Joseph Stiglitz- The economist who cried wolf

American economist Joseph Stiglitz has warned us before, and he's doing it again. Listen.

As interviewed by Larry Elliott of The Guardian

Feb,12,2010

Joseph Stiglitz feels depressed. Having been a voice in the wilderness urging caution when financial capitalism was in a speculative frenzy, he wants the crisis to be the catalyst for radical thinking. But he fears it won't be: Greece is being forced to cut its deficit, the bankers are behaving as if nothing has changed since August 2007, and the political running in the United States is being made by the right-wing anti-state Tea Party.

"There was a moment of euphoria when we were all Keynesians," he said in an interview to mark the publication of his new book.* "Those ideas were working and every government stood behind them. It was not just Keynesian macro-economic policies, it was the need for regulation and the recognition that economics had failed."

Since those heady days of optimism a year ago, when unprecedented government action hauled the global economy back from the brink of a new Depression, Stiglitz says two things have happened to derail prospects of change. "Plans to re-regulate the financial markets have run into a political quagmire and there has been a resurgence of deficit fetishism."

He says he is surprised at how fast the forces in favour of the pre-2007 status quo have re-grouped. "The optimist in me is hopeful we won't need another crisis to finally motivate the political process," he said. "The pessimist in me says it may need to happen."

Pessimistic

Now 67, Stiglitz has been a critic of the Chicago School of free-market economics and its international cousin – the Washington consensus – throughout his career. His trenchant objections to the deflationary policies imposed on Asian countries by the International Monetary Fund in the late 1990s led to him being ousted as the World Bank's chief economist after lobbying from Bill Clinton's treasury secretary, Larry Summers. (Stiglitz's nemesis is now head of Barack Obama's National Economic Council.)Since then, he has written books on the defects in globalisation, the 1990s boom, the cost of the Iraq war and now on the Great Recession. Freefall attacks all his familiar betes noires: the IMF, the US treasury, the Federal Reserve, Wall Street, the mainstream economics profession and, of course, Summers.

Stiglitz is a "big supporter" of Obama's plans to stop Wall Street banks speculating with customers' money. Significantly, the initiative only happened when the president stopped listening to Summers, treasury secretary Tim Geithner and Federal Reserve chairman Ben Bernanke, and turned to the veteran policy-maker Paul Volcker.

"I'm pretty pessimistic about the US. It will be a long time before unemploy­ment returns to normal." He believes the struggling housing market – 25% of households are in negative equity – may harm one of America's traditional strengths: the ability of workers to move from state to state in search of jobs. He says US banks are hiding their exposure to commercial real estate, which he fears will be the next problem.

He says the pick-up in growth across the global economy in the latter half of 2009 will not last. "The likelihood that growth will slow is close to 100%. The likelihood that it will drop below zero is uncertain. We don't know about the policy response, we don't know whether there will be a second stimulus package in the US, and we don't know how bad the balance sheets of the banks are."

For the past couple of weeks, Stiglitz has been advising the Greek government on how to respond to its severe financial crisis. He says the speculators are not basing their decisions on what they think but are gambling on what they think other people will think about Greece. "They are gambling on the degree of irrationality going forward."

Europe, he says, should show "social solidarity": the European Central Bank provides liquidity to solvent banks to help them through the bad times, and should treat Greece in the same fashion. "If the central bank is prepared to provide liquidity support for banks it should be able to provide it for countries."

He added: "Governments had to come in after the banks mismanaged what they were supposed to do. The financial markets are now criticising countries for picking up the pieces after the financial markets failed. They are demanding the wages of workers be cut but bonuses be allowed to continue. This is an absurd situation."

The crisis has exposed a fault line in the single currency. From the outset, critics said the test of the euro would be when the poorer countries came under pressure and lacked the ability both to devalue and to access financial support from the richer parts of the euro area. "That problem was swept under the rug but has now come to the fore."

Stiglitz has long been a supporter of a financial transaction tax, the brainchild of his fellow American Keynesian James Tobin. This week a coalition of groups launched a campaign for a "Robin Hood tax" that would levy a small charge on financial transactions and re-distribute the proceeds. "A transaction tax is designed to tackle high-frequency activity for which it is hard to find any societal benefit," Stiglitz said.

