Making Globalization Work: Sustainability

This excerpt comes from Making Globalization Work by Joseph E. Stiglitz. This first post focuses on the issue of ‘Sustainability’ however Stiglitz covers a large canvas in discussing Globalization. I highly recommend picking this book up to see his blueprint for improving Globalization.

Preface
My book Globalization and Its Discontents was written just after I left the World Bank, where I served as senior vice president and chief economist from 1997 to 2000. That book chronicled much of what I had seen during the time I was at the Bank and in the White House, where I served from 1993 to 1997 as a member and then chairman of the Council of Economic Advisers under President William Jefferson Clinton. Just as my time in the White House and at the World Bank put me in a unique position to understand globalization’s problems, so too has it provided me with the basis for this sequel Making Globalization Work. (page x)

The Limitations of Liberalizatioin
In the 1990s, when the policies of liberalization failed to produce the promised results, the focus was on what the developing countries had failed to do. If trade liberalization did not produce growth, it was because the countries had not liberalized enough, or because corruption created an unfavorable climate for business. Today, even among many of the advocates of globalization, there is more awareness of shared blame.

The most hotly contested policy issue of the 1990s was capital market liberalization, opening up markets to the free flow of short-term, hot, speculative money. The IMF even tried to change its charter at its annual meeting in 1997, held in Hong Kong, to enable it to push countries to liberalize. By 2003, even the IMF had conceded that, at least for many developing countries, capital market liberalization had led not to more growth, just to more instability.

Trade and capital market liberalization were two key components of a broader policy framework, known as the Washington Consensus—a consensus forged between the IMF (located on 19th Street), the World Bank (on 18th Street), and the U.S. Treasury (on 15th Street)—on what constituted the set of policies that would best promote development. It emphasized downscaling of government, deregulation, and rapid liberalization and privatization. By the early years of the millennium, confidence in the Washington Consensus was fraying, and a post-Washington Consensus consensus was emerging. The Washington Consensus had, for instance, paid too little attention to issues of equity, employment, and competition, to pacing and sequencing of reforms, or to how privatizations were conducted. There is by now also a consensus that it focused too much on just an increase in GDP, not on other things that affect living standards, and focused too little on sustainability—on whether growth could be sustained economically, socially, politically, or environmentally. The fact that countries like Argentina—which got an A+ rating form the IMF for following the Washington Consensus precepts—did well for a few short years only to later face calamity has helped to reinforce the new emphasis on sustainability.

Protecting the Environment
A failure of environmental stability poses an even greater danger for the world in the long run. A decade ago, concern about the environment and globalization was limited mostly to environmental advocacy groups and experts. Today, it is almost universal. Unless we lessen environmental damage, conserve on our use of energy on other natural resources, and attempt to slow global warming, disaster lies ahead. Global warming has become a true challenge of globalization. The success of development, especially in India and China, have provided those countries the economic wherewithal to increase energy usage, but the world’s environment simply cannot sustain such an onslaught. There will be grave problems ahead if everybody emits greenhouse gases at the rate at which Americans have been doing so. The good news is that this is, by now, almost universally recognized, except in some quarters in Washington; but the adjustments in lifestyles will not be easy. (page 16-17)

Sustainability: The Promise of Development
A developing country that simply opens itself up to the outside world does not necessarily reap the fruits of globalization. Even if its GDP increases, the growth may not be sustainable, or sustained. And even if growth is sustained, most of its people may find themselves worse off.

The debate about economic globalization is mixed with debates about economic theory and values. A quarter century ago, three major schools of economic thought competed with each other—free market capitalism, communism, and the managed market economy. With the fall of the Berlin Wall in 1989, however, the three were reduced to two, and the argument today is largely between those who push free market ideology and those who see an important role for both government and the private sector. Of course, these positions overlap. Even free market advocates recognize that one of the problems in Africa is the lack of government. And even critics of unfettered capitalism respect the importance of the market.

Still, there is a huge gap between the different perspectives, and we should not let ourselves be fooled into thinking there are no differences. We described the Washington Consensus strategy for development. These policies focused on minimizing the role of government, emphasizing privatization (selling off government enterprises to the private sector) trade and capital market liberalization (eliminating trade barriers and impediments to the free flow of capital) and deregulation (eliminating regulations on the conduct of business). Government had a role in maintaining macro-stability, but the attention was on price stability rather than on output stability, employment, or growth. There was a large set of do and don’ts: do privatize everything, form factories to social security; don’t have the government involved in promoting particular industries; do strengthen property rights; don’t be corrupt. Minimizing government meant lowering taxes—but keeping budgets in balance.

In practice, the Washington consensus put little emphasis on equity. Some of its advocates believed in trickle-down economics, that somehow all would benefit—though there was little evidence to support such a conclusion. Others believed that equity was the province of politics, not economics: economists should focus on efficiency, and the Washington Consensus policies, they believed, would deliver on that.

The alternative view which I hold, sees government having a more active role, in both promoting development and protecting the poor. Economic theory and historical experience provide guidance on what government needs to do. While markets are at the center of any successful economy, government has to create a climate that allows business to thrive and create jobs. It has to construct physical and institutional infrastructure—laws ensuring for instance, a sound banking system and securities markets in which investors can have confidence that they are not being cheated. Poorly developed markets are marked by monopolies and oligopolies; high prices in a vital area like telecommunications hinder development, so governments must have strong competition policies. There are many other areas in which markets, by themselves, do not work well. There will be too much of some things, like pollution and environmental degradation, and too little of others, like research. What separates developed from less developed countries is not just a gap in resources but a gap in knowledge, which is why investments in educations and technology—largely from government—are so important.

