Globalization and Its Discontents
Originally Published at Peace and Conflict Monitor on: 04/28/2003
Category: Book Review
The author, one of the most eminent practising economists, has argued for reform of the international financial system. He is convinced that many of today’s ill can be laid at the door of the institution, the IMF, that was formed to help prevent those ills.
Joseph Stiglitz, joint Nobel prize winner for Economics in 2001, does not mince his words. The IMF with the help of the US Treasury and a small number of other players, has been behind every bad policy move of the nineties. He claims that the IMF, WTO, the World Bank and a few others closely linked to certain financial and commercial interests dominate the scene whereas those most affected are voiceless. His conclusion is simple: change the rules governing the international economic order. Globalization, he argues, is neither good nor bad: while it has the power to do good, for many it has brought unmitigated disaster. It is time for reform.
INSIDE THE BELLY OF THE LEVIATHAN
Stiglitz thus joins other recent solid establishment figures like George Soros who argue from the inside that the system suffers many shortcomings. His inside experience was with the World Bank as Chief Economist and before that as a key Clinton advisor and Cabinet member. But his main target is the IMF. The book is studded with examples of how the IMF went badly wrong, and how the World Bank was generally right or at least less wrong. His solutions are exhortations for institutional change of the major international economic governing bodies.
While it is welcome news to hear criticisms form inside the belly of the Leviathan, it is disappointing to find an absence of hard economic analysis. At least in the nineteenth century when international capitalism was growing rapidly out of the economic development of Western Europe, reformists such as John Stuart Mill accompanied their policy prescriptions with well developed theorising, and retained a commitment to political economy, for good or ill, as their major theoretical position. No such luck with Stiglitz. For one thing his history stretches only as far back as the Depression, to which there are around 14 references, though he insists on calling the Depression of the 1930s the Great Depression, a term reserved by economic historians for the period 1873-96.
ABSENCE OF THEORY
As an example of the elusiveness, even, absence, of theory, let’s look a bit more closely at Chapter 4, which discusses the East Asia Crisis. Stiglitz lays the blame for the crisis in East Asia at the door of the International Monetary Fund (IMF).
- “When the Thai bath collapsed in July 2 1997 no one knew that this was the beginning of the greatest economic crisis since the Great Depression…the crisis is over now (2002)…Unfortunately the IMF policies imposed during these tumultuous times worsened the situation….Indeed, in retrospect, it became clear that the IMF policies not only exacerbated the downturns but were partially responsible for the onset.” (p. 89)
How can this be? The IMF had been set up precisely to prevent the international transmission of depressions, recessions or whatever? Stiglitz continues:
- “…excessively rapid financial and capital market liberalization was probably the single most important cause of the crisis.” (p. 89)
Of course, this was not the view of the IMF, which blamed the Asian governments of Malaysia, Singapore, Thailand, S Korea, Indonesia as well their form, ironically, of crony capitalism. Stiglitz, rightly, was shocked by the IMF response since over the previous quarter of a century it was those very Asian governments, for good or ill, which had been central and successful in the economic advance of their national economies. Overnight, governments, which had performed economic miracles and achieved previously unheard of economic growth rates and increases in per capita incomes, were suddenly pilloried by the US Treasury and the IMF.
Stiglitz is unequivocal when it comes to laying blame. The IMF, led by the US government, had caused and exacerbated the massive falls on the East Asian stock markets, which, in turn, had led to the fall in the value of shares, the reduction in levels of production in the real economy and massive hardship for millions as a result of a substantial rise in unemployment.
- “The crisis economies of East Asia were clearly threatened with a major downturn and needed stimulation. The IMF pushed exactly the opposite course, with consequences precisely of the kind that one would have predicted.” (p. 105)
He then unwraps what should have been done by the IMF. It should have maintained the economy as close to full employment as possible: made sure there was a steady flow of finance; restructured institutions where necessary; changed bankruptcy laws; and restructured debt repayment. Stiglitz seems quite flummoxed as to why this was not done. To him Economics seems to be about actors and institutions. Get the actors to act correctly and fix the institutions and you can solve the problem. He seems unable to explain why this was not done.
ASKING THE RIGHT QUESTION
We have to ask, therefore, a fairly simple question, which Stiglitz does not, nor do most economists or economic journalists. What was the economic function of the Asian crisis?
The answer, arising from the argument that the globalized economic system suffers from a tendency toward overproduction, which puts pressure on the rate of profit, is that the function of the East Asian crisis was to write off the capacity to accumulate capital in the East Asian economies in the interest of maintaining either mass profit, or better still the rate of profit, in the USA. If it were possible to establish that the fall of the rate of profit is the key motor force, then it would be possible to say that the real crisis is the process of overproduction (and it is this that needs reforming) whereas the financial crisis, as with most financial crises, is the solution to the crisis. (We can say the same with the recent history of the US stock markets. When the DOW fell 2000 points and the NASDAQ 3,500 points, many investors may have suffered but what was happening was the gap between the real economy and the price of financial instruments had to be narrowed. The falls on the stock markets represented the solution not the crisis, which actually precedes the stock market falls).
It is in this sense that Stiglitz is disappointing: he neither offers nor attempts a novel theory even though he acknowledges that such theory is wanting. He mentions Keynes several times as one might expect, as he was the economist who did most to establish the modern international system of economic governance, but he finds a theoretical vacuum if Keynesianism is abandoned: “…today’s IMF has, in my judgement, not articulated a coherent theory of market failure.” (p. 197) The IMF lacks theory but, sadly, so does this otherwise worthy book. Perhaps, Stiglitz might cast his powerful brain over the theory of the tendency of the rate of profit to fall. It might just hold the key for understanding the anti-Keynesian policies of the IMF.
At least we can venture a guarded agreement with Stiglitz. Globalisation holds the potential to do good: unfortunately it has the power to bring disaster, too. The globalized world provides the key backdrop for those of us that make peace and conflict studies our special purpose. It helps to know that Stiglitz is on our side. It is a pity he hasn’t been able to take us further in our understanding than he has. Perhaps he will.