REVIEW Making Globalization Work. By Joseph E. Stiglitz. New York, London: W. W. Norton, 2006. 356 pp. $26.95.

Lance Taylor *

We live in the decade of the economic globalizers. Scholars and journalists Joseph Stiglitz, Thomas Friedman, Amartya Sen, William Easterly, Jagdish Bhagwati, Martin Wolf, Jeffrey Sachs, Dani Rodrik, and many others expound at length on how globalization is detrimental or beneficial for social well-being. They are more than willing to offer suggestions about how the process can be improved. Compared to much of the competition (for example Friedmans techno-babble in The World is Flat or Sachss happy talk in The End of Poverty about how throwing lots and lots of money at destitution and misery can miraculously make them disappear), Stiglitzs book is a serious essay. It focuses on the structural problems that developing and transition economies confront and presents concrete policy suggestions. Moreover, he emphasizes that the market liberalization policies that the World Bank and International Monetary Fund have been pushing for the last two or three decades have failed to generate significant per capita income growth in most regions of the developing and post-socialist world (see the United Nations 2006 World Economic and Social Survey for the evidence). The two institutions are now engaged in blaming the victim -- their good policies didnt work because poor countries have poor institutions or governance. To his credit, Stiglitz ignores this whole argument. Despite these virtues, however, Making Globalization Work falls well short of the high standards for progressive popular writing about economic policy set by authors like John Kenneth Galbraith and John Maynard Keynes. Stiglitz aspires to this gold standard; it is only fair to review the book from that perspective. To understand its weaknesses, it helps to begin with Stiglitzs intellectual background.

Comments and criticism by Alice Amsden, Duncan Foley, Jeff Madrick, Jim Miller, Jos Antonio Ocampo, Codrina Rada, and Helen Shapiro are gratefully acknowledged.

Contemporary mainstream economics resembles Greek theater. The chorus gets the last word. It incessantly chants that the economic system is basically competitive, populated by agents with good information who strive to maximize their own well-being (profits for firms and consumption utility for households) subject to an observed price system. These choices lead to a welfare level as high as it possibly can be for each participant (if one gains, another must lose), in what is usually called a Walrasian equilibrium after the French 19th century economist, Leon Walras, who first came up with the idea. If the equilibrium is perturbed in some fashion, prices will rapidly adjust to signal how resources should be reallocated to ensure that they are all fully employed as gainfully as they can be. Unfortunately, the actors in the play have a hard time behaving as the chorus thinks they should. Economic information is in practice not fully reflected in prices; there are also distortions such as taxes and tariffs (almost always blamed on government intervention) which lead decisions astray; and monopoly positions exist which, further supported by economies of scale and decreasing costs of production, which can also distort prices. All these forces can push the economy away from a welfare optimum. Mainstream economists vacillate between the view of the chorus and the travails that the actors confront. Some Bhagwati, Wolf, Friedman, even Sen take the perspective of the chorus. Stiglitz, by contrast, became a mainstream economics superstar by writing hundreds of papers (by himself and with numerous collaborators) that construct mathematical models about the manifold optimization problems that the actors in daily economic life are supposed to resolve. His main theme is how asymmetric information between actors can force the system away from a Walrasian position. State intervention may at times improve the situation. Examples are presented below, but before discussing them it will be useful to contrast the mainstream picture of the economy, whether viewed as a whole by the chorus or in detail with the actors, with an alternative structuralist perspective, rooted in sociology and closer to my own view. In the classical variant as set out by Adam Smith, David Ricardo, Thomas Malthus, and Karl Marx, the focus was on neither the price-mediated function of the whole nor the actions of

