Where Global Markets Are Going Wrong

By Michael J. Mandel


By Joseph E. Stiglitz

W.W. Norton -- 282pp -- $24.95

It has long been an article of faith in the American economics profession that globalization--in the form of free trade and open markets--is both beneficial and inevitable. Even if globalization has its problems, conventional wisdom holds that there are no good alternatives.

In his new book, Globalization and Its Discontents, Joseph E. Stiglitz disagrees. Stiglitz is a scion of the economic Establishment, with an almost unmatched list of accomplishments: Winner of the Nobel Prize in Economics in 2001, chairman of the President's Council of Economic Advisers under Bill Clinton, chief economist of the World Bank, and now professor at Columbia University. This rare mix of academic achievement and policy experience makes Globalization and Its Discontents worth reading.

The main point of the book is simple: Globalization is not helping many poor countries. Incomes are not rising in much of the world, and adoption of market-based policies such as open capital markets, free trade, and privatization are making developing economies less stable, not more. Instead of a bigger dose of free markets, Stiglitz argues, what's needed to make globalization work better is more and smarter government intervention.

While this has been said before, the ideas carry more weight coming from someone with Stiglitz' credentials. Moreover, his passion and directness are a breath of fresh air given the usual circumlocutions of economists. "Critics of globalization accuse Western countries of hypocrisy," he writes, "and the critics are right." He notes that industrial countries have held onto their trade barriers on such industries as agriculture while demanding that developing nations lower their tariffs.

In some ways, this book has the potential to be the liberal equivalent of Milton Friedman's 1962 classic Capitalism and Freedom, which helped provide the intellectual foundation for a generation of conservatives. But Globalization and Its Discontents does not rise to the level of Capitalism and Freedom. While Stiglitz makes a strong case for government-oriented development policy, he ignores some key arguments in favor of the market. In particular, even if government intervention works in theory, many developing countries don't have the sort of professional institutions that could implement good policies.

Globalization and Its Discontents is also repetitious, with stretches of ponderous prose. And even though Stiglitz is aiming for a popular audience, the book could use more data to back up his assertions.

Still, Stiglitz makes his case effectively. The book's main villain is the International Monetary Fund, the Washington organization that lends to troubled countries. Stiglitz' contempt for the IMF is boundless. "It is clear that the IMF has failed in its mission," he declares. "Many of the policies that the IMF pushedhave contributed to global instability." Stiglitz argues that the organization made multiple mistakes handling the Asian crisis of 1997, the Russian crisis on 1998, and even the latest problems in Argentina.

In fact, the author argues, the IMF policies of fiscal austerity, privatization, and market liberalization show little evidence of being an effective road for growth. Instead, East Asian countries such as China and Korea have succeeded precisely because they did not follow most of the dictates of the Washington consensus. After the Asian crisis, for example, Korea accepted a bailout package from the IMF but resisted most of its reform demands, including advice to get rid of excess capacity in the semiconductor industry. Stiglitz argues that in contrast, Thailand followed IMF prescriptions "almost perfectly." The results: Korea recovered much faster than did Thailand.

Stiglitz observes that the IMF's objectives have changed "from serving global economic interests to serving the interests of global finance." He is caustic when he talks about top officials of the IMF ending up going to work for large financial institutions. One example: Stanley Fischer, deputy managing director at the IMF during the Asian and Russian crises, is today vice-chairman at Citigroup. Writes Stiglitz: "One could only ask, was Fischer being richly rewarded for having faithfully executed what he was told to do?"

Stiglitz offers alternatives to the IMF's policies. An example: When a developing country faces a financial crisis, he suggests keeping interest rates low instead of raising them and worsening the recession. It's also vital to keep credit flowing, he says, rather than closing banks, as the IMF suggests.

While Stiglitz agrees that privatization, open capital markets, and free trade are fine ideas in the long run, he argues that slow reform is best. Instead of issuing mandates, the IMF should use its resources to help fund health and literacy efforts, says Stiglitz.

The author's prescriptions have their own problems, though. For example, he predicts that growth in Russia will succeed only if the country creates an "investor-friendly environment." But that may be difficult, he admits, without drastic political reforms.

Still, just as Friedman's book helped to legitimize certain pro-market ideas before they became popular, so may Globalization and Its Discontents give additional weight to a new conception of globalization. That would be no small accomplishment.

Mandel is BusinessWeek's chief economist.

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