ALSO BY JOSEPH E. STIGLITZ MAKING The Roaring Nineties Globalization and Its Discontents GLOBALIZATION WORK JOSEPH E. STIGLITZ W. W. NORTON & COMPANY NEW YORK LONDON Copyright © 2006 by Joseph E. Stiglitz For Anya, forever All rights reserved Printed in the United States of America First Edition For information about permission to reproduce selections from this book, write to Permissions, W. W. Norton & Company, Inc., 500 Fifth Avenue, New York, NY 10110 Manufacturing by The Maple-Vail Book Manufacturing Group Book design by Chris Welch Production manager: Amanda Morrison Library of Congress Cataloging-in-Publication Data Stiglitz, Joseph E. Making globalization work / Joseph E. Stiglitz. — 1st ed. p. cm. Includes bibliographical references and index. ISBN-13: 978-0-393-06122-2 (hardcover) ISBN-10: 0-393-06122-1 (hardcover) 1. Globalization—Economic aspects. I. Tide. HF1359.S753 2006 337—dc22 2006020633 W W. Norton & Company, Inc., 500 Fifth Avenue, New York, N.Y. 10110 www.wwnorton.com W. W. Norton & Company Ltd., Castle House, 75/76 Wells Street, London WIT 3QT 1 2 3 4 5 6 7 8 9 0 CONTENTS Preface ix Acknowledgments xix CHAPTER I Another World Is Possible 3 CHAPTER 2 The Promise of Development 25 CHAPTER 3 Making Trade Fair 61 CHAPTER 4 Patents, Profits, and People 103 CHAPTER 5 Lifting the Resource Curse 133 CHAPTER 6 Saving the Planet 161 CHAPTER 7 The Multinational Corporation 187 CHAPTER 8 The Burden of Debt 211 CHAPTER 9 Reforming the Global Reserve System CHAPTER I0 Democratizing Globalization 269 Notes 293 Index 339 PREFACE My book Globalization and Its Discontents was written just after I left the World Bank, where I served as senior vice p resident and chief economist from 1997 to 2000. That book chronicled much of what I had seen during the time I was at the Bank and in the White House, where I served from 1993 to 1997 as a member and then chairman of the Council of Economic Advisers under President William Jefferson Clinton. Those were tumultuous years; the 1997-98 East Asian financial crisis pushed some of the most successful of the developing countries into unprecedented recessions and depres- sions. In the former Soviet Union, the transition from communism to the market, which was supposed to bring new prosperity, instead brought a drop in income and living standards by as much as 70 per- cent. The world, in the best of circumstances, marked by intense com- petition, uncertainty, and instability, is not an easy place, and the developing countries were not always doing the most they could to advance their own well-being. But I became convinced that the advanced industrial countries, through international organizations like the International Monetary Fund (IMF), the World Trade Organization (WTO), and the World Bank, were not only not doing all that they could to help these countries but were sometimes making their life more difficult. IMF programs had clearly worsened the East Asian crisis, and IX PREFACE Preface the "shock therapy" they had pushed in the former Soviet Union and its of Economic Advisers and as a member of his cabinet. I declined, satellites played an important role in the failures of the transition. because I thought that the task of designing policies and programs that I covered many of these topics in Globalization and Its .Discontents. I would do something about the abject poverty which plagued the less felt I had a unique perspective to bring to the debate, having seen poli- developed world was a far more important challenge. It seemed terri- cies being formulated from inside the White House, and from inside bly unfair that in a world of richness and plenty, so many should live the World Bank, where we worked alongside developing countries to in such poverty. The problems were obviously difficult, but I felt con- help develop strategies to enhance growth and reduce poverty. Equally fident something could be done. I accepted the World Bank's offer, not important, as an economic theorist, I spent almost forty years working only because it would give me new opportunities to study the problems to understand the strengths, and limitations, of the market economy. but because it would provide me a platform from which I could sup- My research had not only cast doubt on the validity of general claims port the interests of the developing countries. about market efficiency but also on some of the fundamental beliefs In my years at the World Bank, I came to understand why there was underlying globalization, such as the notion that free trade is necessar- such discontent with the way globalization was proceeding. Though ily welfare enhancing. development was possible, it was clear that it was not inevitable. I had In my earlier book, I described some of the failures of the interna- seen countries where poverty was increasing rather than decreasing, tional financial system and its institutions, and showed why globaliza- and I had seen what that meant—not just in statistics but in the lives tion has not benefited as many people as it could and should have. And I of the people. There are, of course, no magic solutions. But there are a sketched out some of what needs to be done to make globalization work— multitude of changes to be made—in policies, in economic institu- especially for the poor and developing countries. The book included tions, in the rules of the game, and in mindsets—that hold out the some proposals for reforming the world financial system and the promise of helping make globalization work better, especially for the international financial institutions that govern it, but space did not developing countries. Some changes will occur inevitably—China's allow me to flesh out these proposals. entry into the global scene as a dominant manufacturing economy and Just as my time in the White House and at the World Bank put me India's success, in outsourcing, for instance, are already forcing changes in a unique position to understand globalization's problems, so too has it in policies and thinking. The instability that has marked global finan- provided me with the basis for this sequel. During my years in Washington, cial markets during the past decade—from the global financial crisis of I traveled the world and met many government leaders and officials, 1997-98 to the Latin American crises of the early years of the new mil- as I studied the successes and failures of globalization. After I left lennium, to the falling dollar beginning in 2003—has forced us to Washington to return to academia, I remained involved in the rethink the global financial system. Sooner, or later, the world will have globalization debate. In 2001, I received the Nobel Prize for my earlier to make some of the changes I suggest in the following chapters; the theoretical work on the economics of information. Since then, I have question is not so much whether these or similar changes will occur, but visited dozens of developing countries, continued my discussions with when—and, more important, whether they will occur before another academics and businesspeople, with prime ministers, presidents, and set of global disasters or after. Haphazard changes that are done quickly parliamentarians on every continent, and been involved in fora debat- in the wake of a crisis may not be the best way to reform the global eco- ing development and globalization involving every segment of our nomic system. global society. The end of the Cold War has opened up new opportunities and When I was about to leave the White House for the World Bank, removed old constraints. The importance of a market economy has President Clinton asked me to stay on as the chairman of his Council now been recognized and the death of communism means that govern- XII PREFACE Preface XIII ments can now turn away from ideological battles and toward fixing even more troubled to learn that Clinton's own Treasury was pushing the problems of capitalism. The world would have benefited had the these policies.) United States used the opportunity to help build an international eco- My economic research had shown the deep underlying flaws in IMF nomic and political system based on values and principles, such as a economics, in "market fundamentalism," the belief that markets by them- trade agreement designed to promote development in poor countries. selves lead to economic efficiency. Intellectual consistency—consistency Instead, unchecked by competition to "win the hearts and minds" of with my earlier academic work—impelled me to voice my concerns those in the Third World, the advanced industrial countries actually that the policies which they were pushing in, for instance, East Asia, created a global trade regime that helped their special corporate and might only make matters worse. To do any less would have been a dere- financial interests, and hurt the poorest countries of the world. liction of my responsibilities. Development is complex. Indeed, one of the main criticisms leveled What we had fought for while I was in the Clinton administration against the IMF and other international economic institutions is that was relevant, not just to Americans but to the rest of the world as well. their one-size-fits-all solutions do not—can not—capture these com- As I moved from the Clinton administration to the World Bank, I con- plexities. Yet, out of the myriad of global economic narratives, some tinued to push for the right balance between the private and public sec- general principles do arise. Many of the successful developing countries tors and to advance policies promoting equality and full employment.