Globalization and its Discontents | Study Guide

Joseph Stiglitz

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Globalization and its Discontents | Chapter 9 : The Way Ahead | Summary



Globalization has brought benefits to developing countries, such as increased trade and better health care. Yet, it has fallen far short of its promise because it is "not working for many of the world's poor." There is an urgent need for reform of global economic institutions, particularly the IMF, to make them more responsive to the needs of developing nations.

Interests and Ideology

The IMF's policies are ostensibly to aid developing nations in crisis, but in fact, its policies are shaped to serve Western financial interests. This makes its policies "incoherent and inconsistent," and thus of little use to those developing countries it should be serving. Similarly, the World Trade Organization (WTO) is too closely aligned with commercial interests in powerful Western nations to enforce trade policies that fail to help developing nations. These countries should have a say in the policies they enact to spur economic growth based on their unique culture and needs.

The Need for International Public Institutions

There are some things, such as international trade rules, that a single country cannot make itself. Other essential national needs, such as spending on defense, cannot be provided by leaving it to the whims of the market. Where markets fail to provide, governments must take over. Where individual nations cannot set the rules, collective international institutions should step in. All three levels of economic control and activity—local, national, and global—have their place in the world economy. Global collective action should focus on transnational issues such as climate change and ocean pollution, problems that affect all nations and require a global response.


It has already been shown that the IMF is governed by finance ministers who make decisions that affect millions of ordinary people. The author argues that for development to work for all, representatives of ordinary people should have a seat at the table when important economic decisions are made. This is true both for the IMF and for the WTO.


The IMF's secretiveness and lack of transparency make it difficult for client nations to have a say in the creation of new economic policies. IMF decisions are made behind closed doors and delivered to client countries with no tolerance for input. The IMF is often equally resistant to criticism from non-IMF economists. As described earlier, the IMF's lack of transparency and imposition of its policies on its client countries diminishes the democratic process in these countries because they have no say about what policies to adopt. In a democracy, even a fledgling one, citizens have the right to know what economic policies will be and how their lives will be affected by them. It is also true that secrecy enables the IMF to hide its mistakes and its less visible failures, thus giving it free rein to impose the same failing policies repeatedly.

Reforming the IMF and the Global Financial System

Basic reform of the IMF must address its conflicting objectives: helping developing nations or serving Western financial interests. Too often the IMF ignored important economic data that showed that its liberalization policies hurt developing countries. It also ignored economic data because it is based on economic science, and science always contains uncertainties. The IMF is loath to admit to being uncertain about its policies, projecting "an image of being infallible" to instill a sense of confidence in its client countries. Yet, its stock is so low its claims of infallibility are seen as absurd. The author advises the IMF to refocus on its original mission: to manage economic crises in developing or transitioning countries.

Reform Efforts

Following its failure in the East Asia crisis, the IMF tried to shift the blame onto East Asian nations. When the IMF discussed reforms, it was only with its managers, high-level Western government and financial leaders who gave lip-service to vague reforms but proposed no substantive changes. The few changes that were made, such as limited involvement of client governments, "appeared superficial to outsiders." The IMF continued to hide and/or ignore economic reports that criticized its ideology. When hints of scaling back capital-market liberalization were bandied about, the IMF quickly denounced them, reiterating its dedication to this risky liberalization policy. Other suggested reforms, including the IMF's bail-in policy, were quickly proven failures in aiding countries in crisis.

What Is Needed

Stiglitz proposes several reforms that he feels would benefit the IMF and the nations it serves. These include:

  1. Accepting that capital market liberalization is dangerous because of "hot money" speculation and the vulnerability of the currencies in play.
  2. Reforming bankruptcy law to allow nations in crisis to default on or restructure their loans, obviating the need for new IMF bailouts (which benefit Western banks).
  3. Being less reliant on bailouts and more reliant on bankruptcy to address overwhelming debt.
  4. Improving bank regulations so that a developing nation's banks are well regulated and encouraged to make long-term loans to businesses to boost economic growth.
  5. Improving risk management to avoid the volatility of exchange rates (trading in a currency's value compared to other currencies). To accomplish this, global economic institutions might sell insurance to developing nations to guard them against "fluctuations in the international capital markets."
  6. Improving safety nets within developing countries to ease the burden on poor people of the economic risks that sometimes accompany crisis amelioration.
  7. Improving the response to crises by implementing policies and offering loans targeted at helping businesses stay alive and keeping workers employed.

