Globalization and Its Discontents Revisited Read online

  GLOBALIZATION

  AND ITS

  DISCONTENTS

  REVISITED

  Anti-Globalization

  in the Era of Trump

  Joseph E. Stiglitz

  W. W. NORTON & COMPANY

  Independent Publishers Since 1923

  NEW YORK LONDON

  To my mother and father who taught me to care and reason,

  and to Anya who put it all together and more

  CONTENTS

  Introduction to Globalization and Its Discontents Revisited

  Acknowledgments to Globalization and Its Discontents Revisited

  Part I: Globalization and the New Discontents

  1. The Failures of Globalization

  2. The Multiple Dimensions of Globalization

  3. The New Protectionism

  4. Can Globalization Be Saved? An Agenda for Equitable Globalization with Shared Prosperity

  Part II: Globalization and Its Discontents (2002 edition)

  5. The Promise of Global Institutions

  6. Broken Promises

  7. Freedom to Choose?

  8. The East Asia Crisis: How IMF Policies Brought the World to the Verge of a Global Meltdown

  9. Who Lost Russia?

  10. Unfair Fair Trade Laws and Other Mischief

  11. Better Roads to the Market

  12. The IMF’s Other Agenda

  13. The Way Ahead

  Afterword to the 2017 Edition

  Notes

  Index

  GLOBALIZATION

  AND ITS

  DISCONTENTS

  REVISITED

  INTRODUCTION TO GLOBALIZATION AND ITS DISCONTENTS REVISITED

  DONALD J. TRUMP became president of the United States on January 20, 2017, and threw a hand grenade into the global economic order—the arrangements governing the movement of goods, services, and capital across borders and attempting to ensure stability. The United States was pivotal in the creation of this system in the aftermath of World War II. Partly because of this system, the second half of the twentieth century was markedly different from the first half, which was marred by two world wars and the Great Depression. The smoke has not yet cleared, but the post-Trump world will almost surely be different from what came before. While for three-quarters of a century efforts had focused on creating a more globally integrated world, entailing global supply chains that had enormously lowered the costs of goods, Trump reminded everyone: borders do matter.

  In the beginning of this century, I wrote Globalization and Its Discontents (which, for brevity, I write as GAID going forward) to explain the unhappiness with globalization on display in so many countries in the developing world that I had been able to observe closely from my perch as chief economist of the World Bank. This is the part of the world with 85 percent of the world’s population but with 39 percent of the world’s income.1 The unhappiness was greatest in Sub-Saharan Africa, often rightly called a forgotten region, with a burgeoning population expected to reach 2.1 billion by 2050—close to seven times that of the United States today; its rich human and natural resources have been stolen from it for centuries, leaving it today with a per capita income 2.5 percent of that of the United States.2

  Now, globalization’s opponents in the emerging markets and developing countries are joined by those in the middle and lower classes of the advanced industrial countries. Trump took advantage of this discontent, crystallized and amplified it. Trump explicitly blamed the plight of America’s Rust Belt workers on globalization—on the signing of the “worst trade deals ever.”

  On the face of it, this is a remarkable claim. The United States and other advanced countries wrote the rules of globalization, and they run the international organizations that govern it. The complaint of those in the developing world was that the advanced countries had written the rules and managed these international organizations in ways that disadvantaged them. Yet, President Trump claimed—with enormous support from American voters—that the very trade agreements and other institutions that it shaped were unfair to America.

  Populists in both emerging markets and advanced countries are giving voice to their citizens’ discontent with globalization, but just a few years earlier, establishment politicians promised that globalization would make everyone better off. So too, two and a half centuries of economic research—starting with Adam Smith writing at the end of the eighteenth century and David Ricardo early in the nineteenth—argued that globalization was beneficial to all countries.3 If what they said is correct, how do we explain why so many people in both the developed and developing world have become so hostile to it? Was it possible that not just the politicians, but also the economists, got it wrong?

  One response occasionally heard from neoliberal economists—those economists who believe that the freer the markets the better, and accordingly advocate for “freeing” up trade—is that people are better off, but they just don’t know it. Their discontent is a matter for psychiatrists, not economists.4

  ALL IS NOT WELL IN THE ADVANCED COUNTRIES

  The fact, though, is that large segments of the population in advanced countries have not been doing well. The New Discontents have taken power in the United States in the form of the Trump presidency partly because the United States does things bigger than others—including having more inequality than elsewhere in the advanced world. But much of what I say for the United States applies in a somewhat diminished form to the rest of the advanced world, apart from a few countries, particularly in Scandinavia; here, and elsewhere in my discussion of the New Discontents in Part I, I use the United States as an illustration.

