Today's date:
Winter 2007

Rich Countries, Poor People?

Joseph Stiglitz was awarded the Nobel Prize for Economics in 2001. He is author, most recently, of Making Globalization Work. He spoke with NPQ editor Nathan Gardels in September.

NPQ | You have said that globalization 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 globalization would make everyone better off, the unheralded side of globalization American-style is that it is making many in the advanced industrial countries worse off. This is even so when economic growth increases because globalization has put intense downward pressure on the wages of the unskilled and the less skilled of the labor 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 labor 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 “Wal-Martization.” To be sure, Wal-Mart brings cheaper products to workers in countries like the US, but it epitomizes 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 globalization—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 subsidized 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.

Globalization does hold out great promise if it is managed properly. But it will only work if the winners share with the losers.

NPQ | 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 globalization 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 Organization 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 globalization.

NPQ | What set of policies in the advanced countries can make globalization work?

Stiglitz | The prescription for making globalization 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 a some kind of rupture in the social consensus. The new, more conservative government will only be about fine-tuning the model.

NPQ | Why has East Asia been so successful at taking advantage of globalization 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 globalization 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 raise 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 International Monetary Fund (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.

NPQ | You have often criticized the “democratic deficit” at the IMF 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 US 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.