Reforming the World Bank and Development Assistance

The World Bank's mission is directed more at poverty reduction than that of the IMF. The World Bank is, therefore, "more responsive to the concerns of developing countries." Its own studies showed that development requires a country to strive for a balanced budget, to invest in universal education, and to maintain economic and political stability. Yet, one of the most important pursuits for development was job creation, which is essential for economic growth. Once these basics are in place, a developing nation should focus on competition, entrepreneurship, and making existing businesses more efficient and competitive.


Assistance should be offered to developing countries without conditionalities that impose suffering through unemployment and often make the economic situation worse. Austerity measures should not be so stringent that they further impoverish the client nation's citizenry.

Debt Forgiveness

There are ways to lend developing nations money using global funds, such as those held by the IMF or money derived from international resources (i.e., seabed minerals). Because this money is given by all, it need not be repaid. Any overly burdensome debts a developing nation has should also be forgiven because debt repayment takes so much of the country's revenue that little is left for stimulating economic growth and for social services. Debt-relief programs need to be expanded so that more indebted nations can take advantage of them.

Reforming the WTO and Balancing the Trade Agenda

The inequities sustained by the IMF and WTO have led to worldwide protests against these organizations' unfair, Western-oriented policies. The WTO has been a particular target of protests. Its unfair trade agenda has actually made sub-Saharan Africa "worse off as a result of the last round of trade negotiations." The 2001 Doha round of trade negotiations was supposed to focus on development, including intellectual property rights, which it said should be balanced between the interests of producers and those of users—for example, making prescription drugs more affordable. Yet, as expected, the trade talks in Dubai favored producers over users. Ordinary people and the poor lost again. The issue of bio-piracy robs the poor host country of the use of its native flora and fauna. Drug companies gather medicinal plants in developing countries and then patent these living resources for use in pharmaceuticals. Few developing countries can afford to sue drug companies for the right to own their native living resources. The European Union has tried to address unfair trade practices by instituting an "everything but Arms" trade policy that allows free importation of goods (except weapons) from developing countries.

Toward a Globalization with a More Human Face

Making globalization fair and humane means taking into account a developing nation's culture and traditions, especially as they pertain to rural agriculture. Western control of globalization has thrust alien Western customs and modes of living and working on developing countries, and many of their citizens resent such intrusion and cultural disruption.

Developing countries able to take "charge of their own destiny," to decide for themselves how much to participate in globalization, have benefited the most. Those subject to the harshest IMF policies "have actually been made worse off" by globalization, not only economically but also politically and culturally. The author insists that globalization will be beneficial only if it is made more humane and takes the human experience of globalization into account. If not, instability in developing countries could spread to other countries, with negative effects felt worldwide.

As of 2002, the needed reforms had only begun to be discussed. The author states, "There need to be changes in institutions and in mind-sets." A multi-pronged strategy that includes reforms of global economic institutions is necessary. This strategy also entails developing nation-directed domestic reforms as well as the relinquishing of double-standard privileges so tightly and unfairly held by developed nations. In short, development should be about "transforming societies, improving the lives of the poor, enabling everyone to have a chance at success."


Accepting local input into the decision-making process is vital (if highly unlikely, as those in power do not willingly give it up). The IMF's secrecy creates an asymmetry of information, as does its practice of not giving its client countries a seat at the table. The economics of information, one of Stiglitz's main interests, requires governments to play a role in maintaining a stabilized free market achieving the ideal of perfect information. One of the most important reforms calls for greater transparency among these organizations and a real willingness to engage with representatives of developing nations. Recognizing that each country has its own culture and its own particular set of problems is a first step toward fashioning economic policies that actually work to help the nation's economy grow. To accomplish this, the IMF and WTO should give representatives from developing countries "a seat at the table," and one with actual power or influence on decision-making when policy decisions that will affect them are discussed and determined. This is especially important for developing nations in crisis or in transition, two situations that in the best of circumstances involve some types of disruption and dislocation for citizens. By consulting with nationals who understand local conditions, policies that limit economic disruption can be forged and implemented.

