Stiglitz on more friendly globalisation
By Jon Fernquest[Introduction | Vocabulary | Article | Reading Questions | Answers]
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Is there any middle path between globalisation and anti-globalisation?
Are the only negative impacts of globalisation on poorer developing countries?
Have there been negative impacts on the advanced industrialised countries that originated the very term "globalisation" ?
What can be done to make the impact of globalisation less severe?
Joseph Stiglitz, winner of the Nobel Prize in Economics, answers these questions in today's article.
Adding Outsourcing
If outsourcing becomes more important, what Stiglitz says may change slightly.
Stiglitz only mentions the effect of globalisation on unskilled wages, but with outsourcing both skilled and unskilled wages can be affected.
Some very skilled jobs such as computer programming in the United States can be easily outsourced. This could lower the wages of these skilled jobs. Some relatively unskilled jobs such as taxi driver, janitor, or any personalised service cannot be outsourced at all, so they wouldn't be affected.
For more on outsourcing read the article on outsourcing written by economist Alan Blinder this year in Foreign Affairs.
The papers of Princeton Economist Gene Grossman demonstrate the effects on labour markets that increased outsourcing is likely to have. (Sources: Brad De Long's Blog and Trade Diversion Blog)
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What government policies can help reduce the negative effects of globalisation?
2. What kind of countries are rich industrialised countries like the US becoming?
3. Why is globalisation making many in advanced industrial countries worse off even with increased growth?
4. With imperfect information and the free flow of capital but not labour (outsourcing) what happens to wages in advanced industrialised countries like the United States?
5. What benefits do large retailers like Walmart or Lotus bring to a country or town?
6. What obvious costs do large retailers bring?
7. What is the essence of Walmartisation?
8. Who are the winners and losers of globalisation?
9. What does American society increasingly look like after globalisation?
10. What happened to income inequality between richer America and poorer Mexico after the NAFTA free trade agreement?
11. What impact did highly subsidised American corn have on Mexicans?
12. What would a "fair" trade agreement allow Mexico to do to lessen the impact of American agricultural subsidies?
13. Are trade restrictions by developed countries against developing countries greater than they are against other developed countries? If so, by how much?
14. Has development aid compensated for high tariffs by developed countries?
15. How can globalisation work?
16. Is managed globalisation a radical idea nowadays?
17. What international organisations could help to manage globalisation and prevent a backlash, according to Stiglitz?
18. What strategy can advanced industrialised countries use to manage the impact of globalisation in their own countries?
19. How can the Scandinavian model lead to increased competitiveness?
20. Why have Asian countries been able to take advantage of globalisation better than Latin American countries?
21. Has China relied completely on market forces to eliminate proverty?
22. Is Chile's economy more like an Asian economy?
Bangkok Post Article: October 22, 2006
`Scandinavian model' needed
The negatives of globalisation can be offset by high levels of investment in education, research and technology, a progressive income tax and a strong safety net JOSEPH STIGLITZJoseph Stiglitz was awarded the Nobel Prize for Economics in 2001. He is author, most recently, of "Making Globalization Work." He recently spoke with Global Viewpoint editor Nathan Gardels.
Nathan Gardels: You have said that globalisation is producing ``rich countries with poor people'' not just in the developing world but in the advanced countries, including the United States. What do you mean by that?
Joseph Stiglitz: Despite the promise that a well-managed globalisation would make everyone better off, the unheralded side of globalisation American-style is that it is making many in the advanced industrial countries worse off. This is even so when economic growth increases because globalisation has put intense downward pressure on the wages of the unskilled and the less skilled of the labour force.
The dynamic behind this can be easily seen if we assumed perfect information in markets globally. That would mean everyone at the same skill level would have the same wage. As it is, with imperfect information, and with the free flow of capital but not labour as illustrated in outsourcing, we can see wages being pushed down. For the past five years, real wages in the US have fallen.