individual actors, but rather on collective actors organized groups or classes such as capitalists, landlords, and peasants. In the 20th century, Keynes concentrated on financial markets, directing his opprobrium against groups of bear speculators and high saving rentiers. In this alternative account, relationships among collective actors help to determine relative prices and the income distribution (think of Malthuss theory of population and Marxs reserve army of the unemployed) and influence technical progress and supply. On the other sides of markets are factors that determine the level of effective demand (animal spirits of investing firms for Keynes) and also the pace of productivity growth. The economys position depends on these interacting supply and demand systems. Contemporary structuralists emphasize how what we call accounting restrictions among economic actors essentially, what is bought must be sold-- play a crucial role in determining how demand and supply forces interact. Keyness basic insight that often, but not always, the level of effective demand determines aggregate supply emerges from such macroeconomic accounting balances. Finally, underlying both demand and supply are shifting financial decisions by collective actors such as bull real estate and stock market speculators and bear hedge funds that can strongly affect the overall outcome the Asian crisis of 1997 is a telling example. So much for the structuralist approach. How does it differ from the mainstream focus on individual actors as refined by Stiglitz? We can trace the contrasts through a couple of scenarios. Stiglitz pioneered the modern analysis of sharecropping, in the context of a principalagent microeconomic problem perhaps proposed long ago by the late 19th century neoclassical economist Alfred Marshall. A landlord is the principal, with a peasant as the agent he wants to control. The landlord has better ways to spend his time than standing in the noonday sun to ensure that the peasant works his land to produce an acceptably large crop. If he isnt monitored, theres always the risk the peasant will start talking on his new cellphone under a tree or moonlight for somebody else. In other words, the landlord has incomplete information about how an unsupervised peasant will act (an example of the commonly invoked problem of moral hazard).

Armed supervisors on ATVs (???) presumably being too expensive to employ, the landlord elects to cut a deal with the peasant, splitting the observed crop (an ascertainable piece of information for both) in an attempt to get the peasant not to shirk. If the peasant still doesnt perform under such a contract, presumably he can be replaced. If he does shape up, sharing the crop emerges as a solution to a microeconomic coordination problem required due to information asymmetry. As functionalist economics or a Kiplingesque just-so story, this tale makes sense. However, questions remain. Why are there so few landlords and so many peasants? Why were property rules about the control of land set up to favor the landlord in the first place, and how do they change over time? Means of forced labor extraction sharecropping, bonded labor, serfdom, slavery have existed as institutions for thousands of years. They have been supported by imposing social-cultural-political infrastructures (the Indian caste system being only the most obvious example) which have evolved in support of elite social groups. Economists playing statistical games which show that their formal models of imperfect information are supported by the evidence in a given institutional context simply ignore how social structure underlies economic responses an observation that was crystal clear to their classical predecessors. In the absence of social change, their policy suggestions about how to ameliorate the inequity built into sharecropping and other exploitative systems are beside the point. Another example of this myopia can be constructed around adverse selection, a form of information asymmetry well known to Smith and Ricardo. In credit markets, Stiglitz and various co-authors have argued that because of a high rate of defaults, lenders will get a lower overall return on loans to bad borrowers (Smith called them prodigals and projectors) than good ones. If lenders jack up the interest rate to compensate for this risk, sober people may simply leave the market because they are unwilling to pay the higher rate, while dishonest or incompetent borrowers will remain in. Credit rationing can result, with unsatisfied borrowers in the market at any rate of interest.

By extension, there can also be credit rationing at the national level sober countries may be squeezed out of international credit markets, especially in times of financial crisis. In this context, another institutional detail intrudes. Many developing countries have pursued import substituting industrialization which in practice means that they are dependent on imports of intermediate and capital goods to produce final products at home. If their credit is rationed, they will not be able to import the goods needed to keep production going, and output contraction accompanied by inflation of prices of scarce goods will often follow. Stiglitz has argued forcefully and I think often correctly that countries should pursue more expansionary macro policies than they are permitted under most stabilization programs administered by the International Monetary Fund. But in an economy that is foreign exchange constrained as just discussed, expansionary policy is far more likely to stimulate inflation than economic growth. Mainstream theory the chorus in the Greek theater metaphor above would argue rather that price shifts such as real currency devaluation should allow producers to use fewer imports and more domestically produced inputs to keep production going. But, In practice, such possibilities appear to be quite limited in an inflexible economy subject to external strangulation (a folkloric phrase popular around the Economic Commission for Latin America 50 or 60 years ago) due to lack of foreign exchange. Stiglitz is trapped between the chorus and the actors in this particular play. His expansionary argument makes much more sense in macroeconomically flexible Northeast Asia (which rebounded strongly from the 1997 financial crisis) than in Latin America (which suffered an extended lost decade of growth after the Volcker interest rate shock around 1980). In developing countries, economic structure matters and varies according to time and place. These examples are worth bearing in mind because they inform the content of Making Globalization Work. The heart of the book comprises seven chapters dealing with specific problem areas international trade, patents and profits, problems faced by economies with abundant natural resources, environmental issues, transnational corporations, foreign debt, and the global macroeconomic system.

