Leveling the field.

Making Globalization Work

Joseph E. Stiglitz 

W. W. Norton, $26.95, 384 pp.

Recently America's moral standing in the community of nations has dropped, reflecting rash and preemptive actions abroad--taken against the advice of allies--which have harmed innocents. But America's reputation had already been eroding. As the avatar of globalization, the United States has incurred the widespread discontent of people who have not experienced the prosperity promised by advocates of trade liberalization. As global income inequality widens, those who see themselves as globalization's losers increasingly view international treaties and institutions as instruments used by the economically powerful, especially America, to further their own interests.

Columbia professor and Nobel economics laureate Joseph Stiglitz has written a timely sequel to his Globalization and Its Discontents (2002). Stiglitz believes the promise of globalization can be realized if trade liberalization and monetary policies are managed to account for the interests of all people, rather than just the powerful few. Throughout Making Globalization Work, he proposes solutions derived from his expertise working in national and international governmental agencies.

Nearly every country speaks favorably of liberal trade policies, but progress in reducing tariffs has come slowly; and, indeed, no enforcement mechanism existed until 1994, when the World Trade Organization (WTO) was established. As Stiglitz points out, this mechanism is hardly perfect. By wielding their economic power and expertise in lawyerly maneuvers, developed countries are able to manage the economic system for the benefit of their own special interests. Globalization has not played out on a level field, but on one tilted in favor of the developed world--notwithstanding the dictum of New York Times columnist and globalization cheerleader Thomas Friedman that "the world is flat." In fact, people in the developing world start out already disadvantaged in education and technology, and then join a game whose rules favor the developed countries. Making Globalization Work argues that we have a moral obligation to right this imbalance.

Stiglitz's work in economics dissolves the certitude found in market ideologues that markets alone can regulate economies efficiently and fairly. He agrees that removing barriers to trade--globalization--has allowed markets to play a greater role in determining what goods and services to produce, how to do so, and for whom. In general this is a good thing, because ideally (absent externalities, monopolies, or asymmetries of information) it enlarges the overall economic pie. Yet even in this hypothetical world, standard economic theory provides no reason to expect the pie to be distributed fairly. How the pie is distributed depends as much on the luck of owning labor, capital, and resources as it does on hard work. In other words, markets under ideal conditions maximize output, but not fairness. Stiglitz would accept some intervention to correct market-generated inefficiencies and inequities, as would most economists.

Discontent with globalization is fed by other sources of injustice, many of which arise from the exercise of undue market power by developed countries. Farmers in developing countries have suffered as developed countries used their power in trade-agreement negotiations to protect their own agricultural sectors. To protect the intellectual property rights of its domestic drug companies, the United States has negotiated prohibitions on selling cheaper generic substitutes in poor countries. And by corrupting politicians with well-placed bribes, multinational firms can gain legal access to the mineral wealth of developing countries below cost.

Globalization as currently practiced often fosters inefficient use of the universal endowment that is the environment. Forests, for instance, produce a good that developing and developed nations consume in common; everybody benefits from the carbon reduction these trees afford us, and suffers when this reduction is hampered by overharvesting. Yet, because no market exists to trade, and thereby to value, this good, forests are smaller than they would be if "owners" of these forests were compensated for cleansing the air we breathe. Without a mechanism to effect this compensation, clean air is underproduced. Moreover, industrial plants often produce carbon emissions, and because producers are not always required to address the cost they impose on society, goods whose production generates this negative externality are overproduced. And when the Kyoto Protocol attempted to reduce these emissions, the United States would not sign.

Finally, globalization relies on a system of international finance that is similarly skewed. Whether this or that developing country borrowed in the past to finance needed infrastructure to jumpstart industries, to stabilize currency, or to furnish a dictator with weapons he used to brutalize his own people, current bankruptcy rules protect the lender's rights to repayment. Surely in the last case it would be just to hold the lender responsible for failing to show due diligence, or more generally for any obligation incurred without the democratic consent of the borrowing government's people. Bankruptcy law might be used to discourage future lenders from making such odious loans.

In the first two chapters of Making Globalization Work, Stiglitz summarizes relevant parts of Globalization and Its Discontents. The remaining eight chapters prescribe ways for improving globalization. In closing, Stiglitz encourages all international institutions that regulate trade to give greater voice to the people affected by their deliberations, and proposes a currency reserve bank, like the one proposed by John Maynard Keynes after World War I. Such a structure, as Stiglitz envisions it, would promote fairness and give developing countries a few more financial tools to work with. When the United States, for example, borrows regularly to finance its growing trade and fiscal deficits, some of the lenders are poor nations that hold dollar-denominated assets to stabilize their own currencies. Because the dollar is the primary reserve currency, these developing countries hold too many of their eggs in one basket, and they receive a return on their investment that is well below their own cost of borrowing.

In Stiglitz's proposed "global reserve" bank, members would deposit their own currency annually in proportion to their GDPs, receiving in return the right to draw on stable currencies in defined times of need. This mutual fund would earn income for its members not only from the currencies it holds but also from "emissions" (loans) it makes to members. It's a small way to level the playing field a bit.

Though not offered from a religious perspective, Stiglitz's prescriptions strike me as quite consistent with Catholic social teaching. His stress on "individuals" and "community" in his discussion of the pillars of successful development, for instance, reminded me of subsidiarity and solidarity, as well as a preferential option for the poor. I imagined a discussion group in my parish reading Making Globalization Work together with, say, the Compendium of the Social Doctrine of the Church (2005) and Modern Catholic Social Teaching: Commentaries and Interpretations (2005). Perhaps I will propose this in the future. Meanwhile, I am requiring Stiglitz's book as a capstone reading for my students in introductory microeconomics. I can't imagine a better source of insight into how actual markets work--and into the need for appropriate intervention to make globalization a success not just for the powerful, but for everyone.

George M. Perkins teaches economics at Bates College in Lewiston, Maine.