"The only questions about a financial transaction tax are: can it be effectively implemented and can it be circumven­ted? There is a growing consensus that it can be implemented, if not perfectly then effectively enough to make a difference." Speculators themselves supported the idea of the tax because they knew their activities were "socially counter-productive", he claimed.

Wrinkles

Stiglitz won his Nobel prize for his work on asymmetric information, the notion that markets do not work as perfectly as textbooks suggest. "It is almost impossible to reconcile the description of the economy provided by the mainstream profession and what has actually been going on. These are not minor wrinkles."They acted as if the bubble would go on forever, when real incomes were falling for most Americans."

He says attempts by Tony Blair and Gordon Brown to knock some of the rough edges off of Thatcherism "didn't go far enough" in correcting the Thatcher revolution. "In trying not to over-react they under-reacted."

George Osborne is precisely the sort of "deficit fetishist" Stiglitz has in his sights. Incredulous at the idea that the Conservatives would cut spending when the economy is barely out of recession, he thinks Osborne would take a different view in power. "He originally talked about big deficit cuts but seems to have backed off that in terms of timing. The reason they are doing that is that if they did it the recession would get much worse. If they get elected, they will move from rhetoric to reality."

In the years ahead, Stiglitz says the big story will be the challenge to the west from China and India. There was a time when emerging economies had no choice but to accept the free-market policies imposed by Washington. "The US treasury would be laughed out of town if it went to China or India today and told them they had to de-regulate.

"We can now see a day when the dominance of the west will end."

Further wise words can be found in Stiglitz' latest book Freefall: Free Markets and the Sinking of the Global Economy

 

Rising Powers, Shrinking Planet - Part 2 of 3

RESOURCE NATIONALISM;
A NEW DIRECTION.. OR ANOTHER FORM OF PRIVATIZATION?

So it goes that..
Natural resources have historically propelled nations into hysteria over acquisition of rich lands and turned men into greedy gold-diggers. Given a state government's control over military forces, can a government, {whether democratically or otherwise elected} be trusted by its people to resist the temptation to use military force in pursuit of foreign energy? Resource nationalism entrusts many responsibilities to a nation’s governors, especially in an age when the growth and success of a nation is symbiotic with its production and consumption of energy. The decisions made by those entrusted to, could lead to either the protection of a nation’s resources as exemplified by Vladimir Putin, or the advancement of personal agenda, as is evident with Venezuela’s Hugo Chavez. To apply military power to forcefully obtain foreign energy and to endanger civilians is to misapply a nation’s resources and interests. There is worldwide stipulation that President Bush's main motive for seizing control of Baghdad was to either directly obtain energy resources or to break the political and economical systems down, only to play a controlling/highly influential part in the rebuilding of Iraq's national oil legislation. This stipulation is backed by documents in The National Energy Policy passed by the Bush administration in 2001, specifically calling for "a more assertive government role in helping American energy companies overcome barriers to investment in foreign oil and gas ventures"(24).

It would seem that the efforts of the government in national energy management would be directed towards finding alternatives to foreign energy sources in-state, rather than finding methods to ‘bargain’ for more foreign energy. Later, in his 2006 State of the Union address, as Klare notes, Bush acknowledged America's addiction to oil and called for accelerated efforts in finding energy alternatives, although government spending tells a different story. While former President Bush may have spoken these words, the country’s military presence in Baghdad spoke louder about the interests of the administration. Even worse, the administration rallied public support under the guise of protecting Americans and the rest of the world from a tyrant hoarding weapons of mass destruction. The invasion required a substantial deployment of troops from the U.S. and its allies, some of whom remain in the oil rich lands of the Middle East. The average American or British citizen may understand the need for oil and even be aware of its diminishing supply, but they may not have supported the invasion of Iraq had they known that their country was invading another and imposing its political system on its people, with the intent to unfairly rob it of its natural resources.