Each chapter presents an overview of the issues at hand, followed by specific policy proposals. They are technocratic, and such interventions at times work out. But at the end of the day, technocracy is effective only within social and political limits, as argued by Easterly in The White Mans Burden (W. W. Norton) and Stiglitz himself with his emphasis on bottom-up action in his earlier book on Globalization and its Discontents (Penguin Press). A laundry list of recommendations is an unfortunate description that springs to mind. It is also a list that is global. There are a dozen or two proposals for new international initiatives setting up tribunals, creating bodies of legislation, even passing out research prizes. In the present international political climate, the chances of any such proposal to materialize cant be very bright. Be that as it may, the two chapters about open economy macroeconomics are the weakest. It makes sense to begin with them. The one on Reforming the Global Reserve System raises valid points but misses others (as most discussions of this issue do). Stiglitz correctly observes that holding high levels of international reserves, which many developing countries have been doing in wake of the crises of the 1990s, has big opportunity costs. Most countries can find more profitable opportunities for placements of their money than in US T-bills paying four or five percent per year. However, he misses an accounting relationship emphasized by structuralists stating that an economys total net foreign assets or NFA (holdings of foreign liabilities plus bank reserves less home liabilities held abroad) is constant in the short run the total can only rise (or fall) over time in response to an external current account surplus (or deficit). There is an example of a firm in a poor country that borrows $100 million abroad (p. 249), issuing its liabilities in exchange for dollars. Because NFA will stay constant, the only thing that can happen (assuming that other home holdings of foreign liabilities are not significant) is that foreign exchange reserves in the poor countrys banking system will go up. Under usual conditions, more reserves will feed into an expansion of money and credit so the effect of the capital inflow is to stimulate demand for domestic goods and financial assets such as real estate and equity. Amplified by bull speculators, asset price booms spurred by

capital inflows were at the root of the financial crises all around the emerging market world in the 1990s. As always happens, the booms ended sharply and the bears feasted on the pieces. The real sides of the Asian, Russian, and Latin American economies collapsed. Returning to his example, Stiglitz seems to assume that the country will have to get another $100 million in reserves to cover the debt. Moreover he says that all the foreign exchange going into reserves is effectively buried in the ground (p. 251) apparently meaning that it will not stimulate credit creation and demand in a country receiving capital inflows. Such will be the case only if new reserves are sterilized by the central banks selling domestic liabilities from its portfolio to contract money and credit. Sometimes such a maneuver is undertaken, sometimes not. Its feasibility depends on whether or not the asset-holding private sector is willing to accept its own governments or central banks non-monetary liabilities at a reasonable rate of interest. Across countries, circumstances differ. The chapter also argues that the twin deficit problem applies: when the fiscal deficit increases so too is it likely that the trade deficit will increase (p. 252). Ironically, twin deficit analysis has been at the core of the stabilization packages administered by Stiglitzs favorite whipping boy, the International Monetary Fund for around 50 years. As it turns out, neither the IMF nor Stiglitz is correct because twin deficits rarely show up in the data. In the US, there are clear co-movements of fiscal and foreign deficits in at most 10 years of the six decades since WWII. In developing countries, the UN 2006 World Economic and Social Survey shows that the most common pattern when fiscal net borrowing is reduced in IMFstyle packages is for private sector net borrowing (income minus spending) to go up while the external deficit stays about the same. Finally, Stiglitz invokes (without citation) a dilemma posed by the Yale economist Robert Triffin in the 1950s: To maintain world liquidity, a country like the US whose liabilities serve as the main source of international reserves .winds up getting increasingly into debt, which eventually makes its currency ill suited for reserves (p. 254). His proposed short-term remedy is for the US to cut its fiscal deficit to bring down the twin external gap. As just observed, there is no guarantee that such a policy move will deliver.

