Global Policy Forum

by Joseph E. Stiglitz*

The protests from Seattle to Genoa have made one thing clear: many people are unhappy about globalisation. Protests of this scale are almost invariably the tip of an iceberg: for each protester willing to travel hundreds or thousands of miles to express his disaffection with the way things are, there are thousands of sympathisers back home. The leaders of the world have grudgingly come to recognise this.

The attacks on the US has brought forth another unsavoury aspect of globalisation: the seeming ease of cross-border movements of terrorism. As international meetings around the world are cancelled and rescheduled, the focusof discussion has shifted towards terrorism, and related issues such as nuclear proliferation. There is a danger that the longstanding issues of globalisation will be shunted aside, and the underlying problems will continue to fester.

The protests are somewhat of a puzzle both to those in the north and the south. In the south, the question is why, and why now? Protests were not invented in Seattle (or as some Canadians who would like to claim credit, at theearlier Vancouver meetings of Apec); they have been a regular feature of IMF programmes for the past 25 years. What is new is that they have moved from the south, where they could be conveniently ignored, to the north, where they seemingly cannot be.

Prosperity Brings Disharmony

In the north, the puzzle, particularly to the advocates of globalisation, is why something that has brought unprecedented prosperity should be so vilified.

It seems as if those who are better off do not know that they are more prosperous and happier, a psychological dysfunction requiring more help from psychiatry than economics. Moreover, they ask, what can possibly be accomplishedby taking to the streets? In democracies, if one is unhappy with the way things are, go to the voting booth. Yet, for all the vilifications of the protesters, in a relatively short time, they have been remarkably successful. The protestersgot the media to look at what was going on, and it is to the credit of the mediathat they reported honestly what they saw: there was a darker side to globalisation that its advocates had tried to sweep under the rug.

Popular pressure succeeded in extending debt relief to 20 countries, after years of foot dragging by the IMF. Popular pressure has at least opened up the debate about transparency and disclosure, and it has at least changed the rhetoric, so that the IMF talks more about participation and poverty - though a recent US General Accounting Office report suggests that this may be little morethan rhetoric.

At least part of the success is due to a simple fact: there is at least a modicum of validity in some of the charges of the protesters. Yes, the countriesthat had been most successful - those in east Asia - in their export-led growth strategy had taken advantage of globalisation, but they had done so on their ownterms. They had pursued egalitarian policies that had ensured that as GDP grew, poverty was reduced.

Economic insecurity

Elsewhere, globalisation, conducted under the aegis of the international economic institutions, had too often left too many people behind, and created a heightened sense of economic insecurity. Capital market liberalisation was foisted on these countries, before they were ready, before safety nets were in place, before financial institutions were strong enough to withstand the volatility which hot money flowing into and out of a country overnight could bring.

This was done in the name of "good policy and economic science" ... but there was no evidence that it would enhance growth, and there was enormous theory and evidence that it would enhance instability.

Today, the IMF recognises the mistakes, too late for the countries in east Asia that were devastated by its policies. It is not the taxpayers in America orthe other countries that dominate the IMF decision making that bear the costs ofthe mistakes, but the workers who lost their jobs, the small businesses that were thrown into bankruptcy, the taxpayers in the affected countries who will have to pay back the billions of dollars of IMF loans that helped ensure that the creditors got more of their money repaid (even if they were not reimbursed fully).

Unfair agreements

This may seem unfair, but it is one part of a broader picture, which suggests that the cards are stacked against the developing countries and especially the poor in those countries. The IMF and the World Bank cannot be blamed for the unfairness of the trade agreements negotiated under the WTO; trade agreements that have left in place barriers in the north against the exports of the developing countries, even as the developing countries have opened up their markets to the goods of the advanced industrialised countries.

In the last round of trade negotiations, the so-called Uruguay round, not only did the benefits go disproportionately to the rich, but the poorest region in the world, sub-Saharan Africa, was actually worse off. The problems in the intellectual property regime (TRIPS) have now come to the fore: as it was being implemented, it was, in effect, condemning thousands in the Third World to death, as the high prices for drugs made them unaffordable.

To many, it is unconscionable that American firms can patent traditional foods and drugs, forcing those in poor countries to pay royalties and high prices for what they thought all along was theirs; and while it is unclear whether such patents will withstand legal challenges, what is clear is that few in the developing world have the resources to fight for what is rightfully theirs in the courts.

Critics claim that trade policy has been dictated by corporate interests ... and they are right. I was in the White House, at the Council of Economic Advisers, at the time the Uruguay Round was being negotiated. I, and the Office of Science and Technology Policy (OSTP) were both concerned that the intellectual property regime that was being negotiated was unbalanced; it put producer interests over user interests, including researchers (a major input into research is the research of others), consumers and the developing countries.

An unbalanced intellectual property regime may even slow down the pace of innovation. But we had little say: the negotiations were conducted in secret, behind closed doors, and even those inside the White House that did not represent corporate interests had limited voice.

