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BY JOSEPH STIGLITZ Globalisation and Its Discontents Globalisation itself is neither good or bad. It has the power to do enormous good especially for those who adopt it at their own paces and under their own terms; it has been enormous benefits like those countries in East Asia” (Stiglitz 2001, p.30)

PPT on Globalisation and Its Discontents

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Page 1: PPT on Globalisation and Its Discontents

BYJOSEPH STIGLITZ

Globalisation and Its Discontents

“Globalisation itself is neither good or bad. It has the power to do enormous good especially for those who adopt it at their own paces and under their own terms; it has been enormous benefits like those countries in East Asia” (Stiglitz 2001, p.30)

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THE PROMISE OF GLOBAL INSTITUTES

Chapter 1

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Chapter 1: The Promise of Global Institutes

• Globalisation has following promises: a reduce of senses of isolation, foreign aids, eliminate trade barriers, reducing poverty etc.

• Despite its immense benefits, globalisation has become controversial NOT only in developing countries but also in developed countries e.g. what happened in Seattle meeting of WTO in 1999. Why is it as such?

• Whilst Globalisation has great promises especially for developing countries, it miserably fails to deliver in other areas. A wider gap between the Haves and the Have-Nots

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Chapter 1: The Promise of Global Institutes (Cont’d)

• Developing countries view globalisation as a vehicle for developed countries to take advantage of them through global institutes e.g. IMF and WTO, and the World Bank

• For example, trade liberalisation has been insisted by IMF whilst the developed countries already have ‘safety net’ put in place to benefit their exported goods. With the help of the ‘free trade’ agreement, those goods are forced into developing countries to compete with the domestically-made ones, which jeopardise their already volatile economy and domestic trade.

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Chapter 1: The Promise of Global Institutes (Cont’d)

• Unlike an evolution that happened in the US in the 19th century, globalisation today has been managed by a systems called “global governance without global government”.

• Those global institutes such as WTO, IMF and the World Bank are dominated by a few players and left those who are mostly affected left almost voiceless

• Last but not the least, globalisation can be reshaped to allow ALL countries to have voice in the systems. Then, globalisation could help create a global economy in which growth is sustainable and less volatile and more importantly the benefits are more equitably shared.

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BROKEN PROMISES

Chapter 2

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Chapter2: Broken Promises

IMFWorld Bank

Goal: our dream is the world without the poverty

Goal: to maintain global stability

Methodology: interpretevist; staffs permanently lives in developing countries, mostly in the country side, to understand and lay out strategy to achieve the goal

Methodology: positivist; one-size-fits all attitude and market must know best

In 1997, Stiglitz started his job as a chief economist and senior vice president of the World Bank. The above picture depicted his perceptions on the 2 international institutions that are fundamentally different in beliefs and approaches . In his opinion, IMF establish major obstacles f0r developing countries to diminish poverty problems.

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Chapter2: Broken Promises

The case of aid suspension between IMF and Ethiopia demonstrates strong disagreements between Stiglitz and IMF as shown below:1. Criteria to lend money especially how to spend foreign aid: IMF

suspended it program with Ethiopia who had a good macro-framework due to some unsound reasons. IMF encouraged Ethiopia government NOT to spend the aid fund on facilities as they are supposed to. In so doing, they will have good figures on balance sheet.

2. Early loan repayment: IMF requested Ethiopia, a sovereign country, to ask their permission to repay the loan early due to the fact that Ethiopia did not want to pay a high interest rate any longer.

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Chapter2: Broken Promises

The case in Ethiopia demonstrates strong disagreements between Stiglitz and IMF as shown below (Cont’d)3. Financial market liberalisation. IMF wanted Ethiopian to open its

countries for western banks and divide its largest bank into several pieces. Ethiopia refused to do so its fear of repeating what Kenya had experienced when it followed IMF advices.

At the end, Stiglitz had to use his resources, time and efforts, to lobby people in IMF and the World Bank to reinstate the aid program to Ethiopia.

