Reviewed by Jesi
Joseph E. Stiglitz is Nobel laureate in economics for his work on Asymmetric Information (2002) and University Professor at Columbia University. He was Chairman of President Bill Clinton’s Council of Economic Advisers (1993-97) and served as Senior Vice President and Chief Economist of the World Bank (1997-2000). He was working in the White House when Russia began its transition from communism and later he joined to the World Bank during the financial crisis that began in East Asia in 1997. He has published many books, research papers and articles. His book ‘Globalization and Its Discontents’ draws on Stiglitz’s personal experience as chairman of the Council of Economic Advisers under Bill Clinton from 1993 and chief economist at the World Bank from 1997. Reasons behind writing this book is, he says – ‘‘I saw first-hand the devastating effect that globalization can have on developing countries, and specially the poor within those countries.’’
What is Asymmetric Information?
Asymmetric Information is a situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer. Potentially, this could be a harmful situation because one party can take advantage of the other party’s lack of knowledge. A good example is when selling a car; the owner is likely to have full knowledge about its service history and likelihood to break down. The potential buyer, by contrast, will be in the dark and he may not be able to trust the car salesman. INVESTOPEDIA.
The Globalization and its discontents cover Joseph E. Stiglitz experience including on trekking through the Himalayas to see remote school or village irrigation project in Nepal (P xvi). He has taken other examples of Nepal about vicious cycles facing the poor as said by P D Gupta of Cambridge University- ”They strip the forests for the bare necessities of heating and cooking, the soil erodes, and as the environment degrades, they are condemned to a life of ever-increasing poverty’’ (P83). Whatever I have seen in Nepal he has depicted more than exact picture.
Discontents: All developing countries desperately seeking funds must accept the terms and conditions imposed by IMF to get ‘Structural Adjustment Loan’ from the WB especially they have to liberalise their financial market, But there were not effective policy measures whether the country is able to do so. (P14)
This book shows how the IMF worsened the Asian economic crisis of the late 1990s and devastated the economies of Russia and other formerly Communist countries which were forced to follow IMF/U.S. Treasury department advice. He says countries were undermined and forced into “structural adjustment” programs that were simply ‘cookie-cutter applications’ of Milton Friedman’s economic theories.
Stiglitz is not agreeing with western countries because they pushed poor countries to eliminate trade barriers by keeping their own barriers as it is. And also developing countries were prevented from exporting their agricultural products.
Stiglitz disclosed an example – In April 1999 Chinese president Zhu Rongji visited to USA to negotiate to join the WTO. It was essentials for the world trade and market reform in China itself as well. But China was ‘quite rightly worried’ about a condition- ‘faster liberalization of Chinese financial markets’ put forward by the USA to join the WTO (P63). It was ‘narrow interests of the financial community’’… ‘West was seeking to weaken China’ (P64). Finally, ‘Zhu Rongji was forced to return china without a signed agreement’ (P64).
Regarding job, Stiglitz consider that there are social costs associated with unemployment, which private firms simply do not take into account. (P 56). Workers have fought for greater job security and ‘‘decent jobs’’ from ‘exploitative bosses’ also IMF has fought for ‘‘labour market flexibility’’ which sound like code name for lower wages, and less job protection. (P 84)
Stiglitz said that ‘‘the capital account liberalization was the single most important factor leading to the crisis’’ (P 99) as it was designed by the IMF and the US treasury.
Who is responsible for discontents? He says a rich cannot sleep well if his community is poor. In the book he says ‘‘The United State was, of course, one of the prime culprits, and this was an issue about which I felt intensely. I fought hard against this hypocrisy. It not only hurt the developing countries; it also cost Americans, both consumers and taxpayers’’ (P6). He has sharply criticised the IMF and the World Bank for their role. In his word ‘‘A half century of it’s founding, it is clear that the IMF has failed in its mission to stabilized the economy and betterment of millions poor. Due to such bureaucratic thinking of these organizations now we are facing financial crises, recessions. These two organizations could have provided the alternative perspective on some these challenges of development and transitions.’’
Stiglitz believes that in the early 1990s, the International Monetary Fund (IMF), the World Bank (WB) and the US Treasury launched a conspiracy of sorts to run worldwide economic reform—this is the infamous ‘‘Washington Consensus.’’ According to him structure and policies of these international organizations had been changed by Ronald Regan and Margaret Thatcher after the integration of Germany to protect capitalist globalization (P15).
What about Chinese Indian and Polish Growth: Stiglitz highlights that India and china both had capital controls… India grew its incomes at a rate in excess of 5 percent China at close to 8 percent while developing countries with liberalized capital markets actually saw their income decline. China achieved this by following the prescription of economic orthodoxy by combining its short run needs with long-run growth objectives (P 125). He adds it would go further in future as well.
Poland and China employed alternative strategies. Poland started with ‘‘shock therapy’’ to bring hyperinflation down to moderate level. Once Poland’s former deputy premier and finance minister Grzegorz W. Kolodko argued that the success of his nation was due to its explicit rejection of the doctrines of the Washington Consensus…it did not emphasize in rapid privatisation. (P 180-81) China’s success over the past decade stands in marked contrast to Russia’s failure (P181). China became the largest recipients of foreign direct investment (P183).
Is Globalization solely bad? No. The book Globalization and its Discontent is not anti-globalization. But it has been made dysfunctional due to irrelevant discontents put by Washington Consensus, claimed by Stiglitz. He is fully aware with threats and opportunities of Globalization so he emphasizes that he is not against of market principles in general but he is advocating Keynesian policy making.
Further he says that to abandon globalization is neither feasible nor desirable. The problems are not with globalization, but with how it has been managed. IMF, World Bank and WTO have served the interest of the advanced industrialized countries particularly narrow mind-sets rather than developing world. He believes globalization can be reshaped to realize its potentials. Government can, and has, played an essential role not only in mitigating these markets failure but also in ensuring social justice by providing the safety net for the poor. According to him new international institution that will only look after Globalization, of course, can focus on issue where global collective action is desirable, or even necessary.
Criticism: Three interrelated policy issues are at the centre of Stiglitz’s criticism of globalisation
Sebastian Edwards University of California made a comment in a book review (2002) the problem
1) In designing reform packages during the 1990s, crucial aspects of the sequencing and pace of reform were ignored. As a result, in many countries, reform was implemented to fast Stiglitz prefers gradualism and in the wrong order.
2) Advocating (and imposing) capital account liberalization was a huge mistake. And
3) The IMF response to crises – and in particular to the East Asian crisis – was a disaster that made things worse rather than better. In particular, imposing fiscal austerity and rising interest rates were terrible mistakes that cost the East Asian countries several points in terms of growth.
Not surprisingly, given his theoretical writings during the last 35 years, Stiglitz frames his criticism around the insights of the theory of Asymmetric information.
Sebastian further said ‘‘the book is at its weakest when it comes to the criticism of the IMF. The tone is overly hostile and aggressive.”
While reviewing the book N. Stephan Kinsella (Journal of Libertarian Studies Vol. 18, 2004) said that, however, the core argument of the book is not the analysis of the causal link between ideology, politics, and economic performance in a globalized world.
Due to his sharp criticism Joseph Stiglitz has been blamed ‘‘anti” globalization as well that is not true.
January 2014
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INFORMATION AND THE CHANGE IN THE PARADIGM IN ECONOMICS (Prize lecture) by Joseph Stiglitz
Prize Lecture by Joseph E. Stiglitz (45 minutes) : Video
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INCOMESCO 
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