  The Sobering Statistics

  The data describing what has been happening in the United States are sobering: for nearly a third of a century the incomes of most Americans have been essentially stagnant. A middle-class life—a decent job with decent wages and a modicum of security, the ability to own a home and to send one’s kids to college, with the hope of a reasonably comfortable retirement—has been moving increasingly out of reach for a large proportion of the country. The numbers in poverty have been increasing, as the middle is being eviscerated. The one group doing well has been the top—especially the top 1 percent and even more, the top .1 percent, the richest several hundred thousand Americans.

  While moving up the ladder seems increasingly difficult, everyone knows someone who has fallen down: trying to avoid falling down the ladder has put increasing stress on individuals, and not surprisingly, has had health consequences. This stress, combined with increasing inequality and the absence of an adequate health “safety net,” has had dramatic consequences: by 2015, the mortality rate (the probability of death) of American middle-age white males was increasing—while elsewhere in the world, it was decreasing.5 (This is to say nothing of life expectancies of, say, black Americans, which continue to lag far behind those of whites.) This was not because of an AIDS epidemic, Ebola, or the spread of some other virus: the death rate reflected social strains—alcoholism, drugs, and suicide. By 2016, life expectancy for the country as a whole was in decline.6 Such declines are shocking: they occur in rare circumstances, such as the AIDS epidemic in Sub-Saharan Africa or the United States, or the breakup of the Soviet Union.

  It is not just in the United States that the middle class is suffering. My former colleague at the World Bank, economist Branko Milanovic´, has studied how people in different segments of global income distribution have fared over the past quarter century, and he has found that the middle and working classes in Europe and the United States have experienced near stagnation. There are others that also seem not to have done well—including those at
the bottom of the global income distribution (poor farmers in Africa and India, for example). As I explain in GAID, they have been among the victims of the “unfair” rules of globalization.

  Not surprisingly, there are some who have done well over the past quarter century: the big winners are the global 1 percent—the multimillionaires and billionaires—and the new middle classes in India and China.7

  The global picture then is this: in most countries around the world there is growing inequality—those that followed the American economic model have typically done worse than countries following other models, though their outcomes have not been as bad as that in the United States. Of concern is not just the disparity between the top and bottom; it’s that large parts of the population are not doing well. The economic model that’s been sold as the best possible—the “liberalized” and “globalized” free-market economy—has not been delivering for large fractions of the population, even more so in the country that seemed to be the most liberalized, the most globalized, and the most market-oriented: the United States.

  This raises three questions: To what extent are these results the consequences of globalization? To what extent are they inevitable? And if due to globalization, to what extent do they occur because the rules of the game for globalization are poorly designed, and to what extent do they come about because individual countries have done a poor job at managing the effects of globalization, given the rules?

  GAID—both the original book and this new volume—gives clear answers: Globalization has played a central role, even if there were other important forces at play, like changes in technology and the structure of economies. These adverse outcomes are not inevitable—they are a result of policies. Globalization has been mismanaged. The rules governing globalization are partly to blame—they are, for instance, unfair to developing countries and have given free rein to destabilizing capital flows. But, even with these rules, the advanced countries could have prevented what has emerged, with so many in the developing world, and now in the advanced countries as well, counted among the losers from globalization.

  So, the short answer to the question of whether the economists and politicians who boasted of the virtues of globalization were correct is this: they were partly wrong, partly right. Globalization, if well managed, could have benefited all. But it was typically not managed well, and globalization has resulted in some—even possibly a majority—of citizens being worse off.

  The Benefits of the Global Economic Order

  Before beginning our discussion of what has gone wrong with globalization, we should say a few words about its benefits. Given the title of this book—and the mood around the world that inspired it—it is to be expected that I focus on the downsides of globalization, what has gone wrong. But we should not lose sight of its benefits. In spite of all the discontent, for all the inequities which are real, the world has benefited enormously from the post–World War II global economic order, of which globalization is a part. I alluded to these benefits earlier. It has contributed to creating the fastest rate of global economic growth ever, and the successes of emerging markets in particular, with hundreds of millions moving out of poverty—more than 800 million in China alone8—and the creation of a new global middle class.

  The second half of the twentieth century was in many ways a vast improvement on the first half, when millions died in two devastating world wars. Part of that improvement may be attributed to the economic successes associated with the global economic order, in the creation of which the United States was central. Modern economics has shown that the rule of law has been an important ingredient in the success of the advanced countries. But the same arguments for why the rule of law has economic benefits within a country hold internationally: a rules-based system is infinitely better than the law of the jungle.

