Globalization and its Discontents | Study Guide

Joseph Stiglitz

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Globalization and its Discontents | Chapter 7 : Better Roads to the Market | Summary

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Summary

Different countries pursued different strategies in transitioning from a communist to a capitalist economy. Those that strictly adhered to the IMF's rigid liberalization policies experienced more problems during transition and had poorer results than those nations that more or less ignored IMF policy and forged their own transition strategy.

Poland and China ignored the precepts of the Washington Consensus and forged transition strategies more attuned to their citizens' needs. Their "homegrown" strategies maintained both economic and political stability. Poland had started down the "shock therapy" road to reduce inflation but then fashioned policies less likely to result in social dislocation. It created the necessary financial infrastructure before embarking on widespread privatization. Its policies emphasized job creation and the maintenance of a social safety net during the unavoidably stressful period of transition. Poland also made sure it had the majority of its citizens' support for the social and economic changes that were being made.

China had the most successful transition of all. It slowly introduced a policy of "individual responsibility," which incrementally permitted farmers to own and sell some of their crops. This program was expanded slowly and only after the central government saw that it worked and was popular among the people. As the program was allowed to expand, it "engendered widespread support" among China's rural population. Another ingenious program introduced a "two-tier price system" that left the old, command economy prices for some goods but allowed market pricing for other goods. Once people got used to and profited from market pricing, the old pricing system was abandoned. China also kept its social safety nets in place and created the needed regulatory institutions before it slowly began to privatize its state-owned enterprises. China became the economic powerhouse it is today because it built "the foundation of a New Economy on existing institutions, maintaining and enhancing its social capital."

Poland and China's transition experience stands in sharp contrast to that of Russia and the Czech Republic. The Czech Republic followed IMF prescriptions to the letter and quickly implemented radical liberalization reforms without taking the wishes or experiences of their citizens into account. In Russia rapid privatization led to widespread corruption and deep inequalities between the oligarchs and ordinary people. Real economic growth was sacrificed to corrupt privatization. Nearly all the benefits of privatization accrued to those close to the Kremlin. Millions of people living throughout this vast nation were destitute. At the behest of the IMF, Russia did not first establish necessary regulatory and oversight institutions before it created a class of oligarchs who came to dominate the country both economically and politically, squelching democracy. In its continued support of lending to Russia's corrupt government, the IMF acquiesced in Russia's becoming a kleptocracy—rule by those who steal a nation's wealth, or government by thieves.

Analysis

The Washington Consensus implemented by the IMF demanded the rapid adoption of economic liberalization—shock therapy—for countries with economies in transition. The vivid contrast between those nations that adopted the IMF's policies and those that chose a more gradual, citizen-oriented path is clearly delineated. Russia, in particular, fell victim to corruption resulting from rapid privatization without the benefit of functioning financial and regulatory institutions. The breakneck speed at which Russia transitioned to a market economy left almost all its citizens behind, victims of an indifference that led to abject poverty unrelieved by any social safety net. Corruption, lack of competition, disregard for local needs and citizen support, and seeming disinterest in pro-growth policies inevitably led to social instability and a toxic economic climate. This, in turn, failed to attract foreign direct investment which might have boosted economic growth and employment.

Countries in transition that ignored IMF prescriptions and followed their own gradual implementation of transitional policies fared much better. When Poland realized that shock therapy was "inappropriate for societal change," it went its own way while garnering public support for the changes to come. Poland, which had a strong market tradition and a private sector even while it was communist, paid attention not only to the pace of change but to its sequencing. It developed functioning financial institutions before it privatized its state-owned enterprises. Banks lent money to ambitious and creative entrepreneurs, and their successes increased employment and led to real economic growth. Poland's leaders emphasized "the importance of democratic support for [its] reforms" with policies that kept unemployment low and safety nets intact. By making the well-being of its citizens its primary concern, the Polish government strengthened democratic institutions and maintained both its economic and political stability. These factors attracted foreign investment, which led to economic growth.

No country did as well as China in its transition to a market economy. The key to China's success was its gradualism, its focus on local conditions, and the importance it placed on its citizens' acceptance of change. Chinese officials implemented gradual reforms and field-tested them before they were expanded. Only after the earliest experiments in "individual responsibility" among a village of local farmers proved popular and profitable did China slowly expand the program to other rural communities. Only when the Chinese people got used to the two-tier system of command economy pricing alongside market pricing did the government slowly abandon the government-dictated pricing system. The key to its transitional success was the Chinese government's belief that only after a reform became popular and gained widespread acceptance among citizens was it instituted nationwide. When China opened some of its state-owned enterprises to partial privatization, employment grew and poverty declined. And because China had first created "the institutional infrastructure for a market economy," competition flourished and inflation flagged. The author calls China's approach "creative destruction," or the dismantling of the old economy and its gradual replacement with a new, market-oriented one. Because Chinese citizens supported these gradual reforms, China experienced none of the instability and dislocation that plagued IMF-directed nations. Thus, "China became the largest recipient of foreign direct investment among the emerging markets." Companies and investors from around the globe rushed to invest in China, benefiting from its economic growth and stability. As employment grew, the Chinese economy took off, boasting enviable economic growth.

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