states did not reciprocate. Manufactured goods, which had been the center of the discussions in trade for the preceding 50 years, were an increasingly small part of the American economy.

Employment in manufacturing is now down to 14 percent of the American labor force. So it just is not as important -- services are the dominant sector, and so it is quite natural that America wanted to focus the discussion on that area. But what were the services that were on the agenda? For the most part, financial services, in which the United States has the comparative advantage -- one could call them the U.S.' new export industries. The services that were not on the agenda were maritime services, construction services, services that are intensive in unskilled labor- that is, those services in which America did not excel. And the U.S. remains extremely protectionist in those areas.

Because globalization was driven by what I call a "special privilege" agenda, the fundamental problems underlying globalization were not addressed. And it is the global financial system that creates the most trouble. There were six financial crises in a period of six years, and these were not the first crises. What is particularly disturbing is that while we were talking about how wonderful the globalized financial system is in addressing the problems of risk, the developing countries were left to carry the burden of interest rates and market volatility.

This has had enormous consequences for the developing countries. In Latin America, in the beginning of the 1980s, many countries sank into a debt crisis. They may have defaulted on their loans, but they were still forced to carry the burden of interest rate volatility.

There is a second major problem with the current globalized system. The global reserve system has enormous peculiarities and is the underlying source of much instability. One source of concern is that the United States is effectively borrowing money from much poorer countries. To put it another way, the U.S. today has an enormous trade deficit -- running at US$600 billion a year, borrowing more than $1.5 billion a day. To put it another way, it means that the richest country in the world is unable to live within its means. Meanwhile, the U.S. is content to lecture the poorer countries about why they should be living within their more limited means.

There are some more lessons that I think ought to emerge from the instabilities over the past ten years. The first is that capital market liberalization and trade liberalization can expose markets to enormous risks. Thus one needs to carefully craft these policies to sequence and pace reforms. Otherwise one can have enormous costs without benefits. A second, related, issue is the fundamental problems in the distribution of risk in the global reserve system that I referred to earlier -- larger states need to assume more responsibility and alleviate burdens on developing countries.

Globalization entails the closer integration of the countries of the world, and that means there is going to be more interdependence. Our welfare, our well-being, will depend on others, and it will depend on how globalization is managed. America, as the sole superpower with the strongest economy, has to be willing to play a special role.

There are reforms that would make globalization work better, work better both for developed countries and for the developing countries. It is imperative -- if we want a better and more equitable world, or even if we just want a safer world -- that we undertake these reforms.

This article is adapted from his presentation on a conference on globalization on Oct. 10, organized by the Yale Center for the Study of Globalization and the World Bank at Yale University. This article appeared in YaleGlobal Online, (www.yaleglobal.yale.edu) a publication of the Yale Center for the Study of Globalization, and is reprinted by permission.