“Such organisations (IMF) are opaque rather than transparent, and not only does far too little information radiate from inside to the outside world, perhaps even less information from outside is able to penetrate the organisation”. (Stiglitz 2001, p.33)

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Chapter2: Broken Promises

Stiglitz provides criticisms of how IMF should improve:1. IMF Conditionality

• The economists basic notion of fungibility e.g. the fund that meant for one project was spent on another project

• Some conditions imposed on developing countries are simply wrong e.g. financial market liberalisation in Kenya

• Some conditions imposed on made the country politically unsustainable e.g. Corruption problem was a reason IMF ceased lending program with Kenya but not Russia

• The lending decisions were political

2. Lack of transparency during the process and IMF perception of “rights to know” for the public

3. Inadequate participation of the poor countries

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Chapter2: Broken Promises

Stiglitz identifies several reasons of failure of IMF (cont’d):4. Unfairness of treatments between the rich and poor countries e.g.

adherence to article 4

5. IMF should consult widely within a country as it makes its assessments and designs its programs

6. IMF initial reports that each country has to fill reflects the one-size-fit-all attitudes.

“The international institutions have thus escaped the kind of direct accountability that we expect of public institutions in modern democracies. The time has come to grade the international economic institution's performance and to look at some of those programs “ (Stiglitz 2001, p.52)

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FREEDOM TO CHOOSE?

Chapter 3

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Chapter3: Freedom to Choose?

Fiscal Austerity, Privatisation and Liberalization are the 3 pillars of Washington Consensus advice. IMF and the World Bank also deploy them as criteria for grading systems of countries. Foreign Investment is also a key of globalisation. The problem was that many of these policies became ends in themselves and are pushed too fast

and too far. Privatisation: Governments, often times, spend too much time and efforts

doing things that should NOT be doing, such as running airlines and running railways systems, rather than providing spending necessary supports and fundamental policies to monitor and control those industries. However, privatisation could miserably fail when:

• Privatization is implemented too fast and too far without policies or regulations to provide essential services which eventually causes market failure

• Corruption; without the appropriate legal structure and market institutions, the new owners might have an incentive to strip assets rather than use them as a basis for expanding industry.

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Chapter3: Freedom to Choose?

Liberalisation failure: • So far, in developing countries experience an opposite result that

this mechanism has intended. It forces domestic businesses to close down once trade barriers are eliminated and markets in developing countries have strong competitions flooded into. Markets in developing countries desperately require two important skills to survive; capital and entrepreneurship.

• To survive this invasion, governments in the developing countries have to open itself gradually and systematically e.g. China spent more than 20 years to gradually open itself up to the global market

• Hypocrisy of developed countries and inequalities between the developed and developing countries.

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Chapter3: Freedom to Choose?

Foreign Investment: it’s a new part of globlisation that resulted from liberalisation, privatisation and macro-stability. It promises growth, accessibility to knowledge and expertise for a local community and an access to sources of finance. However, it could, yet again, result otherwise.•Local businesses are closed down because they cannot compete with such strong competitors e.g. Wal*Mart•Foreign investors do not attempt to improve the working conditions for local community e.g. financial markets in Argentina and Bolivia•Governments of developing countries are pushed to favour those foreign investors e.g. an investment in Indonesia

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Chapter3: Freedom to Choose?

1. Trade liberalisation + high interest rate = job destruction and unemployment creation

2. Financial market liberalisation without regulatory structure = economic instability

3. Privatisation without competition policies and oversight to ensure that the monopoly are not abused = HIGHER price for consumers

4. Fiscal austerity is pursued blindly = higher unemployment rate and shredding of social contract.

In Short: Freedom to choose is when countries can consider the alternatives which strategy, priorities should they adopt through democratic political processes with their own pacing and sequencing. International intuitions should only play a role of information provider so that those countries can make a judgment on their own knowing the consequences.

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THE EAST ASIA CRISIS: How IMF Policies Brought the World to the Verge of a Global Meltdown

Chapter 4

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Chapter 4: The East Asia Crisis

• Crisis in Asia in 1997, due to a rapid financial and capital liberalisation started in Thailand, was felt all over the world and some countries still feel it in years to come such as Indonesia. Since the IMF was founded particularly to avert the crisis, it should reconsider its role and its strategy to provide recommendation and supports.

• Yet, IMF blamed it on Asian’s institutions that they were rotten and corrupt whilst those countries especially China has miraculously established itself as an economic power and its growth has surged compare to 30 years ago

• Stiglitz identified 2 patterns of the crises; self-fulfilling prophecy and speculative attacks. IMF also had patterns to solve the identified crises but failed miserably.