In addition to this, there is the added factor of what some call "Walmartisation.'' To be sure, Wal-Mart brings cheaper products to workers in countries like the US, but it epitomises the conservative model that says a company must cut costs to remain competitive, or a country must cut taxes and the welfare state in order to be globally competitive.
The resulting society is one in which the winners of globalisation - those with capital and at the high-skill end - are better off, but the middle class is being squeezed as pensions and health care are stripped and wages depressed. American society is being hollowed out so there is only a top and a bottom.
In developing countries, unbalanced free trade agreements have also made things worse for many. During the first 10 years of the Nafta agreement, for example, the income disparity between Americans and Mexicans actually grew by more than 10 percent. Poor Mexican farmers now have to compete in their own country with highly subsidised American corn, often driving them off the land, into cities or up to the US, even if it is true that corn has become cheaper for urban residents.
A fair agreement would let Mexico "countervail'' with its own tariffs to even out the impact of US subsidies, or for the US to eliminate sugar tariffs and the like.
Overall, developed countries impose tariffs on developing countries that are on average four times higher than against other developed ones. Rich countries have cost poor countries three times more in trade restrictions than they give in total development aid.
Globalisation does hold out great promise if it is managed properly. But it will only work if the winners share with the losers.
Gardels: This line of thinking was once considered radical, but now even US Federal Reserve Chairman Ben Bernanke said recently that the decline of social benefits in the US and the inequality resulting from globalisation is becoming too vast to last. He fears a backlash of protectionism will be the result unless there are compensatory social policies.
Stiglitz: He is absolutely right. On this we are on the same page. We now have the World Trade Organisation and a set of international trade rules that might help mitigate a backlash. It happened before, in the interwar years between the First and Second World Wars - before which global trade was greater than it is now. So it could happen again now if we continue with unfettered globalisation.
Gardels: What set of policies in the advanced countries can make globalisation work?
Stiglitz: The prescription for making globalisation work is what is generally called "the Scandinavian model.'' That means high levels of investment in education, research and technology plus a strong safety net. That of course also entails, as in the Scandinavian countries, a highly progressive income tax.
Far from making these countries less competitive, it has made them more so. Though it may seem a contradiction to conservative ideologues who think cutting taxes is the answer to everything, the fact is that people are more willing to take entrepreneurial risks if they can count on a safety net and if they have the training to be innovative.
In Sweden, the social democrats who fashioned this policy have just been turned out of office. But we should not read that as some kind of a rupture in the social consensus. The new, more conservative government will only be about fine-tuning the model.
Gardels: Why has East Asia been so successful at taking advantage of globalisation while Latin America, for example, has not?
Stiglitz: The East Asians - first Japan and later countries like Singapore, Taiwan and South Korea and now China - understood that their gap with the advanced world was in knowledge and technology. So they encouraged direct foreign investment, insisting that technology transfer come along with it, and invested massively in education and infrastructure, largely through their own national savings, which are the highest in the world.
China, especially, has embraced globalisation on its own terms. It was slow to open up its markets for imports and even today does not allow the entry of speculative, short-term capital flows that so easily lead to boom and bust cycles in emerging economies.
But on top of this, China, like the others, has not relied on trickle-down wealth to lift up those at the bottom, but has sought to raising the poorest through government intervention. In the past decade and a half, hundreds of millions have been lifted out of absolute poverty there.
Now that a wealth gap is emerging because of sustained, rapid growth, the Communist Party has put the new policy of "harmony'' at the top of its agenda, aiming to stop the gap from growing too large.
Latin America has been, in the main, a mirror image of East Asia. It lacks domestic savings. It hasn't the fiscal wherewithal for the necessary investments in education and research or to pay for a safety net. It allowed in short-term speculative capital, which fled at the first sign of trouble, sending a country like Argentina, with an A+ rating from the IMF, into default and calamity.
Though Chile is an exception, growth in Latin America as a result has been in spurts and reversals. By and large it has been weak and unsustainable - except in the export of raw materials to China.