In the longer term, Triffin (like Keynes before him) proposed that the IMF should act as an international bank, accepting deposits from countries and offering loans, thereby creating international money and stabilizing the system. The special drawing rights (SDRs) set up by the Fund in 1969 were a halting step in this direction. Stiglitz suggests supplementing or replacing them with a new international currency called global greenbacks (Keynes proposed the name bancor). It is hard to see the point. The SDR has been withering on the vine for more than 35 years; the greenback is unlikely to thrive any better. The chapter on The Burden of Debt recites problems of countries with odious debt acquired by corrupt governments, highly indebted poor countries (HIPC), economies in which private borrowers acquired too much private external debt (the pre-1997 Asians, for example), and places like Argentina were both private and official lenders jumped in to push loans. Odious debt should be forgiven, or if not an international credit court should adjudicate responsibility between debtors and creditors. The HIPC/Gleneagles debt forgiveness process is duly noted. But complications arise. Basically what the accords did was reduce the annual flow of debt repayments from poor to rich countries. Supposedly the funds thereby freed up would be used to expand pro-poor expenditures in debtor countries. What Siglitz does not note (probably because it started to happen after the book went to press) is that in many country-level negotiations now underway, governments are not being allowed by donor agencies to increase spending to employ the resource flows they were allegedly given. The key points about the external borrowing that led up to the Asian and other crises are that it took place under relatively fixed exchange rates, and that countries typically issued longterm liabilities in their local currency (real estate ownership, shares, etc.) while they borrowed short-term in foreign currencies. They relaxed controls on cross-border financial flows (India and China avoided crisis by being notable exceptions). For the reasons mentioned above, capital inflows stimulated domestic credit markets and led to rising asset prices which brought in more hot money. Because it is an asset price in and of itself and also because internal commodity prices were rising with a stable nominal exchange rate, the real exchange rate tended to appreciate or get stronger.

When the booms broke, foreign lenders fled and unavoidable currency devaluation followed. Argentina and Russia were extreme cases, with highly over-valued pesos and rubles and completely deregulated capital markets. After the Argentine crash, re-imposition of capital controls played a key role in stabilizing the economy, a detail that Stiglitz does not bring out. For the rest, the chapter contains the usual list of policy initiatives, most of them already on the table. International bankruptcy laws are not a bad idea, but arent likely to be enacted any time soon. Stiglitz is on firmer microeconomic ground in his chapters on Making Trade Fair and Patents, Profits, and People, the best ones in the book. The trade chapter is a complete, progressive review of the issues around the successive tariff negotiation rounds and offers sensible recommendations better market access for poor counties, making room for industrial policy, cutting farm subsidies in rich countries, getting rid of escalating tariffs on developing country exports with higher value-added content, freeing up international migration, attacking rich countries non-tariff barriers to trade, and so on. Most of the proposals have been previously presented, but by stating them forcefully Stiglitz makes a solid contribution to the policy debate. The main drawback of the chapter is that it implicitly accepts the mainstream distinction between microeconomic trade theory and open economy macroeconomics. In practice, however, the two sorts of theories interact. If a country receives capital inflows after market liberalization, then as noted above the real exchange rate (broadly, the ratio of indexes of traded and non-traded goods prices) will get stronger, making it difficult to traded goods producers to operate. Massive interest rate hikes and real devaluation after a financial crisis will disrupt the price system, upending the supply side. The Argentine economist Roberto Frenkel emphasizes that maintaining stable, relatively weak real exchange and interest rates combined with intelligently managed capital controls is a natural policy package for developing countries to pursue if they want to enhance their productive capacity in the long run. Such macro price regulation is not an idea that fits naturally onto Stiglitzs analytical radar screen (the contrarian MIT structuralist Alice Amsden calls it getting the prices wrong).