• Stiglitz along with many governments in developing countries share the same view that IMF itself is part of the problem

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Chapter 4: The East Asia Crisis

How IMF and US Treasury led to the crisis•Liberalisations policies were pushed to the market though there was little evidence that growth would have been generated•IMF insisted Thailand to lift their regulations to control real-estate speculation as they believe that “market must know best”•Similar crisis also happened in Korea led by US Treasury forcing Korean government to accept liberalisation too fast and too far before the safety net was establishedAfter the crisis happened, IMF still failed to provide the remedy because:•Austere fiscal policy made the recession far worse then it needed to be•The failure to recognise the important interactions among the policies pursued in different countries•IMF forced banks in Asia to increase the interest rate up to 25% which resulted in contraction of the economy in the region during the crisis e.g. Korea and Indonesia. •IMF policies did not accommodate the restructuring of both financial sectors and corporates e.g. forced to close down banks and tighten loans

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Chapter 4: The East Asia Crisis

After the crisis happened, IMF still failed to provide the remedy because (Cont’d):•Last not not the least mistake of IMF is the risk in social and political turmoil due to its excessively contractionary monetary and fiscal policies e.g. in Indonesia•After the crisis happened, those countries who shut doors to IMF policies, such as Malaysia and China, had gotten away from falling into the recession whilst those countries who was a good pupil like Thailand had suffered the recession for several years. Korea who smartly chose IMF policies to adopt handsomely recovered from the recession whilst developed itself as today’s forefront runner in global economy.•Explanation to the failure; IMF cannot accept its own mistakes and conspiracy belief that it helped to open the gateway for western investors to make money

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Chapter 4: The East Asia Crisis

An Alternative to IMF mistakes proposed by Stiglitz•Is to implement the policy and operate the market as if it was at fully employment whilst conducting a financial restructuring and a debt restructuring and allowing the financial flow like Korean government did.

In sum, what happened in East Asia helps to present the discontent in developing countries towards international institution and developed countries. Additionally, IMF should reconsider its strategy and plan to provide aids to developing countries. What happened in Russia in the 1990’s which will be discussed in the next chapter shall demonstrate more clearly.

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WHO LOST RUSSIA?

Chapter 5

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Chapter 5: Who Lost Russia

When USSR collapsed and Russia was reformed, IMF and Western leaders claimed that the matter would have been far worse without their supports. However, the current circumstance in Russia is now disastrous (p.135). There are challenges and opportunities of the transition for Russia as follows:

Challenges Opportunities

Market revolution ignored knowledge in history, economics or society that happened prior to the reform.

Not just an economic reform but the whole social structure reform

The move from one price systems to market price system

Russia can put a high level of education into good use for the New Economy

An appropriate speed of the reform “shock therapy” and “gradualist”

A replacement of decentralised systems to centralised systems

Military budget was reduced to supposedly improve quality of lives of the people in Russia

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Chapter 5: Who Lost Russia

Reform Story•3 pillars for the reform were identified; Liberalisation, Stabilisation and a rapid Privatisation. Nevertheless, the strategy did not work as indicated by a shrunken GDP post 1989. •Russia followed IMF advices quite closely but the result was quite the opposite to that IMF predicted. Fund flow poured out of the country rather than pouring in by foreign investors so Russia had to borrow more from IMF and thus became more indebted•Privatisation happened without a good plan to support so the government gave away its valuable state asset away.•To make the matter worse, IMF encouraged Russian government to borrow more in US dollars which eventually devalue its own currency, Ruble. •IMF also convinced the World Bank to lend more of money despite strong opposes due to its corruption problems, an efficient governance within the country. Predictably, the rescue miserably failed

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Chapter 5: Who Lost Russia

The Failed TransitionThere are signs that the reform as closely advised by the IMF has failed; •A significant decline in GDP •A shorter life span (around 3 years shorter)•The increase in poverty and inequality

Stiglitz identifies area where IMF failed to provide legitimate advices to help the transition in Russia:•Inflation- policies that result in a contraction. •Privatisation- too fast and too far•The social context- IMF policies failed to appreciate the social context of the transition economies (they focus too much on inflation and macroeconomics)•Speed of the reform: shock therapy treatment versus gradualist•The Bolshevik approach to market reform

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Unfair Fair Trade Laws and Other Unfair Fair Trade Laws and Other MischiefMischief

Chapter 6

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• The IMF is a political institution. The 1998 bailout was dictated by a concern to maintain Boris Yeltsin, an ex-communist.

