Globalization and Its Discontents

“Globalization itself is neither good nor bad. It has the power to do enormous good, and for the countries of East Asia, who have embraced globalization under their own terms, at their own pace, it has been an enormous benefit, in spite of the setback of the 1997 crisis. But in much of the world it has not brought comparable benefits. For many, it seems closer to an unmitigated disaster.”

Although the author is highly critical of the international institutions that uphold and regulate the process of globalization, he does not believe globalization itself to be the problem on an inherent level. Rather, he asserts that international free markets, just like domestic free markets, are capable of failure and need adequate regulation. Globalization is an inevitable process, but the international organizations that are supposed to regulate it are not doing so fairly.

“Modern high-tech warfare is designed to remove physical contact: dropping bombs from 50,000 feet ensures that one does not ‘feel’ what one does. Modern economic management is similar: from one’s luxury hotel, one can callously impose policies about which one would think twice if one knew the people whose lives one was destroying.”

This passage critiques the IMF for being too detached from the realities of the developing world. It highlights how insular and isolated its analysts are from the local situation, even though their decisions can have severe and lasting consequences. This standard procedure does not foster empathy and instead encourages IMF workers to see their project as merely an economic venture rather than a humanitarian endeavor.

“But the IMF did not want to take on the mere role of an adviser, competing with others who might be offering their ideas. It wanted a more central role in shaping policy. And it could do this because its position was based on an ideology—market fundamentalism—that required little, if any, consideration of a country’s particular circumstances and immediate problems.”

Despite its multiple failures to maintain economic stability in Asia after the 1997 crash, the IMF continues to pursue its old policy of market fundamentalism. This quote shows the institution’s hypocrisy: It touts the benefits of free trade and competition, but when Japan proposed to create an Asian Monetary Fund, it rejected the project to maintain its monopoly.

“There was a certain irony in the stance of the IMF. It tried to pretend that it was above politics, yet it was clear that its lending program was, in part, driven by politics.”

Along with the above quote, this passage serves to underline the IMF’s hypocrisy. The organization exports an ideology to developing countries yet makes an exception of itself whenever convenient. Since it continuously fails to practice what it preaches, the IMF has lost much of its credibility in the eyes of developing countries.

“Privatization needs to be part of a more comprehensive program, which entails creating jobs in tandem with the inevitable job destruction that privatization often entails.”

The IMF seems to believe privatization is an end in and of itself, but Stiglitz disagrees. This is especially the case when transitioning from a communist to a market economy. Without adequate institutions to protect laid-off workers, regulate interest rates, and encourage entrepreneurship, privatization left on its own will not automatically fill the gaps and immediately achieve efficient production. Rather, the process needs structure and planning adequate for the local situation to succeed. This passage ties into The Necessity of Regulation.

“Perhaps of all the IMF’s blunders, it is the mistakes in sequencing and pacing, and the failure to be sensitive to the broader social context, that have received the most attention—forcing liberalization before safety nets were put in place, before there was an adequate regulatory framework, before the countries could withstand the adverse consequences of the sudden changes in market sentiment that are part and parcel of modern capitalism; forcing policies that led to job destruction before the essentials for job creation were in place; forcing privatization before there were adequate competition and regulatory frameworks.”

This passage describes “shock therapy,” a school of thought that influenced the IMF’s policy in post-Soviet Russia and other ex-Communist bloc countries. This school of thought argued for a rapid transition from a centrally planned market to a free market, arguing that Russia might be tempted to fall back to communism if it did not quickly privatize, liberalize, and stabilize its economy. It ultimately failed to promote long-term growth, especially compared to Eastern European countries like Poland, which instead chose to transition its market at its own pace—a process defended by the “gradualist” approach.

“It is important not only to look at what the IMF puts on its agenda, but what it leaves off.”

Stiglitz argues that, as an opaque institution with decision-makers that are not elected, the IMF pursues a biased agenda that favors the financial community. To make sense of its failures, people should look not only at what it prioritizes but also at what it does not value at all. For example, the institution pursues macrostability, but it dismisses factors such as unemployment rate and job creation, thereby ignoring The Importance of Social Capital.