  As I look back at my critique of globalization today—distanced by two decades from the controversies that I was embroiled in at the World Bank and the IMF—I feel that I should have celebrated the successes more. The UN has succeeded in reducing conflict and protecting children and refugees. Global diseases have been effectively attacked—including HIV/AIDS, the avian flu, and Ebola. Life expectancies have increased in many countries through the efforts of international organizations. Cancer-causing ozone holes, a result of the use of chlorofluorocarbon gases, are being repaired. These are remarkable achievements in a relatively short period, achievements which should be recognized and in which globalization has played a key role. The right way to read GAID is that, given the importance of globalization and the global order that had been established in the aftermath of World War II, it was essential that we make that system as equitable and efficient as possible. GAID was written out of the conviction that we could improve it; indeed, that we had to improve it.

  THE MISMANAGEMENT OF TRADE GLOBALIZATION

  How we have managed one of the most important aspects of globalization—the freer movement of goods and services across borders, sometimes called “trade globalization”—illustrates the mismanagement of globalization more generally.

  Trade Agreements: Unfair to Whom?

  Global trade has increased enormously, some 50 percent faster than global growth since 1980.9 In the United States, imports went from 10 percent of GDP to 15 percent over the same period.10 This increase in trade results partly from the lowering of transportation costs, but even more important have been changes in the rules of the game, the reductions in tariffs (the taxes imposed on imports) and other man-made barriers to trade. These reductions typically occur through trade agreements, in which there is a mutual reduction of trade barriers.

  Trump’s claim that in negotiating these agreements U.S. trade negotiators got snookered is simply false. American negotiators got most of what they wanted. Anyone who has watched these trade negotiations, as I have for years, would view Trump’s charges as laughable. The problem was with what they wanted: From the perspective of America as a whole, they wanted the wrong thing. What they asked for was essentially what American corporations wanted. American corporations wanted access to cheap labor, without environmental and labor protections. The corporations also liked the fact that threats to move their factories abroad weakened workers’ bargaining power. This enriched their coffers, as wages were driven down. They were pleased that trade agreements helped ensure the property rights of investments made in developing countries, for this made their threats to relocate their plants in these cheap-labor countries more credible. When they drafted the provisions concerning intellectual property rights, they weren’t thinking about what would be good for the advancement of science in the United States, let alone the world. They were thinking about what would increase the profits of America’s big corporations, and especially its large drug and entertainment companies—even if it increased the prices that American consumers had to pay and even if it resulted in a slowing down of the overall pace of innovation.11

  Trade Globalization: Benefiting Some at the Expense of Others

  Thus, the real problem with trade globalization was simple: even if globalization was good for the country as a whole, as its boosters claimed—in the sense that overall national income went up—it was not good for everyone in the country. The trade agreements were unfair, but they were unfair in favor of America and other advanced countries—the developing countries were justified in their complaints. But the agreements were also unfair in favor of corporations, and against workers whether in the advanced countries or the poorer ones. So the workers in America were also right to complain.

  Within each country, there were winners and losers. Those at the top got more than 100 percent of the gains, meaning that the rest—and unskilled workers in particular—were worse off. The gains went to those who were already doing well, the losses to those who were already suffering. I will explain in Part I on the New Discontents how all of this came to be.

  Could Everyone Have Been a Winner?

  If the advocates of globalization were correct about th
e magnitude of the gains, then in principle, it would have been possible to take some of the gains away from the winners, having them share their gains with the losers, and everyone could have been better off.

  But to put it bluntly, the winners as a group were selfish: politics in the era of globalization’s rapid advance concentrated globalization’s gains ever more in the hands of the winners, especially in the United States, where money has so much influence in determining political outcomes. There were successive tax cuts (for instance, in 1997, 2001, and 2003) under both major political parties12— aimed at the top, the groups that were benefiting the most from globalization.

  Had the advocates of globalization in the United States and other advanced countries been more enlightened and less shortsighted, they would have recognized the threat to workingmen and -women posed by globalization and they would have done something about it—just as they would have recognized the threat to economic stability posed by unbridled financial market deregulation. They should have known that in a democracy, policies that, year after year, leave significant groups of the population worse off are likely not politically sustainable.

  Destroying Communities

  Globalization not only exacerbated the already too-high level of inequality among individuals13 but also deeply weakened many communities.

  In the decades well before Ronald Reagan’s presidency, when a company grew, the executives and workers prospered together and so did the communities in which they lived and worked together.14 But increasing inequality split management, workers, and the communities in which they lived. Increasingly, as economic segregation grew apace, the executives making key decisions lived in separate neighborhoods from ordinary workers.15 They didn’t have to bear the consequences of living in dying communities; they could pretend they didn’t exist. Corporations often rotated managers among different locations—enabling the executives to get to know the company better, but distancing them from the community in which they lived. The community that is important to the executive is that of his or her fellow executives—very different from a hundred years ago, when the business leaders lived in the community where their businesses were located and were part of it and its leadership. The care for the community was born partly out of true social responsibility—a kind of noblesse oblige—and partly out of enlightened self-interest—well-functioning communities meant happier and more productive workers.