52 pages • 1 hour read
Joseph E. StiglitzGlobalization and Its Discontents
Nonfiction | Book | Adult | Published in 2002A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.
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The Failures of Market Fundamentalism and IMF Policy
Stiglitz’s criticism of the IMF mainly centers around the topic of market fundamentalism. This economic concept is founded on the belief that free markets are self-regulating and do not require government intervention to operate optimally. However, market fundamentalism has time and again been proven to be imperfect in practice. Several factors—such as a lack of information or adequate institutions—can cause a market to fail without adequate governmental intervention. These factors are either not accounted for or presumed to be perfect in the free-market economic model. For example, at the microeconomic level, information is often presumed to be perfect, so consumers always make rational purchase decisions. This is clearly not the case in practice.
Stiglitz’s discontent stems not from the theory itself—economic predictions and models are never perfect, as they cannot account for everything—but from the IMF’s pursuit of it as an end in and of itself. In other words, the IMF’s defense of market fundamentalism is ideological rather than logical, causing the institution to repeatedly ignore signs of its failure and find ways to justify its actions. For example, in Chapter 5, Stiglitz highlights that Russia’s transition from a centrally planned economy to a market economy was far too abrupt to be successful.
The IMF pushed Russia to pursue privatization, liberalization, and macroeconomic stabilization without first establishing the foundational structures that would uphold such a large-scale structural change. Banks, which had previously only lent money based on governmental regulation, were now to regulate their own interest rates. Sectors were forced to privatize, but no one except those already in power could take advantage of this: There was a lack of entrepreneurship because prices are regulated by the government under centrally planned economies. Inflation decimated people’s savings while banks were still setting up credit policies. In other words, these processes, which market fundamentalism would deem automatic, could not happen on their own in practice without proper guidance.
Stiglitz underlines that market fundamentalism can be not only destabilizing but also destructive. He does this by comparing Russia’s economic growth in the 1980s to that of Poland. They are both ex-Communist countries, but only Russia underwent the IMF’s “shock therapy”—rapid and unregulated privatization and market liberalization. Poland instead focused on societal change, promoting land reform and building solid institutions for a healthy market economy. It did so at its own pace. As a result, whereas corruption eroded social capital in Russia, causing a wide income disparity and a decrease in standard of living, Poland saw its growth rates increase steadily and its wealth better distributed.
Stiglitz therefore argues that the IMF’s dogged pursuit of market fundamentalism is completely inadequate in helping developing countries grow. It encourages the international institution to be inflexible in its stance, exacerbates the accumulation of wealth in the hands of the elite, and fails to encourage the establishment of social and structural infrastructures integral to the proper functioning of a market economy.
The Necessity of Regulation
Stiglitz believes globalization is inevitable: The more countries develop, the more they become mutually reliant for resources, capital, information, and technology. He also highlights that the economic growth that comes from globalization is not guaranteed to be distributed equally. When managed well, growth from globalization can be a force for good: In China, it has helped the country establish a solid middle class and improved the standard of living. However, when managed poorly, globalization can also deepen social problems: In post-Soviet Russia, not only did the standard of living decrease, but corruption also became more rampant and wealth inequality grew significantly. This, Stiglitz argues, points to the necessity of regulation to make globalization work for all.
Globalization fails when markets are expected to be self-regulating when they are in fact imperfect. This is especially the case for emerging markets: Developing countries do not yet have the proper structures to ensure market stability, and even developed countries with structural fail-safes are not guaranteed to be free of economic crises. This is why Stiglitz strongly argues in favor of establishing reliable international institutions that will help regulate globalization and turn it into a force that encourages equitable growth and collective action. He proposes that this should be done by ensuring macrostability—the maintenance of global aggregate demand—and by paying attention to other indices, such as unemployment rate and social capital, which can affect consumer behavior and the standard of living.
