Globalization and its Discontents | Study Guide

Joseph Stiglitz

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Globalization and its Discontents | Chapter 1 : The Promise of Global Institutions | Summary



Globalization has had some positive effects. In some cases it has created jobs in developing nations and connected the nations of the world through trade. Yet, "to many in the developing world, globalization has not brought the promised economic benefits." Too often, globalization increases the divide between the haves and the have-nots, with some of the world's poorest becoming even poorer. Thus, globalization hasn't reduced either poverty or the vast inequality neoliberalism creates between the super-rich and the rest of the populace. The many worldwide protests against globalization are reactions to the unfairness of the economic strictures imposed by global economic institutions, particularly austerity measures that severely curtail a government's ability to fund social programs that benefit ordinary citizens. Other demonstrations protest the negative economic effects of trade agreements, such as the North American Free Trade Agreement (NAFTA) and the global institution that governs international trade, the World Trade Organization (WTO). Free trade agreements often force developing nations to import goods from developed nations, but vital goods may be priced too high for local consumption.

Globalization has not increased economic or political stability. In a closely interconnected world based on free trade, a developed nation that forces its goods on a developing nation may cause instability and economic problems in the developing nation, such as greater unemployment or financial (bank) failure. Interference by global financial institutions that are ignorant of a developing nation's conditions and needs may lead to severe economic disruption that plunges the nation's citizens into poverty. Russia suffered from this very calamity. When a nation shuns such interference, as did China, it is able to take control of its own economic development and thus avoid such disruptions.

Global economic institutions are hypocritical when they impose strictures on developing nations, such as demanding the elimination of trade barriers and government subsidies, while allowing developed countries to maintain these subsidies and barriers. This double standard only increases poverty in developing nations while enriching banks and corporations in developed countries. The opening of global financial markets permits banks in developed countries to speculate on the value of currency in developing countries—a risky venture that may have devastating effects on the developing nation.

Global financial institutions have maintained a monopoly over the lending of money to help developing countries grow their industries. But the loans come with high interest and are given only if the borrower agrees to strict conditions that limit its ability to serve its citizens. Imposed austerity, or reduced government expenditure on necessary public services, often leads to increased poverty and a greatly reduced quality of life among citizens of the developing nation. Debt is so pernicious to developing countries that nongovernmental organizations around the world are pushing for debt relief or debt restructuring for indebted countries.

This chapter introduces the major global economic institutions. The original General Agreement on Tariffs and Trade (GATT) became the World Trade Organization (WTO), which oversees global trade and works to reduce barriers to trade. The original International Monetary Fund (IMF) lent money to developing nations suffering from a financial or economic crisis. The original World Bank (WB) was created to eliminate poverty in developing countries.

The 1980s saw the adoption of what is known as the Washington Consensus, an ideology based on absolute free-market policies. The unwavering commitment to Washington Consensus ideology changed the way the IMF functioned. Whereas previously the IMF worked in tandem with the governments of debtor nations, the new economic orthodoxy saw "government as the problem. Free markets were the solution to the problems of developing countries." The IMF imposed rigid conditions, called conditionalities (conditions that turn a loan into a policy tool), on any country that sought a loan. Crucially, and to the detriment of many developing countries, austerity measures were imposed on every nation seeking a loan, regardless of its unique economic problems, culture, and needs. No alternatives to the free-market ideology were considered or offered. This "one-size-fits-all" free-market ideology resulted in the frequent failure of the IMF and increasing poverty for indebted nations.

The rules by which these global institutions operate were written by, and essentially for, developed nations, particularly their banks and corporations. It's no surprise then that the lion's share of the benefits goes to them, not to those in developing countries. Further, the imposition of restrictions on government spending is clearly anti-democratic.

In short, Stiglitz believes "globalization ... has not lived up to what its advocates promised it would accomplish." The author continues, "Globalization itself is neither good nor bad. It has the power to do enormous good" if it allows the nations it helps to develop "under their own terms [and] at their own pace." Yet, for globalization to be a positive force in the global economy it must reassess "in whose interest" it operates and "place less emphasis on ideology and to look more at what works."


This chapter provides an overview of globalization. Stiglitz defines globalization as the "closer integration of the countries and peoples of the world." He provides examples and reasons for how and why globalization has, for the most part, failed developing countries in recessionary crisis. He cites the IMF's rigid ideology and its adherence to a policy of rapidly implemented liberalization accompanied by draconian constraints on government action. These constraints—conditionalities and austerity measures—are counterproductive because they contract economies in need of stimulus, expansion, and growth. These harsh measures are imposed by the IMF's Western economists and financial experts who have little or no knowledge of the needs and conditions of the countries they are trying to help. For this reason, these policies often make matters worse in IMF client countries, whose economies contract and whose populations suffer from greater poverty.

The IMF's ideologically narrow policies have a track record of failure, from the East Asia crisis (Chapter 4) to the chaos it oversaw in Russia as it transitioned from a communist to a capitalist economy (Chapter 5). Only the nations that refused to fully implement IMF policies and developed their own policies—notably China, who refused to accept IMF funds—were largely unscathed by IMF failures. China controlled its own policies for economic growth and fared far better than nations dictated to by the IMF.

Global economic institutions are managed and controlled by Western experts, many of whom seek to protect Western interests while supposedly aiding developing nations. Thus a double standard is applied, with Western interests permitted to implement protectionist policies that developing countries cannot. For example, the WTO doesn't object to subsidies paid by developed countries to their important domestic industries and agriculture, but they prohibit developing countries to subsidize fledgling industries or agriculture, a clear double standard that favors wealthy nations.

The IMF's policy prescriptions are based on the Washington Consensus, a set of economic principles that stress anti-inflationary policies (even when a country has no inflation); a distrust of government knowledge and action (because governments are seen as a hindrance to the free market); and wholesale liberalization of capital markets (markets in currencies), financial markets (banks), and the market in goods and services.

Client countries, both their governments and their citizens, have little or no input into IMF decisions. Those who govern global financial institutions tell governments of developing nations what they can and cannot do, regardless of what citizens want or need. The resulting dislocation and poverty these policies cause often leads to "social and political chaos" in developing nations, as citizens mobilize against the ill effects of globalization. Dictating a nation's policies also undermines democracy, as the government must do what the IMF demands, not what its citizens elected it to do.

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