Making Globalisation Works – Joseph Stiglitz –  2006

 stiglitz_20990t

P X  My research cast doubt on the validity of the general claims about market efficiency but also on some of the belief underlying globalisation, such as the notion that free trade is necessarily welfare enhancing.

 

P XIV the reason that the invisible hand seems invisible is that it is not there. Without proper regulation and intervention, markets do not  lead to economic efficiency.

P XVI Free market economists believe that the benefits will trickle down to the poor. Interestingly, such beliefs have persisted, even as economic research has undermined their intellectual foundations.

 

P6 Changes in the thinking of globalisation: in the 90’s discussion at Davos focused on virtues of opening international markets. By early 2000 it centered on poverty reduction, HR, and the need for fairer trade arrangements

 

Argentina, Mexico saw lending to local companies dry up after many of their banks were taken over by foreign banks in the 90’s.

 

“the World Commission on the Social Dimension of Globalisation (ILO, 2004 report). Out of 73 countries, 59% of people were living in countries with growing inequalities (rich and poor countries alike). Only 5% in countries with declining inequalities.

 

P 10  If globalisation is being used to advance the American model, many elsewhere are not sure they want it. Developing world compliant that globalisation has been used to advance a version of market economics that is more extreme and more reflective of corporate interests, than can be found in the US.

 

China economic growth has lifted several hundred millions out of poverty. But China was slow to open is markets for imports and even today does not allow the entry of hot speculative money.

 

Dev Countries face more risks has they have no insurance against the insecurity of globalisation: in more advanced countries governments fill in the gap by providing pensions for senior citizens, disability payments, health insurance, unemployment insurance…In DC the poor are left to fend for themselves and so are vulnerable when the economy slows down or job are lost due to competition by foreign countries.

 

P 14 Poverty has at last become a global concern.

 

P16 Advanced countries were allowed to levy tariffs on goods produced by DC that were on average 4 times higher than those on goods produced by other advanced countries. While DC were forced to abandon subsidies designed to help their nascent industries, industrialised countries were allowed to continue their own enormous agri subsidies…

 

By 2003 IMF conceded that  at least for many DC capital market liberalisation had led to no more growth, just to more instability.

 

P17 Washington consensus paid too little attention to equity, employment, competition, sequencing and pacing of the reforms or how privatization were conducted.

 

A decade ago, concern about ENV and globalisation was limited to advocacy group and experts. Today, it is almost universal.

 

At the end of the 90’s there was money to bail out western banks but not for minimal food subsidies for those on the brink of starvation.

 

P20 While globalisation has put new demands on nation-states – in particular DC – to address the increasing inequality and insecurity that it can cause and to respond to the competitive challenges that it presents, globalisation has, in many ways limited their capacity to respond.

…There has yet to be creatd at the international level the kinds of democratic global institutions that can deal effectively with the problems globalisation has created.

 

P21 The fact that the institution which make the decisions suffer from a democratic deficit is clearly a problem.  It results in decision that are too often not in the interest of those in the developing world.

 

P 22 Most of us will always live locally…But globalisation has meant that we are at the same time, part of the global community…we have to think globally…this entails more than just treating others with respects. It will entail thinking about what is fair: what for instance would be a fair trade regime?

 

P23 China, India in the global economy: this is an event of historic proportions. Even in the most successful years in the west, growth seldom exceeded 3%. China has been three time that over the last 30 years.

…Even developed countries start questioning globalisation ( economic insecurity, inequality…) There may be growth but most people may be worst off

 

There has been reversal of globalisation before – the degree of economic integration fell after world war I and it can happen again.

 

P26 Dev is a process that involves every aspects of society, engaging the efforts of everyone…A DC that simply open up itself to the outside world does not necessarily reap the fruit of globalisation.

 

P29 Today most academic economists agree that markets, by themselves, do not lead to efficiency. The question is whether government can improve matters.

 

P31 China Vietnam Indonesia in the 90’s achieved growth and stability. They focused not only on price stability but on real stability, ensuring that new jobs were created in pace with new entrants to the labor force.

 

P35 Critics argue that IMF policies were not designed to protect countries from recession but to protect lenders by rebuilding reserve so that international creditors (such as the IMF) could be repaid.

 

P 36 in the 80’s  fighting its own problem of inflation, the US initiated interest rate increases that climbed to over 20%. These rates spilled over to latin America, triggering the crisis…

 

 P44 India did far less well than China in reducing poverty  but it has done better in preventing the rise of inequality, the disparities across region and between the very top and the rest.

