Globalization and Its Discontents

Hardcore anti-globalization activists likely greeted the 2002 publication of Joseph Stiglitz’s Globalization and Its Discontents with the sense that a justification of their protests from a mainstream, authoritative source had arrived. After all, Stiglitz is a Nobel Prize-winning economist who has served as President Clinton’s chief economic adviser and president of the World Bank. But the book’s message is not so simple. From the outset, Stiglitz maintains alongside his ideological adversaries not only that globalization is here to stay, but that it carries with it the potential for improving the lot of the world’s poor.

Where Stiglitz parts company with his opponents is in his objection to what he terms "market fundamentalism," an ideology which holds that unregulated, unrestrained free market capitalism is the road to prosperity for all. Stiglitz finds the "Washington Consensus" that governs the actions of international financial organizations like the International Monetary Fund firmly rooted in this ideology, and it is the IMF which happens to be the bete noir of his book.

In Stiglitz’s account, the IMF was conceived in 1944 at the famous Bretton Woods meetings, whose purpose was to devise an economic framework for the postwar reconstruction of Europe. The field of economics was at that time dominated by the thought of John Maynard Keynes, who taught that markets, left on their own, often functioned poorly, that significant government regulation was thus needed, and that during hard times, an economy ought to be treated with expansionary policies that maintain employment and stimulate "aggregate demand," rather than be allowed to contract further through fiscal austerity measures which seek to reduce government spending.

The IMF, then, was designed to employ these Keynesian principles in the administration of the macroeconomic affairs (e.g., managing deficits, monetary policy) of countries in the need of aid. In the years since its inception, however, two things happened. First, as commonly happens in any large bureaucratic institution, the IMF fell victim to "mission creep"–that is, it started to extend its reach beyond its core competency in macroeconomics to offer recommendations in structural economic matters (e.g., stimulating competition, efficiency). Second, it betrayed its Keynesian heritage and took up the cause of the Washington Consensus, preaching the triumvirate of fiscal austerity, privatization and market liberalization.

What was the cause of this shift of allegiance? Stiglitz admits that the set of policies that came to be known as the Washington Consensus had considerable validity when first applied in Latin America during the 1970s and 80s. Governments there were profligate spenders and notoriously corrupt. Stiglitz argues, however, that these policies were later generalized and applied—with disastrous consequences—to countries whose circumstances were altogether different. Stiglitz charges the IMF and other defenders of the Washington Consensus with blindly adhering to a simplistic ideology that ignores evidence which suggests a more interventionist approach.

Among the most controversial aspects of Stiglitz’s book is his suggestion that the reason for the IMF’s adherence to a market fundamentalist ideology is that it works to protect the interests of Wall Street and the financial community, rather than the people of the countries where it operates. He summarizes the motivations of that community thus:

Wall Street regards inflation as the worst thing in the world: it erodes the real value of what is owed to creditors, which leads to increases in interest rates, which in turn lead to declines in bond prices. To financiers, unemployment is far less of a concern. For Wall Street, nothing could be more sacrosanct than private property; no wonder then the emphasis on privatization. Their commitment to competition is far less passionate…. And notions of social capital and political participation may never appear on their radar screen.

Regarding the first of these aspects of the Wall Street mentality, Stiglitz describes a typical IMF intervention:

The billions of dollars which it provides are used to maintain exchange rates at unsustainable levels for a short period, during which the foreigners and the rich are able to get their money out of the country at more favorable terms (through the open capital markets that the IMF has pushed on the countries).

The temptation to lay the blame for the collapse of developing economies at the feet of powerful rich-world organizations like the IMF becomes even stronger when one considers the hypocrisy inherent in the insistence on market liberalization in poor countries. Stiglitz offers a particularly illuminating example:

Bolivia not only brought down its trade barriers to the point that they were lower than in the United States but also cooperated with the United States in virtually eradicating the growth of coca, the basis of cocaine, even though this crop provided a higher income to its already poor farmers than any alternative. The United States responded, however, by keeping its markets closed to alternative agriculture products, like sugar, that Bolivia’s farmers might have produced for export–had America’s markets been open to them.

As recent events at the WTO meetings in Mexico have shown, Western European countries have proved similarly unwilling to open its markets.