The economics of incomplete information is central to the analysis of trade-related aspects of international profit rights (or TRIPs), and Stiglitz presents it admirably. The recommendations are for cheap distribution and compulsory licensing of crucial drugs, more support for research and innovation by developing county investigators, keeping rich country corporate interests under control. In the chapter on The Multinational Corporation Stiglitz pursues similar reasoning but ignores the structuralist description of MNCs as set out by the former New School economist Stephen Hymer in his dissertation at MIT in 1960 (not published until 1976, two years after his untimely death). Hymer stressed that multinationals can dominate local markets because of advantages which vary according to time and place, but include factors such as preferential access to finance, organization, technology, and product differentiation. The playing field between MNCs, local firms, and government will be shaped by such considerations. Hymers approach is distinctly classical, with its focus on social relationships and the division of labor. Although these ideas have been at the heart of developing country negotiations with and debate about MNCs for decades, Stiglitz doesnt mention them. He also skips over the Harvard business historian Alfred Chandlers analysis of corporate strategy and structure, which leads naturally to a more robust defense of industrial policy (on the part of Amsden and others) than the infant industry and infant economy arguments in the chapter on foreign trade, Rather, the topics mentioned for MNCs include limited liability as the key defining factor for modern corporations, stockholder vs. stakeholder dominance, and market failures. Suggested correctives include global laws for a global economy (meaning provision for international class action suits), global competition law and authority, more corporate social responsibility, etc. The chapter on Saving the Planet contains little beyond what an intelligent newspaper reader already knows about environmental problems. A nice addition is a suggestion that other rich countries might impose countervailing trade duties on US exports because they are not subject to the carbon emission standards of the Kyoto Protocol not a bad idea! Lifting the Resource Curse refers to the fact that countries with abundant natural resources are often victims of general fiscal profligacy, corruption at the top of the government

where extraction permits are portioned out, and environmental exploitation by MNCs. Resource revenues can be extremely unstable, making it hard to run the economy from one year (or month!) to the next. In the longer run, resource-rich economies often follow a lopsided development pattern, with little to show by way of manufacturing or agricultural capability outside the natural resource sector (Venezuela has never properly industrialized, Nigeria shut down its cocoa production after petroleum was discovered). This problem is called Dutch disease after the effects of gas discoveries in the Netherlands in the 1970s but has been remarked upon since the Australian gold rushes beginning in the 1850s. The economy re-orients itself around the natural resource sector, often in conjunction with a strong real exchange rate and low taxes on everything but resource rents. Stiglitz suggests that resource-rich countries should set up stabilization funds la Norway (the size is currently around one-half of GDP). Transparency initiatives may act against corruption and steps can be taken to reduce environmental damage. In an interesting omission, the book says little about the Millennium Development Goals as advocated by the United Nations and Sachs. They state that massive inflows of foreign aid into the poorest countries can reduce poverty substantially by 2015. The money will probably not be forthcoming but even if it were to materialize it could create its own version of the natural resource curse. It is just as easy to reshape the economy around aid inflows as around resource rents with equally disastrous outcomes when the bonanza comes to an end. Making Globalization Work contains other material including vignettes of regional development experiences, but the book stands or falls on its policy proposals and overall approach to the development problem. Although its lapses have been emphasized here, the policy analysis is on the whole coherent and on target. The books overall contribution is significant but falls well short of a revelation. Finally, an observation on style: Stliglitz like most academic globalizers (Easterly and Rodrik are agreeable exceptions) finds it difficult to write more than a few pages without bringing in his personal experiences with underdevelopment around the world or explicating his

contributions to economic theory. In their writing on policy Keynes and Galbraith rarely referred to themselves. Rather, their ideas were founded on great personal gravitas and intellectual mass.