The author establishes early on in Globalization and Its Discontents that existing international organizations have fallen short of accomplishing this goal. In fact, some recent economic crises, such as the Asian financial crisis of 1997, occurred as a direct result of a poor management of globalizing forces. More specifically, the IMF, the US Treasury, and even the World Bank’s involvement in this region has been inadequate in reducing poverty and improving standards of living. One of the main reasons for this failure is their ideological pursuit of market fundamentalism—the Washington Consensus—the shortcomings of which are explored in detail in the theme above.
Stiglitz cites another reason for the 1997 financial crisis: The IMF and the US Treasury pursued financial market liberalization too quickly, ultimately increasing macroinstability and precipitating the massive capital flight that occurred after the collapse of the Thai baht. Protectionist policies that reduce imports and exports also affect neighboring countries, which rely on trading resources to maintain low production costs. Thus, the crisis expanded to affect the entire region.
This example teaches two key lessons. First, domestic economic crises will increasingly impact the international scene as globalization deepens. Second, unregulated or poorly regulated markets are volatile and can be detrimental to both short-term and long-term economic growth. These are the reasons why Stiglitz believes it is crucial that existing international regulatory structures, such as the IMF, are reshaped into a force that encourages global equitable growth. This is what he calls “collective action.”
The Importance of Social Capital
Real markets are imperfect. This is the key reason Stiglitz remains skeptical of market fundamentalism: It is a theory predicated upon economic models that assume perfect information circulation, rational decision-making, and flawless infrastructures. It does not factor poverty and unemployment rate as indices that can affect a country’s overall economic performance. As a result, it cannot entirely explain why markets are prone to failure when they should be self-regulating. Stiglitz believes there are practical factors that can affect a market’s performance that are either excluded or difficult to include in theoretical models. This is the case of social capital, which is defined as the glue that holds society together and is difficult to measure quantitatively. Stiglitz argues that its importance needs to be factored into economic policies.
Social capital erodes when people stop cooperating and trusting each other. This, in turn, affects the economy negatively because it does not encourage buyer confidence and can reduce aggregate demand. For example, if corruption is rampant, entrepreneurs might hesitate to take out loans and banks might increase interest rates. In severe cases, a prolonged erosion of social capital can cause domestic unrest, further disrupting the economy. This was the case for Argentina and Indonesia, both victims of ineffective IMF programs.
In Globalization and Its Discontents, Stiglitz calls for a reform in the IMF because its rigid economic models have time and again failed to take into account the impact these social indices can have on a developing country’s economy and macrostability. Although the IMF was founded on Keynesian principles—which do take into account social indices—its shift toward a free-market ideology in the late 1970s has set it on the opposite path, which it has clung to despite evidence of its numerous policy failures.
Stiglitz finds fault in both the Fund’s ideology and its execution. On one hand, the international organization continues to promote a one-size-fits-all solution to every developing country, disregarding local circumstances and dismissing insights provided by local experts. On the other hand, its market analysis process, which involves sending an IMF representative to the developing country for three weeks and lodging them in luxury hotels, hardly invites a genuine understanding and care for the local situation. These factors further obscure the impact social indices can have on a country’s economic growth.
Stiglitz calls for a reform of these international organizations to reflect these social indices. He argues, morally, that poverty and unemployment rates should be addressed, even when other macro indices are adequate. Most importantly, he also proves that ignoring these indices is counterproductive in the long run. In other words, any policy that attempts to maintain macrostability, both domestic and global, should factor in social indices when doing analyses and projecting growth models. It is social stability—not only economic stability—that invites investor confidence. Prolonged unemployment, meanwhile, can negatively impact productivity and consumption levels. Broader structural changes, such as improving literacy levels and establishing social safety nets, are also factors that affect market stability.
Stiglitz concludes that, to account for imperfections in real markets, international organizations such as the IMF should learn to adapt and complicate their economic models in response to the local situation. Rather than impose their rigid ideological vision, they should respect the insights provided by local experts and consider social indices. This, in turn, will encourage equitable economic growth in the long run, both domestically and globally.