Gardels: You have often criticised the "democratic deficit'' at the International Monetary Fund and World Bank. At the recent Singapore meeting, Brazil, China, South Korea and Mexico were given a greater voice on the governing board. Is that meaningful?
Stiglitz: Clearly, the IMF had lost all political legitimacy. Its pressures and prescriptions made the Asian crisis much worse and led to disaster in places like Argentina. Is this a step forward? Hopefully. But it remains to be seen.
For the moment, I tend to fall on the side of the skeptics who feel that bringing these top-end emerging economies on board is meant to quell the pressure for fundamental reform. The United States still, unconscionably, retains its veto power. And the World Bank can still only be headed by an American. When those aspects are reformed, then maybe it will make a real difference.
2006, Global Viewpoint. Distributed by Tribune Media Services Inc.
Vocabulary
progressive income tax - a tax on income where the percentage taken as tax increases the more one earns (richer people get taxed more)
unheralded - unexpected (not mentioned beforehand)
Walmart - the largest retailer in the world, similar to Lotus, Carrefour, or Big-C (See Wikipedia)
Walmartisation , Walmarting - the spread of the competitive business practices of Walmart among large corporations (See Wikipedia on Walmarting)
x epitomises y - x is a perfect example of y
NAFTA agreement - North American Free Trade Agreement, the free trade agreement (FTA) between the United States, Mexico, and Canada (See Wikipedia on NAFTA and articles on Trade Blocs)
income disparity - large difference in income
subsidised - when the government gives money to some activity to make it possible to do
countervail - extra duties (tariffs, taxes) that restrict international trade where imports are subsidized by a foreign country and hurt domestic producers (See Wikipedia on countervailing duties)
a backlash - a sudden strong reaction against something
compensatory social policies - government policy that lessens the impact on certain groups of policies that increase economic efficiency (like lowering tariffs and import restrictions)
we are on the same page - we agree
mitigate a backlash - take steps to solve the problem that caused the backlash
unfettered globalisation - globalisation without regulations
a prescription for x - how to solve a problem or improve situation x
a safety net - social safety net (See Wikipedia on social safety net)
x entails y - x implies y, if x then y
rupture in the social consensus - a society agreed about policy in the past, now they don't
fine-tuning the model - make small and precise changes to improve
direct foreign investment - Foreign Direct Investment (FDI), when a foreign controls a company in another country and its assets (See Wikipedia on Foreign Direct Investment)
technology transfer - a developing country gaining technology from developed countries
embraced - accepted enthusiastically
trickle down wealth - the view that wealth automatically passes from the wealthy to non-wealthy through economic growth and investment (See Wikipedia on trickle-down economics)
government intervention - when government makes regulations that govern markets
hasn't the fiscal wherewithal - doesn't have enough money
short term speculative capital - money that enters a country temporarily from people speculating that they can earn a profit from temporary differences in asset prices (can't count on this money being there in the long run)
default - default on loans, fail ure to pay borrowed money back to the lender in time
calamity - damage, destruction, and tragedy
a spurt - a sudden jump (not permanent)
growth in spurts and reversals - not constant upwards growth (growth with a lot of problems)
political legitimacy - popular acceptance of government that is currently governing a country (See Wikipedia)
the Asian crisis - the financial crisis that started in July 1997 in Thailand and affected currencies, stock markets, and other asset prices in several Asian countries, especially South Korea (See Wikipedia on the East Asian Financial Crisis)
skeptics - people who have trouble believing what other people easily believe, people who doubt (See Wikipedia on Scepticism)
quell the pressure for y - reduce demands by the public for y
unconscionable - should be ashamed of what they did (because the effects have been severe)
Answer Key:
1. What government policies can help reduce the negative effects of globalisation?
a. Investment in education, research, and technology.
b. A progressive income tax.
c. A strong safety net.