• Russia has joined free markets since 2000.• The problems with the reform strategy and the Yeltsin

government became clearer, when they agreed the conditions of loan agreements.

• Many critics worried about the pressure from the IMF for rapid privatization.

• This cause huge inequality through the corrupt privatization process.

Chapter 6: Unfair Trade Laws and Other Mischiefs

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• The United States supports free trade, and impose fair trade laws, but known outside the United States as ‘unfair trade laws’.

• These laws will protect below cost of selling product from foreign rival through dumping duties but U.S. proved it with little evidence.

• Aluminum and uranium case – Russia would not be able to sell its goods in the U.S. because it was suppressed by American firms who accused Russia of dumping goods.

• With a trade restriction would generate excess profit and rise to further source of corruption.

Chapter 6: Unfair Trade Laws and Other Mischiefs

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Better Roads to Better Roads to the Marketthe Market

Chapter 7

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• The failure of reform strategies in Russia have become increasingly evident. Meanwhile China and Poland employed alternative strategies.

• China and Poland pursued a gradualist policy of privatization, trying to build up the basic institutions of a market economy such as banks and legal systems.

• Moreover, Poland gave importance of democracy for reforms, keep unemployment low, and adjust pensions for inflation.

Chapter 7: Better Roads to the Market

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• China’s reform began in agriculture, and moved from collective system to individual system of production.

• Foreign firms were invited to participate in joint venture.

• Monetary policy and financial institutions facilitated the creation of new enterprises and jobs as well as maintain social stability.

• Key attribute of the success is that they are ‘homegrown’ designed by people, sensitive to the needs and concerns of their country.

Chapter 7: Better Roads to the Market

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The IMFThe IMF’’s Other Agendas Other Agenda

Chapter 8

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• Today’s IMF loose intellectual coherency by setting intervening in the market. IMF forged policies which weaken and allow problems to play out.

• Thailand’s real estate and stock market bubble. IMF poured billion of dollars into the market, speculators gain profit coming from government, supported by the IMF.

• The crisis of trade deficit can affect the long term investment if a country has borrowed short term.

Chapter 8: the IMF’s Other Agendas

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• Business firms who could not repay their loans, they go to bankruptcy just in the case of real estate bubble burst in Thailand.

• Therefore, IMF programs provide funds for governments to bail out Western creditors but this strategy caused moral hazard problem by taking less care in screening ‘free’ insurance.

• Even worse, the bail out cannot insure foreign exchange volatility.

Chapter 8: the IMF’s Other Agendas

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• IMF believed that raising interest rate would lead to a stronger exchange rate but in real life is not, it hurt more firms by raising interest rate or the fall in the exchange rate.

• IMF has objectives that are often in conflict with each other, one is enhancing global stability and ensuring that there are funds for countries facing a threat of recession. It is also pursuing the interest of the financial community.

• IMF emphasis on getting creditors repaid rather than helping domestic business.

Chapter 8: the IMF’s Other Agendas

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The Way AheadThe Way Ahead

Chapter 9

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• The world is complicated, workers worry about jobs and wages, they see interest rates as inducing an economic slowdown this mean unemployment.

• There is not just one market model.

• Swedish model that government takes responsibility on social welfare, provide better public health, unemployment insurance, and retirement benefits.

Chapter 9: the Way Ahead

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• International financial system should be reformed by resisting such large externalities, interventions.

• Trying to impose more creditor-friendly bankruptcy reforms.

• Giving less reliance on bailouts.

• Improving banking regulation such as bad lending practices, and export of instability.

• Improving risk management such as volatility of exchange rates.

Chapter 9: the Way Ahead

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• Improving safety nets such as unemployment insurance programs.

• Improving response to crisis.

• The developing countries require not only that aid be given in a way that helps their development but small amount of money could be promoted in health and literacy.

Chapter 9: the Way Ahead

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• Reforming WTO will require more balanced trade agenda, and more balanced in treating concerns, like environment.

• Today globalization can be forced for good; democracy and civil society have changed, political movements have led to debt relief, people attain higher standards of living, seeking new markets for their exports and welcome foreign investment.

• International institution should work in the way that is a change in governance, a change in voting right, and become transparency

Chapter 9: the Way Ahead