Making Globalization Work

Joseph E. Stiglitz, a Nobel Prize-winning economist who served as chair of the Council of Economic Advisers under President Clinton (1993–1997) and as senior vice president and chief economist of the World Bank (1997–2000), builds on his earlier book Globalization and Its Discontents to argue that globalization's failures stem not from globalization itself but from the way it has been managed. Drawing on his academic research into the economics of imperfect information, which showed that unregulated markets do not automatically produce efficient outcomes, he contends that "market fundamentalism," the belief that free markets by themselves produce optimal outcomes, has been discredited. The book proposes concrete reforms across trade, intellectual property, natural resources, the environment, corporate governance, debt, and the global financial system.

Stiglitz opens by contrasting two gatherings he attended in January 2004: the World Social Forum in Mumbai, where over 100,000 activists rallied under the motto "Another world is possible" and agreed that globalization had benefited some while leaving others worse off, and the World Economic Forum in Davos, where the global business elite expressed relief that the economy was recovering, though some participants questioned whether globalization was delivering promised benefits to poorer countries. He identifies five core grievances: the rules of globalization are unfair and designed to benefit wealthy nations; material values are prioritized over the environment and human life; developing countries have lost sovereignty over their own economic decisions; many people in both rich and poor countries have been made worse off; and the economic model pressed upon developing countries has often been inappropriate, amounting to an Americanization of policy and culture.

The evidence on poverty reinforces these complaints. Outside of China, which managed globalization carefully by restricting speculative capital and maintaining state-guided growth above 7 percent annually, poverty in the developing world increased over the two decades preceding the book's publication. Approximately 40 percent of the world's 6.5 billion people lived in poverty, and in Africa, the share in extreme poverty rose from 41.6 percent in 1981 to 46.9 percent in 2001. Stiglitz identifies six areas of acknowledged failure: the persistence of poverty, the need for foreign aid and debt relief, the aspiration for fair trade, the limitations of rapid liberalization, the imperative to protect the environment, and flawed global governance marked by a democratic deficit in institutions like the International Monetary Fund (IMF), where developing countries' voices are inadequately represented.

Turning to development, Stiglitz contrasts East Asia, which averaged 5.9 percent growth over thirty years, with Latin America, sub-Saharan Africa, and the former Soviet Union, all of which stagnated or declined under Washington Consensus prescriptions of privatization, deregulation, and rapid liberalization. East Asian governments expanded education, invested in infrastructure, promoted specific industries, and opened their economies gradually. Latin America, which embraced these policies more thoroughly, saw growth in the 1990s fall to half the rate of earlier decades. In the former Soviet Union, "shock therapy," meaning rapid privatization and liberalization, produced hyperinflation, asset stripping by a new class of oligarchs, and a tenfold increase in poverty. In Africa, structural adjustment programs—IMF and World Bank loan conditions requiring privatization, deregulation, and rapid market liberalization—opened markets to foreign goods but gave African countries little to sell abroad. Stiglitz argues that successful development goes beyond gross domestic product (GDP) growth to encompass health, education, equity, and sustainability, citing the Grameen micro-credit bank in Bangladesh as evidence that local participation can transform lives.

On trade, Stiglitz uses the North American Free Trade Agreement (NAFTA) as a case study. Despite predictions that the agreement would close the income gap between Mexico and the United States, the gap grew by more than 10 percent in NAFTA's first decade, and poor Mexican corn farmers were forced to compete with heavily subsidized American corn. The Uruguay Round of trade negotiations, completed in 1994, was deeply asymmetric: Sub-Saharan Africa lost approximately $1.2 billion annually, and tariffs imposed by rich countries on developing-country goods averaged four times those on goods from other wealthy nations. Stiglitz proposes that rich countries open their markets to poorer ones without reciprocity, eliminate agricultural subsidies, end tariff escalation (the practice of imposing higher tariffs on processed goods than on raw materials), and curb the abuse of dumping duties (trade penalties on imports sold below alleged fair value) through international tribunals.

The chapter on intellectual property targets the TRIPs agreement (Trade-Related Aspects of Intellectual Property Rights), signed at Marrakech in 1994, which forced developing countries to adopt the patent and copyright standards of advanced industrial nations. Stiglitz argues that TRIPs raised drug prices to levels unaffordable for the world's poor. Patents create monopolies, and knowledge is by nature a "public good" that can be shared at no additional cost, so restricting access is inherently inefficient. He proposes less restrictive intellectual property regimes for developing countries; compulsory licensing, which allows generic manufacturers to produce a patented drug without the patent holder's consent, for lifesaving drugs; a prize-based innovation fund for research on diseases of the poor; and international agreements protecting traditional knowledge and prohibiting bio-piracy, the patenting of indigenous knowledge by foreign corporations.

Stiglitz devotes a chapter to the "resource curse," the paradox that countries rich in natural resources often have lower growth and higher poverty than those without. Nigeria earned almost a quarter of a trillion dollars in oil revenues over three decades yet saw per capita income decline by over 15 percent. Resources breed conflict and corruption: in Sierra Leone, fighting over diamonds killed 75,000 people. The "Dutch disease" compounds these problems, as foreign exchange inflows from resource sales drive up the local currency and make other sectors uncompetitive. Stiglitz proposes transparency initiatives, reductions in arms sales, fair contract norms, and enforcement through trade sanctions.

On the environment, Stiglitz frames global warming as the most critical global problem, noting that the United States emits close to 25 percent of all greenhouse gases yet refused to ratify the Kyoto Protocol (1997). He proposes trade sanctions against countries that refuse to reduce emissions, a Rainforest Coalition initiative compensating developing countries for preserving forests, and a common carbon tax as an alternative to negotiated country-by-country emission targets.

Regarding multinational corporations, Stiglitz acknowledges their benefits in transferring technology and channeling investment but argues that the pursuit of profit creates systemic problems when private incentives diverge from social costs. He proposes global competition law, reformed corporate governance with personal executive accountability, international legal frameworks for cross-border accountability, and enforceable anti-corruption measures. On debt, he argues that developing countries are trapped in cycles of borrowing and crisis, with lenders sharing blame for designing contracts that shift risk to borrowers while IMF bail-outs insulate Western banks from the consequences of reckless lending. He proposes international bankruptcy laws, counter-cyclical lending (in which international lenders increase credit to struggling countries during downturns rather than withdrawing it, as private lenders typically do), and a doctrine of "odious debt" under which debts incurred by oppressive regimes would carry a presumption against repayment.

Stiglitz's most ambitious proposal addresses the global reserve system. Developing countries hold over $3 trillion in reserves, mostly in low-yielding U.S. Treasury bills, at an opportunity cost exceeding $300 billion per year. He proposes replacing the dollar-based system with "global greenbacks," a new form of international reserve currency modeled on the concept proposed by the British economist John Maynard Keynes. Annual emissions of $200 billion to $400 billion would offset the deflationary effect of reserve accumulation and finance global public goods including health research, environmental protection, and education.

In his concluding chapter, Stiglitz argues that economic globalization has outpaced political globalization, producing a governance gap. He calls for a new global social contract between developed and developing countries, encompassing fairer trade, reformed intellectual property, action on global warming, increased financial assistance, extended debt forgiveness, and stronger representation for developing nations in international institutions. In an afterword to the 2007 paperback edition, he notes that the problems he identified have intensified: the Doha Round of trade talks stalled, a February 2007 scientific report confirmed human-caused global warming without producing consensus on emission reductions, the U.S. trade deficit reached $856.7 billion in 2006, and modest IMF voting reforms failed to address the institution's fundamental legitimacy problem.