But rather than charging IMF leadership with malicious greed, Stiglitz claims that they are (mis)guided by the notion that "what the financial community views as good for the global economy is good for the global economy and should be done. In some instances," Stiglitz concedes, "this is true; in many it is not." Stiglitz asks that the IMF and other global financial institutions discard uncritical ideology as a basis for decision-making and pay closer attention to empirical evidence that shows "what works" in restoring health to an ailing economy. As Stiglitz implies, with a rational approach of this kind we can expect that in some cases the interests of the financial community will intersect with those of citizens of countries under IMF tutelage; in others, they will not.

IMF policy failures in countries like Indonesia and Argentina showed that "excessive austerity led to high unemployment, without an adequate safety net, which in turn contributed to high levels of urban violence, an environment hardly conducive to investment." Stiglitz, like Keynes, places a premium on policies that encourage stability by, for example, maintaining high employment and availability of public services, and which thereby honor the "social contract" that binds a government to its constituents. One way that the IMF can become an organ which fosters respect for that contract is to become more transparent. As Stiglitz notes, international financial organizations are not subject to the kind of transparency that characterizes other organizations in a democratic society—too many of its dealings go on behind closed doors. There’s no equivalent to the Freedom of Information Act to permit ordinary citizens access to the activities of these entities.

Stiglitz’s recommendations for dealing with countries in need of economic aid contrast notions like "gradualism" and "sequencing" with the privatize, liberalize, and economize now approach employed by the IMF, and offers case studies showing how countries such as Zimbabwe, Poland and South Korea, which ignored IMF advice in favor of the kinds of policies Stiglitz advocates, prospered.

The enemy Stiglitz engages is a camp that has an "overly optimistic view of markets and overly pessimistic view of government." While Stiglitz provides ample evidence that markets usually cannot, on their own, efficiently generate and fairly distribute wealth, he does leave himself somewhat open to the charge of not taking seriously enough the corruption and inefficiency that can result from excessive government intervention.

Still, after reading Globalization and Its Discontents one is left to wonder where this "overly optimistic view of markets" comes from, and why it is so prevalent. A book that attempts to answer this question, at least as it relates to the American case, is Thomas Frank’s One Market Under God, a less balanced, but equally incisive and far more entertaining treatment of this same theme of "market fundamentalism."

One Market Under God

The book’s title is key to understanding Frank’s originality. Frank describes the current economic arrangement in the U.S. as being marked by the "diverging fortunes of top management and everyone else," in which these latter find themselves menaced by the "constant threat of termination." Throughout the ’90s, these "top managers were enriched in proportion to the amount of power and security that workers lost." With characteristic vitriol, Frank writes, "There is no social theory on earth short of the divine right of kings that can justify a five-hundred-fold gap between management and labor."

And yet, that justification is exactly what, according to Frank’s account, those who presided over the dubious economic expansion of the 1990s attempted to provide. In the face of stagnating wages and and ever-increasing income inequality, any such justification would almost have to be religious in character. And indeed Frank opens his book with an exhaustive catalog of examples of advertising that extols the divine attributes of, for example, financial products and computer software.

Still, unlike earlier attempts to manufacture the consent of the American public, the means of legitimating an economic regime which so lopsidedly favored the rich were decidedly secular in character. One of the most fascinating aspects of this book is Frank’s analysis of the political logic of the so-called culture wars, their emergence from the "backlash politics" of the ’70s, and how the right ultimately lost them. Frank cites Republican presidential adviser Lee Atwater: "In 1984, worried that the blue collar workers were becoming ‘liberal on economics’ and without culture wars to distract them, they had no compelling reason to vote Republican." Since then, in what Franks conspiritorially refers to as a "planned provocation by the right," the party has actively courted fundamentalist Christians, shoring up support for its dubious mixture of traditional morality and savagely free-market economics.

Frank accepts the popular notion that the culture wars exhausted themselves when the Clinton impeachment trial failed to elicit the kind of indignation from the American public that the former president’s enemies had hoped for. Indeed, the coarsening of the culture in the few short years since the Lewinsky affair is evident to any critic, moralizing or otherwise. Republican party support now consists as much of those who continue to believe in the party’s efforts to promote a conservative social agenda while uncritically accepting the existing economic regime, as it includes legions of so-called "libertarians" who have no use for Republican moralizing, but passionately support the party’s free-market economic agenda. Meanwhile, the Democrats, by Franks’ account, have outdone the Republicans themselves in their enthusiasm for market-friendly policies such as deregulation and their evisceration of social programs once regarded as indispensable to a civil society.