2. What kind of countries are rich industrialised countries like the US becoming?
Rich countries with poor people.
3. Why is globalisation making many in advanced industrial countries worse off even with increased growth?
Many people are made worse off because of "intense downward pressure on the wages of unskilled and the less skilled of the labour force."
4. With imperfect information and the free flow of capital but not labour (outsourcing) what happens to wages in advanced industrialised countries like the United States?
Wages are pushed down (because capital flows out of the country to take advantage of lower priced labour in other countries.)
5. What benefits do large retailers like Walmart or Lotus bring to a country or town?
Large retailers bring "cheaper products to workers."
6. What obvious costs do large retailers bring?
They eliminate local retailers selling local products making people less self-reliant.
7. What is the essence of Walmartisation?
That a company "must cut costs to remain competitive, or a country must cut taxes and the welfare state in order to be globally competitive."
8. Who are the winners and losers of globalisation?
The winners are people with rich people with capital and educated people with high skill levels. The losers are the middle class with lower wages and lost benefits such as healthcare and pensions.
As noted before, with outsourcing it isn't that simple, because both high skill and low skill jobs can be outsourced.
9. What does American society increasingly look like after globalisation?
It looks "hollowed out" with only a top and a bottom.
10. What happened to income inequality between richer America and poorer Mexico after the NAFTA free trade agreement?
During the first ten years of the agreement income inequalities rose by 10%.
11. What impact did highly subsidised American corn have on Mexicans?
Corn became cheaper for urban residents in Mexico.
Poor Mexican farmers could not compete with the subsidised corn. Poorer farmers often had to leave the land they farmed and move to the city to work or migrate to the United States illegally and work.
12. What would a "fair" trade agreement allow Mexico to do to lessen the impact of American agricultural subsidies?
It would allow countervailing duties to counteract American agricultural subsidies.
13. Are trade restrictions by developed countries against developing countries greater than they are against other developed countries? If so, by how much?
"...developed countries impose tariffs on developing countries that are on average four times higher than against other developed ones."
14. Has development aid compensated for high tariffs by developed countries?
No, "rich countries have cost poor countries three times more in trade restrictions than they give in total development aid."
15. How can globalisation work?
If it is managed properly and the winners (developed countries) share with the losers (developing countries).
16. Is managed globalisation a radical idea nowadays?
No, even Federal Reserve chairman Bernanke advocates social policies to prevent a backlash of protectionism.
17. What international organisations could help to manage globalisation and prevent a backlash, according to Stiglitz?
The World Trade Organisation (WTO).
18. What strategy can advanced industrialised countries use to manage the impact of globalisation in their own countries?
a. High levels of investment in education, research and technology.
b. A strong safety net.
c. A highly progressive income tax.
19. How can the Scandinavian model lead to increased competitiveness?
Education and safety nets (social insurance provided by the government such as unemployment insurance and health insurance).
"...people are more willing to take entrepreneurial risks if they can count on a safety net and if they have the training to be innovative."
20. Why have Asian countries been able to take advantage of globalisation better than Latin American countries?
Savings, education, and foreign direct investment (FDI).
Asian countries "understood that their gap with the advanced world was in knowledge and technology. So they encouraged direct foreign investment, insisting that technology transfer come along with it, and invested massively in education and infrastructure, largely through their own national savings, which are the highest in the world."
Latin America "lacks domestic savings. It hasn't the fiscal wherewithal for the necessary investments in education and research or to pay for a safety net. It allowed in short-term speculative capital, which fled at the first sign of trouble."
21. Has China relied completely on market forces to eliminate proverty?
No, the poorest have been raised through government intervention: "In the past decade and a half, hundreds of millions have been lifted out of absolute poverty." Preventing the gap between rich and poor from growing too large is an important part of government policy.
22. Is Chile's economy more like an Asian economy?
No, not really. Chile's growth has been "weak and unsustainable" relying on the "export of raw materials to China."
