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'Making Globalization Work,' Joseph Stiglitz

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"Making Globalization Work"

by Joseph Stiglitz

WW Norton | September 2006 | ISBN 0393061221

Click here to read an interview with Joseph Stiglitz discussing his new book

Extract from the preface to "Making Globalization Work"

This book reflects my faith in democratic processes; my belief that an informed citizenry is more likely to provide some checks against the abuses of the special corporate and financial interests that have so dominated the globalization process; that ordinary citizens of the advanced industrial countries, as well as of the developing world, share a common interest in making globalization work. I hope that this book, like its predecessor, will help transform the globalization debate, and, ultimately, the political processes which shape globalization.

Globalization is the field on which some of our major societal conflicts - including those over basic values - play out. Among the most important of these conflicts is that over the role of government and markets.

Today, by and large, there is (at least among economists, if not among politicians) an understanding of the limitations of markets. The scandals of the nineties in America and elsewhere brought down "Finance and Capitalism American Style" from the pedestal on which they stood for too long. More broadly, Wall Street's perspective, which is often shortsighted, is being recognized as antithetical to development, which requires long-term thinking and planning.

There is also a growing recognition that there is not just one form of capitalism, not just one "right" way of running the economy. There are, for instance, other forms of market economies - such as that of Sweden, which has sustained robust growth - that have led to quite different societies, marked with better health care and education and less inequality. While Sweden's version may not work as well elsewhere, or may not be appropriate for a particular developing country, its success demonstrates that there are alternative forms of effective market economies. And when there are alternatives and choices, democratic political processes should be at the center of the decision making - not technocrats. One of my criticisms of the international economic institutions is that they tried to pretend that there were not trade-offs - a single set of policies made everyone better off - while the essence of economics is choice, that there are alternatives, some of which benefit some groups (such as foreign capitalists) at the expense of others, some of which impose risks on some groups (such as workers) to the advantage of others.

Among the central choices facing all societies is the role of government. Economic success requires getting the balance right between the government and the market. What services should the government provide? Should there be public pension programs? Should government encourage particular sectors with incentives? What regulations, if any, should it adopt to protect workers, consumers, and the environment? This balance obviously changes over time, and will differ from country to country. But I shall argue that globalization, as it has been pushed, has often made it more difficult to obtain the requisite balance.

I also hope to show that while globalization's critics are correct in saying it has been used to push a particular set of values, this need not be so. Globalization does not have to be bad for the environment, increase inequality, weaken cultural diversity, and advance corporate interests at the expense of the well-being of ordinary citizens. In Making Globalization Work, I attempt to show how globalization, properly managed, as it was in the successful development of much of East Asia, can do a great deal to benefit both the developing and the developed countries of the world.

Attitudes toward globalization, and the failures and inequities associated with the way it has been managed, provide a Rorschach test for both countries and their people, revealing their fundamental beliefs and attitudes, their perspectives on the role of government and the market, the importance they attach to social justice, and the weight they put on noneconomic values.

Economists who place less importance on reducing income inequality are more prone to think that the actions governments might take to reduce that inequality are too costly, and may even be counterproductive. These "free market" economists are also more inclined to believe that markets, by themselves, without government intervention, are efficient, and that the best way to help the poor is simply to let the economy grow - and, somehow, the benefits will trickle down to the poor. (Interestingly, such beliefs have persisted, even as economic research has undermined their intellectual foundations.)

On the other hand, those who, like me, think that markets often fail to produce efficient outcomes (producing too much pollution and too little basic research, for instance) and are disturbed by income inequalities and high levels of poverty, also believe that reducing that inequality can cost less than the conservative economists predict. Those who worry about inequality and poverty also see the enormous costs of not dealing with the problem: the social consequences, including alienation, violence, and social conflict. They are also more sanguine about the possibilities for government interventions; while governments sometimes, or even often, are less efficient than one might have hoped, there are notable instances of success, several of which I discuss in the pages that follow. All human institutions are imperfect, and the challenge for each is to learn from their successes and failures.

These perspectives on the importance of dealing with inequality and poverty are mirrored in differences in views about their origins. By and large, those who are concerned about inequality see much of it as arising out of luck - the luck of being born with good genes or with rich parents (the "sperm lottery"), or the luck of buying a piece of real estate in the right place at the right time (just before oil is struck, or before a local real estate bubble develops). Those who are less concerned feel that wealth is a reward for hard work. In this view, redistribution of income not only takes away incentives for work and savings but is almost immoral, for it deprives individuals of their just rewards.

Paralleling these positions are stances on a host of other issues. Those who are less concerned about inequality and more concerned about economic efficiency tend to be less concerned with noneconomic values such as social justice, the environment, cultural diversity, universal access to health care, and consumer protection. (There are many exceptions, of course - conservatives, for instance - who worry about the environment.)

I emphasize these connections between economic and cultural attitudes to emphasize how much it matters to whom we entrust key aspects of economic decision making. If one delegates decision making to "conservatives," almost inevitably one will get economic policies and outcomes that reflect their political interests and cultural values. This book obviously reflects my own judgments and values; at least, I hope to be transparent, and present both sides of the ongoing economic debates.

Saving Globalization from Its Advocates

Some seventy years ago, during the Great Depression, the British economist, John Maynard Keynes, formulated his theory of unemployment, which detailed how government action could help restore the economy to full employment and growth. Keynes was vilified by conservatives, who saw his prescription as increasing the role of government. They seized on the budget deficits that inevitably accompany a downturn as an occasion to cut back on government programs. But Keynes actually did more to save the capitalist system than all the pro-market financiers put together. Had the advice of the conservatives been followed, the Great Depression would have been even worse; it would have been longer and deeper, and the demand for an alternative to capitalism would have grown. By the same token, I believe that unless we recognize and deal with the problems of globalization, it will be difficult to sustain its current momentum.

Globalization, like development, is not inevitable - even though there are strong underlying political and economic forces behind it. By most measures, between World War I and World War II, both the pace and extent of globalization slowed, and even reversed. For example, measures of trade as a percentage of GDP actually declined. If globalization leads to lower standards of living for many or most of the citizens of a country, and if it compromises fundamental cultural values, then there will be political demands to slow or stop it.

The path of globalization will, of course, be changed not only by the force of ideas and experiences (ideas about whether trade or capital market liberalization will improve growth and the actual experiences with these reforms, for example) but also by global events. In recent years, 9/11 and the war on terrorism, the war in Iraq, and the emergence of China and India have all redefined the globalization debate in ways that I will discuss.

This book is as much about how politics has been used to shape the economic system as it is about economics itself. Economists believe that incentives matter. There are strong incentives - and enormous opportunities - to shape political processes and the economic system in ways that generate profits for some at the expense of the many.

Open, democratic processes can circumscribe the power of special interest groups. We can bring ethics back into business. Corporate governance can recognize the rights not only of shareholders but of others who are touched by the actions of the corporations. An engaged and educated citizenry can understand how to make globalization work, or at least work better, and can demand that their political leaders shape globalization accordingly. I hope this book will help make this vision a reality.

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About the author: Joseph E Stiglitz is a Nobel prize-winner in economics and professor of economics at Columbia University. He has served as chairman of the Council of Economic Advisers to President Clinton, and chief economist and senior vice-president at the World Bank. Among his books are Globalization and its Discontents (WW Norton, 2002) and Making Globalization Work (WW Norton, 2006).



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