Client input is also an issue that affects democratic institutions as well as organizational governance. If the leaders of the IMF were more representative of the people they are charged with helping, decisions would reflect the aspirations and needs of citizens and not just the interests of Western finance. The author believes that this fundamental "change in governance" is what will make globalization work for all people. Bringing about such change is problematic because the West resists giving up even a bit of its control over these institutions. However, by relinquishing some of its control to client nations, the West would not only promote economic growth, it would also be acknowledging the importance of democracy and democratic processes in developing nations.

The inclusion of local input into the decision-making process should be approached in a way that permits, even ensures, the rollback of Western influence on policymaking. The IMF and the WTO must reexamine their ties to Western financial institutions and Western commercial interests, respectively. These organizations cannot serve two masters, and since their mandate is economic assistance to developing countries, their policies should not be dictated by developed countries. The hypocrisy that characterizes these organizations must be addressed and any double standards must be eliminated. The use of subsidies and tariffs denied to developing nations should also be denied to developed nations. If developed nations refuse to give up these protectionist policies, similar policies to protect domestic industries should be allowed in developing countries.

A key reform should address bias and inequity. It should be a change in mind-set away from serving special interests to serving the interests of developing nations, as well as global interests. Different Western nations have different types of capitalist economic systems, each modeled on their respective culture. So too should developing countries be free to adapt capitalism to suit their unique societal needs. Governments must play a part in shaping capitalism so that it relieves poverty, creates jobs, and promotes social justice. A balanced view of government's role "recognizes both the limitations and failures of markets and government" but understands the need for both to work in tandem.

Allowing for more client nation input would almost certainly entail a revision of the IMF's rigid adherence to its Washington Consensus ideology because these policies are so unresponsive to local conditions and have failed repeatedly to cure economic crises and promote economic growth. Abandoning its contractionary, anti-inflation, one-size-fits-all approach to economic downturns and admitting that its critics are correct in advising it to implement expansionary policies when a developing nation is in a recession would greatly improve the IMF's success rate, as well as its global reputation. The author points out that there are many different policies besides the Washington Consensus that would better address problems in developing nations. The imposition of its single ideological policy of liberalization means the IMF is depriving nations of the chance to make their own choices about development based on local needs and wants. Yet, the IMF's ideology blinds it to the benefits of openness and to other economic prescriptions. Flexibility based on a client nation's needs would go a long way toward creating a more humane form of globalization.

Several aspects of the IMF's ideological policies need to be changed but severe conditionalities and austerity are among the most destructive. The IMF's conditionalities—namely raising interest rates—are actually counterproductive when imposed on a developing country in economic crisis. Austerity, the cutting back of social programs, incites instability and exacerbates poverty. The author suggests that developing nations be given the opportunity "to choose for themselves their own development strategies," so long as they are otherwise economically sound.

Pace and sequence should also be taken into account. Too often developing nations have experienced economic crises because they were forced to implement liberalization policies before they had created the necessary regulatory and legal framework to oversee them. In developing nations, as in nations in transition, participation in the global liberal economy or global free trade should be introduced gradually and in the correct sequence. A solid financial infrastructure should be built and functional before gradually introducing liberal economic policies, particularly privatization, that are tried and accepted by the nation's citizens. The author believes that a slow easing into the rigors of globalization would likely give citizens of developing nations more time to adapt to the new global marketplace. A slower process of globalization would also very likely allow developing nations to build more democratic institutions while retaining their sovereignty. Perhaps most importantly, it should be up to the countries themselves to what degree they wish to take part in the global economy. It should not be forced upon them.

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