“The countries had been successful not only in spite of the fact that they had not followed most of the dictates of the Washington Consensus, but because they had not.”

This passage shows the extent to which the Washington Consensus has failed to encourage global economic stability. The IMF’s policies have time and again been shown to exacerbate or prolong economic depressions in places where they were implemented, such as in post-Soviet Russia, Indonesia, and Thailand. In contrast, countries such as China and Poland—which have transitioned to a market economy on their own terms—have demonstrated much greater success both in the short and long term.

“I believe that capital account liberalization was the single most important factor leading to the crisis.”

The collapse of the Thai baht is an instance of sudden capital flight caused by a reckless pursuit of capital account liberalization. This policy was imposed by the IMF. The subsequent chain reaction caused the 1997 Asian financial crisis, which had a profoundly destabilizing effect on the area.

“While the IMF had provided some $23 billion to be used to support the exchange rate and bail out creditors, the far, far smaller sums required to help the poor were not forthcoming. In American parlance, there were billions and billions for corporate welfare, but not the more modest millions for welfare for ordinary citizens.”

Since the IMF is headed by tycoons in the financial community, Stiglitz believes its policies are often biased toward protecting these people’s bottom lines. Bailouts are beneficial to creditors and investors, but this also implies that ordinary taxpayers shoulder the cost of the financial crisis.

“The leaders of the 1917 Revolution recognized that what was at stake was more than a change in economics; it was a change in society in all of its dimensions. So, too, the transition from communism to a market economy was more than just an economic experiment: it was a transformation of societies and of social and political structures.”

This passage highlights Stiglitz’s stance on economic reform and one of the key themes of the book: The author believes that free markets are not inherently self-sustaining and that there is The Necessity of Regulation as well. Markets require structure in the forms of adequate institutions and social stability. Societies transitioning from a centrally planned to a free-market economy require a systemic restructuring of society and time. Market forces by themselves are insufficient to accomplish this change.

“While the Bank and the IMF had seemingly taken a strong stance against lending to corrupt governments, it appeared that there were two standards. Small nonstrategic countries like Kenya were denied loans because of corruption while countries such as Russia where the corruption was on a far larger scale were continually lent money.” 

This quote demonstrates the IMF’s bias. It does not treat every country equally because it is mainly concerned with defending the interests of the US Treasury more than helping improve standards of living. Since the US was concerned with triumphing over communism, aiding Russia in transitioning to capitalism took precedence in spite of the widespread corruption there.

“Political judgments as much as economics lay behind the stances of the people at the Treasury. They worried about the imminent danger of backsliding into communism.”

This quote further defends the point Stiglitz made in the previous passage. It argues that the Fund’s programs are biased toward upholding ideology, sometimes at the cost of remaining impartial. Although its original mission was to maintain global economic stability, the IMF continues to fund unsound policies in Russia.

“As time went on, and the problems with the reform strategy and the Yeltsin government became clearer, the reactions of people both in the IMF and the U.S. Treasury proved not unlike those of officials earlier inside the U.S. government as the failures of the Vietnam War became clearer: to ignore the facts, to deny the reality, to suppress the discussion, to throw more and more good money after bad.”

Ideological dogmatism causes the IMF to fall for the sunk cost fallacy. The IMF and the US Treasury continue to pour money into Russia to uphold free-market ideology, even at the cost of funding unsound policies that prolong economic stagnation and that bring no benefit to the US. This same desire to fight communism once perpetuated US involvement in Vietnam despite its heavy costs on the US economy and society.

“Whereas China’s transition has entailed the largest reduction in poverty in history in such a short time span (from 358 million in 1990 to 208 million in 1997, using China’s admittedly lower poverty standard of $1 a day), Russia’s transition has entailed one of the largest increases in poverty in history in such a short span of time (outside of war and famine).”

This passage is meant to demonstrate the extent to which the IMF’s policies were detrimental to economic development in Russia. Whereas China ignored the Fund’s advice and began social reforms on its own terms, Russia quickly transitioned into a market economy at the insistence of the IMF. It quickly privatized without first establishing sound regulatory institutions, exacerbating corruption and lowering the standard of living.