 

 

P51 Brain Drain: another way in which developing countries wind up subsidising the developed world.  Former Malaysian prime minister referred to this loss, as stealing the developing countries intellectual property.

 

P55 In Uganda, the government has been publicizing all checks sent to the local level, so that villagers know what they should be receiving – and can make sure that those between Kampala and the village do not take their cut.

 

P56 IMF conditionality undermines democracy. Many international trade agreements especially bilateral by circumscribing  the legitimate activities of democratically elected government do that too…

 

 

P57 And recent Trade agreement  have made those policies – promoting  technology, closing the knowledge gap,  using financial markets as catalysts for growth – more difficult if not impossible to pursue.

 

P59 The rest of the world cannot solve the problem of the developing countries.  They will have to do that for themselves. But we can  at least create a more level playing field. It would be even better if we tilted it to favour the developing countries. There is a more case to do it There is also a case that it is in our interests. Their growth will enhance our growth. Greater stability and security in DC will contribute to better stability and security in developed world.

 

 

Making Trade Fair

 

P62 Assymetric opening up of markets have put Dc at a disadvantage. … trade liberalisation can help development.

67 Free trade is a substitute for people having to move.  We can sit at home in developed world and buy product made in China. Conversely Chinese can stay in China and buy high tech product made in US. This will push unskilled labor to increase and higher wages…

 

People may buy cheap good from China instead of from US. Fear of lost job opportunities. High productivity job will be created to compensate for low skilled job lost.  In many country people don’t move to better paid job, this is particularly true in DC were liberalisation was fast and private sector had no time to respond and create new job and with high interest rate could not invest to do so.

 

P 68 if trade liberalisation works, some groups will still be worse off. Judging from experience in developed countries, it is those at the bottom – unskilled workers – who will be hurt the most.

It is not just those who loose job who are affected – when local industries shut down their suppliers are adversely affected.  Increased insecurity is one of the reasons that opposition to trade liberalisation is so widespread.

Supply side constraints are a big problem thoughout Africa – they may have no infrastructure, they may not have anything to export, interest rate may be too high (as capital market are highly imperfect).

 

P 71 most successful countries developed behind protectionist barrier.

Infant industries argument: it impose enormous cost on the rest of the economy (and special interest get higher profit).  In Bangladesh protection of textile producers puts apparel makers in jeopardy by raising the cost of raw materials. This is a warning for countries contemplating using protection as a basis for encouraging new industries…but there is nothing inevitable in such a failure. Broad based protection – uniform tariff on say manufactured goods is one option (this is the infant economy approach as opposed to infant industry).  Broad based industrial protection can lead to increase industrialisation which is source of innovation  with spill over effect on the economy (institutions, financial market etc. (this does not work with agricultural products).

 

It is export – not removal of trade barriers – that is the driving force of growth. Studies on removal of trade barriers show little relationship with liberalisation and growth.

 

What is fair trade:  it is the trade regime that would emerge if all subsidies and trade restrictions were eliminated.  Note 24 chap 3: stricter rules apply to those countries that want to enter the WTO than for those that are already within. Anyone applying should be welcome and given time enough to adapt. Countries – like Cambodia – were imposed TRIPS to accede to WTO. US is using this practice to enforce the rules it wants to newcomers – Oxfam calls this “extortion at the gate”…

135. Conflict may arise between regions that have resources and those that don’t. Ressources rich region – Ogonilan in Nigeria, Kurdish north of Iraq, Katanga in Congo– have obvious incentives to break away. Why should they share their wealth? The rest of the country will equally be determined to hold on it. The violence that has afflicted resource rich countries represents the extreme of resource curse.

 

137. Democracy is needed to ensure a fair distribution of wealth. (note: Collier argues that electoral democracy actually is worse than autocratic regimes when it comes to sharing wealth but proper democracy (with adequate checks and balances and informed citizens) is part of the solution).The political dynamics of resource rich countries often lead to high level of inequality: wealth is used to maintain economic and political power.

 

139 There is now an OECD convention on bribery, but enforcement is difficult and incomplete. As of December 2005, there had yet to be a single prosecution outside the US under national legislation enacted to implement the convention.

 

139 The Malaysian, the Russian, Indian and Chinese oil companies…have become global players. They do not have to follow OECD agreements banning bribes….

140 Most developing countries are ill prepared to engage in sophisticated negotiations that are multinationals’ stock in trade….[multinationals] want all the risk of environmental damage to be borne by the country rather than themselves. In many cases where natural gas is concerned the contracts are designed to shift ordinary commercial risk – the size of demand for gas – from business to government.