The international financial institutions may feel that it is unfair that they should suffer this contagion of bad will from the unfair trade regime, but even in this sphere, their hands are not clean. They have forced rapid liberalisationas a condition for their loans; and just as capital market liberalisation done too rapidly and in the wrong way can have devastating effects, so too can trade liberalisation. The theory of the benefits are clear: liberalisation leads countries to take advantage of comparative advantage, moving resources from low productivity to high productivity uses.

Low productivity

But if financial markets do not work, and if IMF programmes force interest rates up to 15% or 20% or higher, firms cannot get the capital they need to create jobs; and in the absence of new jobs, workers simply move from low productivity jobs to zero productivity unemployment, surely not a recipe for growth. And when unemployment rates are already high, the prospects of finding anew job can be bleak. Perhaps, after all, the protesters know something about globalisation that its ardent advocates have yet to recognise.

The critics of the international financial institutions bring two charges: that they have been ineffective in accomplishing their objectives and that they are undemocratic. There is at least a grain of truth in both. The IMF was supposed to provide funds to countries facing downturns, to help them maintain full employment. Instead, it routinely forces on countries policies that have exacerbated their downturns.

In east Asia, it now admits that its excessively contractionary fiscal policies contributed to the recessions, and that its misguided policies in restructuring Indonesia's banks contributed to the devastation of the financial sector.

It did not take a crystal ball to predict that the depression that they were causing in Indonesia - combined with cutting out food and fuel subsidies for thepoorest - would lead to riots, and that the riots would exacerbate the flight ofcapital and entrepreneurs, making the depression still deeper and recovery stillharder.

The IMF was also supposed to enhance global stability, but under its watch, crises have become more frequent and deeper - and partly because of the policies, like capital market liberalisation, which it pushed. The bail-outs which it financed both fed the speculative sharks and contributed to the moral hazard of imprudent lending.

If the international financial institutions had been more successful, it might have been possible to overlook the "democracy deficit" - the mismatch between who has a voice and impacts. While the IMF's programmes are virtually all in developing countries, the institution is controlled by the advanced industrial countries. Although there is dissatisfaction with the fact that five countries have veto power in the UN, only one country has effective veto power in the IMF.

While the IMF is governed by finance ministers and central bank governors, its impact goes well beyond finance, on the lives and livelihoods of workers, small businesses, and on every sector of the economy. Its effects are pervasive;for instance IMF forced cutbacks in health expenditures in Thailand have contributed to a resurgence in Aids.

Voting rights

To return to the beginning: what is to be done? Are we to accept protests as a part of life for the indefinite future, holding international meetings at inaccessible locations or in police states with less qualms about bashing the protesters than hopefully prevail in our democracies. Fundamental reform, for instance, in the governance structure, will not be easy: The US is not likely togive up its veto: it has been a hard struggle to get voting rights for countriessuch as China even closely commensurate with their increasing role in the globaleconomy. I would argue for a six-part strategy:

- Recognising the undemocratic nature of current arrangements, establishing a study group to look at ways of changing the formal governance structures.

- In the meantime, adopting interim measures that increase the voice of the developing countries, for example, having all programmes reviewed by a separate committee of developing countries and putting more developing countries around the table, such as establishing executive directors with half votes.

- Helping developing countries to be more effective in expressing their viewpoint, by establishing a capacity building research and policy think tank outside the international financial institutions. The developing countries are at a marked disadvantage - they simply do not have the staff that, say, the US Treasury has, to evaluate and comment on policies.

- Increasing transparency, ensuring, for instance, that all letters of intent be made public (the excuse that it is the decision of the borrowing country is itself a transparent sham: the IMF has never shown a hesitancy to impose conditions; placing a condition of transparency is the least it could do), and subjecting itself to principles of disclosure, such as those in the US (the Freedom of Information Act) and Sweden. The IFIs are public institutions, and the public has the right to know what they are doing. The fact that the governance structure limits their accountability makes transparency all the moreimperative.

- Limiting scope: Here, the Meltzer Commission is right on. If we have no way of ensuring that the IMF will in fact do the right thing, at least we can limit the damage by forcing it to focus on what should be its core competency, handling crises.

- Revisiting policies: here, the Bush Administration is right on. The massive bail-outs of the Clinton administration were a huge failure. The passing of Rubin, Summers, Camdessus, Fischer and Mussa provides a welcome opportunity to admit the mistakes of the past and to look for alternative strategies for the future. But this cannot be done behind closed doors. There has to be an inclusive process of review. It is not just those who were responsible for designing the failed programmes that need to be heard from.

Financial architecture

We should be frank: the debate on the reform of the global financial architecture has not gone very far. Sceptics might say it was never intended to go very far. The US treasury had no intention of shutting down, regulating, or making more transparent the offshore banking centres and the hedge funds.

But that is not the fundamental issue. The basic problem has been one of voice: those who are affected by the policies have had no seat at the table. Andnow, they have no seat at the tables at which reform is being discussed. We should not be surprised that any modest reforms that do emerge will lack political legitimacy, or will fail to quell the protesters whose voices have become increasing loud and clear.

*Joseph E Stiglitz is professor of economics at Columbia University and a former chief economist at the World Bank

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