By and large, no longer did the polity of a once Christian nation face a choice between serving God or Mammon. God was Mammon. The Market was God. The management gurus whom Frank exhaustively surveys unanimously admonished their readers to "listen to the market" when in doubt, even on matters outside the economic sphere.

The divine omniscience and benevolence of the market has proved a particularly difficult notion to debunk, according to Frank, for it preaches that "markets express the will of the people" and "any criticism of business could be described as an act of contempt for the common man." For this reason, not only could politicians and business leaders be seen rushing regularly to the market’s defense, but so could academics, the same ones who were routinely castigated by Republican moralizers with charges of relativism and corruption of youth with unamerican ideas. Frank finds this latter situation particularly irksome, perhaps because as a committed leftist he might have expected to find natural allies in academe. But in his review of much of the "cultural studies" literature which defined the tenor of humanities scholarship throughout the ’90s, he finds little more than the "most egregious sort of apologia for existing economic arrangements." The "cult studs" provided a stark contrast to the Frankfurt School ideas that until recently prevailed in humanities departments–ideas grounded in a hermeneutic of suspicion regarding cultural production. Again, to infer that individuals were passive recipients of the collective output of a "culture industry" which may not have had their best interests in mind minimized the agency of those recipients, and therefore smacked of elitism. And "no error outranked the moral crime of elitism." The cult studs reversed the polarity of the logic of the "culture industry," and viewed acts of consumption (particularly of popular cultural artifacts) as opportunities for self-expression, or even "transgression" of the dominant order.

It is perhaps the breadth of the forces Frank sees deployed in the defense of the unrestrained free market which illustrates most vividly the fundamental weakness of One Market Under God. Unlike Stiglitz, Frank is unwilling to accept market capitalism as a given of modern economic life. "The logic of business is coercion, monopoly and destruction of the weak, not ‘choice’ or ’service’ or universal affluence," he fumes. Virtually the only category of people of that escapes Frank’s venom is the traditional labor union. Management gurus who would attempt to humanize the workplace through "post-Taylorist" reforms that reduce the monotony and attempt to restore creativity to labor are regarded with disdain by Frank. Similarly, "socially responsible" businesses are treated just so–within quotation marks. Still, Frank’s scathing account of the ’90s is a welcome antidote in the face of all the evidence that we remain, three years after the era’s "irrational exuberance" collapsed, a society consumed by greed.

Conclusion

One’s response to both books depends on one’s attitude toward the free marketeers’ proposition that "a rising tide lifts all ships." There is little doubt that at least in America free market policies have, by traditional economic measures such as GDP per capita and ability to purchase goods, benefited a vast majority over the past fifty years. But an economics that takes seriously the notion of a "social contract" recognizes that in the presence of great economic inequality, a "rising tide" is not sufficient to guarantee a just society and a healthy political life.

One final quote, pertaining to East Asian countries’ rejection of Washington Consensus prescriptions, from Stiglitz’s book is instructive:

While the Washington Consensus policies paid little attention to inequality, arguing implicitly or explicitly that the benefits would trickle down to the poor, the East Asian governments worked actively to reduce poverty and limit inequality, believing that such policies were important for maintaining social cohesion, which was necessary for a climate favorable to investment and growth.

Among the many virtues of The Economist is that it’s a publication that constantly questioning its own presuppositions, which are firmly rooted in liberal economic orthodoxy. Recently the magazine ran an article about the impact that economic inequality has on "happiness":

In one striking example, students at Harvard University were asked whether they would prefer (a) $50,000 a year while others got half that or (b) $100,000 a year while others got twice as much. A majority chose (a). They were happy with less, as long as they were better off than others. Other studies confirm that people are often more concerned about their income relative to others’ than about their absolute income.

This sort of evidence, while not conclusive, suggests that income inequality, no matter how prosperous a nation may be in terms of GDP, is very unlikely to conduce to the kind of social cohesion that Stiglitz believes essential to sustained economic growth.