“The ultimate irony is that many of the countries that have taken a more gradualist policy have succeeded in making deeper reforms more rapidly.”

Here, Stiglitz warns against being shortsighted when it comes to large economic reforms. Changes in market structure often need time because industries are easy to destroy but hard to rebuild. Similarly, entrepreneurship is a skill that requires time to develop. Infrastructures are not established overnight. As a result, Stiglitz believes that slower transitions that account for the specificities of a country’s domestic market are often deeper and more stable in the long run.

“The hubris of those in the Clinton administration and the IMF, that they could ‘pick’ those to support, push reform programs that worked, and usher in a new day for Russia, has been shown for what it was: the arrogant attempt by those who knew little of the country, using a narrow set of economic conceptions, to change the course of history, an attempt that was doomed to failure.”

This passage elaborates on the point defended in the previous quote. Meaningful socioeconomic reforms are usually achieved domestically, and foreign forces often do not exercise real power over these processes. The IMF’s failure to recognize this has encouraged corruption and reduced the standard of living in post-Soviet Russia.

“Keynes not only identified a set of market failures; he explained why an institution like the IMF could improve matters […] Today, however, market fundamentalists dominate the IMF; they believe that markets by and large work well and that governments by and large work badly.”

This quote demonstrates how much the IMF has changed from its original raison d’être. Although it was originally created to uphold global economic stability when failures inevitably happen, it is now defending a market free of government or institutional intervention. This is why it defends rapid liberalization and privatization as the keys to economic growth, leading to The Failures of Market Fundamentalism and IMF Policy.

“The Fund was created to deal with the liquidity crises caused by the credit market’s occasional irrationality […] Now, the IMF was handing power over its lending policies to the same individuals and institutions that precipitated crises. Only if they were willing to lend could it be willing to lend.”

This references the IMF’s adoption of “bail-in” policies, which force private sector investors to shoulder part of the bailout funds should their venture prove unfruitful. As an institution developed to lend liquidity to alleviate the need for large bailout sums at times of financial crises, the fact that it refuses to lend money to countries like Romania who maintain good credit is profoundly ironic.

“Moreover, the IMF’s behavior should come as no surprise: it approached the problems from the perspectives and ideology of the financial community, and these naturally were closely (though not perfectly) aligned with its interests.”

Stiglitz believes that the IMF’s seemingly contradictory policies can all be explained by examining the people who head it, such as the US Treasury and the financial community. Since its actions are in large part influenced by these people, and since these people benefit most from rapid capital liberalization, it is expected that its policies lean toward market fundamentalism.

“There was an even more profound issue at stake. The U.S. Treasury had during the early 1990s heralded the global triumph of capitalism. Together with the IMF, it had told countries that if they followed the ‘right policies’—the Washington Consensus policies—they would be assured growth. The East Asia crisis cast doubt on this new world-view unless it could be shown that the problem was not with capitalism, but with the Asian countries and their bad policies.”

In this passage, Stiglitz once again highlights the IMF’s tendency to shift the blame for its unsound policies onto developing countries. If the IMF admits to its mistakes, it could threaten capitalism, the ideology it fights to uphold. The US Treasury is also concerned with this issue as one of the governing forces of the IMF.

“Globalization today is not working for many of the world’s poor. It is not working for much of the environment. It is not working for the stability of the global economy.”

The author points out that globalization is not always a self-regulating force. Without proper regulation, it can be profoundly destructive to the environment and the livelihoods of ordinary people. Later, Stiglitz argues that for globalization to do good, it must be overseen by responsible international institutions that believe in maintaining global stability and social justice (235), pointing toward The Necessity of Regulation.

“I believe that globalization can be reshaped to realize its potential for good and I believe that the international economic institutions can be reshaped in ways that will help ensure that this is accomplished.”

This quote demonstrates Stiglitz’s optimism. Although much of his book highlights the pitfalls of globalism and of the institutions that uphold it, he ultimately believes in the inevitability of the globalization process and the necessity for reform. He argues earlier that, although the IMF and World Bank are slow to change, they have made efforts toward being more transparent.