141 after  oil prices skyrocketed in the 70’s, the United States imposed a windfall profits tax on the oil companies. The fact that the typical contract allows oil companies to walk away with windfall profits suggests that something is wrong with the way these contracts are designed.

141: It is the strategy of the oil, gas and mining companies to make sure that governments gets as little as possible…. Too often the only benefit for the country from a mine is the few jobs created….the environmental damage of the mine may simultaneously destroy jobs elsewhere and sometimes impose  enormous budgetary costs as government is forced to pay for the clean up.

142 Before privatization, the amount a government official  can steal is limited by the current sales (of oil etc.). With privatization, the future value of the resources is up for grabs and the stakes increases enormously.

Privatization can lead to lower revenues. With corruption etc. as each bidder believes bidding will be less keen, bidders bid less aggressively and the government may end up accepting a bid that is woefully inadequate. Problem is worse in situation where the number of bidders is very limited…

 

143 The argument for privatisation is that the private sector is more efficient than the public. The opinion is driven as much by ideology as by hard analysis – there are many efficient government oil and mining companies (note: Sweden, Finland in EU): Malaysia’s publicly owned Petronas has become a global player… Dr Mahathir says his country receives a larger fraction of the value of its resources than countries elsewhere who have privatised….Chile has privatised half of its copper mines yet Government mines are just as efficient….Russia provides a dramatic case of privatisation gone amok…

146 DC do not have the ability to weather the wings in export earnings as well as developed countries do. They do not have the built in stabilizers – progressive income tax, unemployment insurance etc. – that pump money into the economy when economy is weak. Individuals do not have savings. Banks are often not as well capitalized or regulated, so they are more prone to collapse.

International bankers are always willing to lend to resource rich countries when price is high. When resource prices drop, bankers of course want their money back  – just when the country needs it most. The boom and bust lending exacerbates the economic volatility brought on by  boom-and-bust prices.

148 Dutch disease…. Inflow of dollars lead to high exchange rate and loss of competitivity…..natural resources have the perverse effect of harming the rest of the economy……Nigeria was a major exporter of agricultural produce. Today it is a major importer.  Reducing amount (of dollars) converted in local currency  reduces exchange rate appreciation: that means a country must spend some money of the resource money on imports and keep some of the rest abroad. This is an argument for stabilisation funds in which a country can save when prices are high and use when recession comes.

 The major responsibility for getting as much value as possible from natural resources and using it well resides with the countries themselves. Their first priority should be to set up institutions that will reduce scope for corruption and ensure that money derived from …natural resources is invested well. It may be desirable to have some hard and fast rules (% on health, on education etc. ) Procedures needs to be put in place for independent evaluations of the returns on investments. Stabilisation funds are essential …Most importantly DC needs to view their natural resources as their endowment, of which the current government are trustees for future generations.

 

151Transparency : sunshine is the strongest antiseptic Citizens’s right-to-know laws are necessary (freedom of information acts). Government can set the rules and there are enough honest companies willing to play with rules of transparency. The citizen’s right to know should trump any claims to business confidentiality.

 

153 Just as a company’s books show depreciation of its assets, so too should a nation’s accounting framework reflect the depletion of its scarce resources. ( Green Net National Product – Green NNP is a measure that subtracts out not just depreciation of capital but depletion of natural resources and degradation of the environment.  A focus on GNNP would induce countries to invest more in conservation.

 

155 An action agenda for international community

In addition to promoting anti corruption laws, curtailing bank secrecy and compensate DC for the environment services they provided (by keeping the forest etc.) – 7 proposals are made:

 

1 – EITI – disclosure of what is paid and how much of resource was extracted…

2– Reducing arms sales

3 Certifications (for diamonds and woods)

4 – targeting financial assistance:

            Should tax payers in the developed world subsidize a government that is itself in effect giving away its resources?  Giving aid to countries that have demonstrated ability to pursue appropriate policies

5 Setting norms: design model contract s that ensure DC are treated fairly and assess what fraction of the value of the resource is being received by DC. Try to create a race to the top….

6 Limiting environmental damages: provide incentive for multinational not to despoil the environment: monitoring of damages by international  agency.

7. Enforcement : there is good practices in the business but this should not be left to goodwill. Trade agreement can be used to force good behaviour: trade sanction against companies and countries that engage in unfair trade practices, failing to subscribe to EITI, to OECD anti bribery measures……..these should be seen as unfair trade practice (and sanctioned accordingly)…