In practice, the advocates of this alternative view also put more emphasis on employment, social justice, and nonmaterialistic values such as the preservation of the environment than do those who advocate minimalist role for government. Unemployment, for instance, is seen not just as waste of resources; it also undermines the individual’s sense of self-worth, and it has a host of undesirable social consequences—including violence. Proponents of this view often argue for political reforms as well, to give citizens more voice in decision making; they point out that conditionality and economic institutions like independent central banks that are not politically accountable undermine democracy. By contrast, advocates of the Washington Consensus express a lack of confidence in democratic processes, arguing, for instance, that the independence of central banks is essential for ensuring good monetary policy. (page 28)

As countries like Argentina adopted the Washington Consensus policies, praise was heaped upon them. When price stability was restored and growth resumed, the World Bank and the IMF claimed credit for the success; the case for the Washington Consensus had been made. But, as it turned out, the growth was not sustainable. It was based on heavy borrowing from abroad and on privatizations which sold off national assets to foreigners—the proceeds from which were not invested. There was a consumption boom. GDP was increasing, but national wealth was diminishing. Growth was to last a short seven years, and was to be followed by recession and stagnation. Growth for the decade of the 1990s was only half what it had been in the decades priority 1980, and what growth there was went disproportionately to the rich. (page 36)

Success means sustainable, equitable, and democratic development that focuses on increasing living standards, not just on measured GDP. Income is, of course, an important part of living standards, but so too is health (measured, for instance, by life expectancy and infant mortality) and education. The king of Bhutan has spoken of GNH, gross national happiness, as he sought growth strategies that improved education, health, and the quality of life in rural areas as well as in the towns, all the while maintaining traditional values.

GDP is a handy measure of economic growth, but it is not the be-all and end-all of development. Growth must be sustainable. Everyone knows that by cramming for an exam you get your grade up, but what you learn is soon forgotten. You can get GDP up by despoiling the environment, by depleting scarce natural resources, by borrowing from abroad—but this kind of growth is not sustainable. Papua New Guinea is cutting down its tropical rainforests, home to an immense range of species; the sales improve its GDP today, but in twenty years there will be nothing more to cut.

Still, because GDP is relatively easy to measure, it has become a fixation of economists. The trouble with this is that what we measure is what we strive for. Sometimes, increases in GDP are associated with poverty reduction, as was the case in East Asia. But that was not an accident: governments designed policies to make sure that the poor shared in the benefits. Elsewhere, growth has often been accompanied by increased poverty and sometimes even lower income for individuals in the middle. This is what has been happening in the United States: between 1999 and 2004, average disposable income went up by 11 percent in real terms, but median household income­—the income of the family at the center, the true middle middle-class family—fell by some $1,500 adjusting of inflation, or around 3 percent.

The East governments realized that success requires social and political stability, and that social and political stability in turn require both high levels of employment and limited inequality. Not only was conspicuous consumption discouraged, but so too were large wage disparities. In China, at least in the earlier stages of development, senior management typically received no more that three times the income of an ordinary worker; in Japan, ten times. By contrast, in recent years the compensation of senior managers in the United States has been hundreds of times that of ordinary workers. By 2000, CEO pay was more than 500 times the wages of the average employee, up from 85 times at the beginning of the decade, and 42 times two decades earlier.

I believe that it is important for countries to focus on equity, on ensuring that the fruits of growth are widely shared. There is a compelling moral case for equity; but it is also necessary if there is to be sustained growth. A country’s most important resource is its people, and if a large fraction of its people do not live up to their potential—as a result of lack of access to education or because they suffer the lifelong effects of childhood malnutrition—the country will not be able to live up to its potential. Countries that don’t invest widely in education find it hard to attract foreign investment in businesses that depend on a skilled labor force—and today, more and more business depend in part on skilled labor. At the other extreme, high levels of inequality, especially as a result of unemployment, can result in social unrest; crime is likely to increase, creating a climate that is unattractive to business.

It is not just income—even the income of the average individual—that matters but overall standards of living. There can be a discrepancy between the two. Development is typically accompanied by urbanization, and many cities in developing countries are squalid, marred by noise, congestion, poor sanitation, and dirty air. In March 1991, air pollution got so bad in Mexico City that President Carlos Salinas de Gortari ordered a major oil refinery to be shut down. In the nineteenth-century transformation that marked the Industrial Revolution in Europe and the United States, environmental problems were so serious that health deteriorated and life spans were shortened. In Britain, the first country to enter the Industrial Revolution, average height—a measure of physical well-being—declined from the late eighteenth century to the middle of the nineteenth. Fortunately, improvements in medicine and nutrition have managed partially to overcome environmental factors, so that in most developing countries, other than those devastated by AIDS, life spans are increasing.

Today, there is more concern in the development community about the importance of health and the environment. There is also more concern about economic security­—reflecting the importance that ordinary workers place on economic security since individual workers are ‘risk adverse’. (page 45)