Perhaps they would have, we may never know, for a vote is not democratic if it is based on misinformation. The lesson in this case is that resource nationalism could simply be a misleading term to describe state robbery and misapplication of national power to obtain natural resources, and that those who govern must be held up to the revealing light in whenever the governance is questionable.

Rising Powers, Shrinking Planet brings to mind the natural resource curse described by Joseph Stiglitz in Making Globalization Work, as having afflicted nations such as Nigeria, Venezuela and Sudan. These nations, although rich in natural resources, are populated by a majority of poverty-stricken people. The profits from the country’s boundless resources are distributed among corrupt government officials or the brutally selfish insurgents who overthrow them, or are carted back out in personal foreign investments and to Swiss bank accounts. To the low and middle class citizen of any country that is wealthy in natural resources, the biggest cause of concern is whether those who manage the wealth of a shared land will also share the harvest.

Ironically, the same laws created to give a person the right to own property, maybe the same laws that allows a tycoon or supersized institution to acquire all the land on which natural resources sit. Nonetheless, one can be hopeful, that if the resource nationalism were in place, the state would be inclined to distribute the profits somewhat equitably, rather than relying on the unlikely philanthropy of the private hands that seize the resources for their sole interests.


More on Michael Klare

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The World is Flat- Part 6 of 6

GLOBALIZATION; SUCCESS OR FAILURE?

In conclusion..
A key variance in both books is the discourse on globalization’s effect on the environment, repeatedly mentioned in Making Globalization Work , and given special attention in the sixth chapter. Again, Stiglitz finds a somewhat poetic way of describing the universal environment shared by all and the danger posed to it by the actions of some. He calls it the “tragedy of the commons”, a description that combines the commonality of a resource and the impending disaster created hen an individual fails to consider the ramifications of their actions on another individual, thereby leading to abuse of common resources(161). Several conservatory and reparative ideas are presented, but I believe Stiglitz needn’t say more when he says, "No issue is more global than global warming: everyone on the planet shares the same atmosphere"(166). If a statement as simple and as directive as this does not highlight the curse and joy of global interdependence, then nothing can.

Friedman and Stiglitz have both rendered excruciating insights into globalization, albeit with different goals. It appears that Friedman is concerned with emphasizing the aspects of globalization that have happened thus far, unbeknownst to the average consumer, why they have happened, and how these elements could continue to evolve in the near future. The World is Flat is a jolt to those who may have been sleepwalking while globalization was reshaping the world, and a tribute to the ten flatteners responsible for doing so. It is an informative journey shining the spotlight on globalization, its capabilities, and possible consequences.

In stark contrast, Making Globalization Work seems to represent the post-honeymoon phase of globalization. It seeks not to shine a spotlight on globalization, but to shine a light through it, to expose the impediments that have prevented what is possibly the greatest collaboration of global communities from becoming a success for all, or at least most. Stiglitz painstakingly reminds the reader throughout his mission, of the developing countries, of the have-nots of this world, stressing that we as a people enjoying the benefits of a collaboration at the expense of others, are “morally compelled” to take action to rectify the present imbalances(59).

More on Friedman

Hope you have enjoyed my review of this book. Which book would you like to see me review next? Which top 3 books do you think are most pertinent to the discourse on globalization?

The World is Flat- Part 5 of 6

GLOBALIZATION; SUCCESS OR FAILURE?

Furthermore..
Rather than force an economic system on a country, Stiglitz advocates making trade more fair using various changes, some more agreeable to the advanced industrial nations than others. One example of a reform that would likely be unpopular with developed countries would be to treat developing countries differently in the drafting of international trade agreements. What Stiglitz means, is that this time around, the agreements should be tilted in favor of the developing countries, especially on topics such as agriculture, on which the vast majority of those in developing countries rely on. Making Globalization Work displays Stiglitz’ adept experience, as he identifies the precise issues in trade liberalization today. In chapter three, the following non-tariff barriers typically used by the advanced industrial countries to deceive trading ‘partners’ in international agreements are revealed: safeguards, dumping duties, technical barriers & the rules-of-origin. All of these non-tariff barriers are aimed at reducing or completely eliminating the imports of a country that threatens to compete with a nascent industry of a country.

In the reforming of international trade, Stiglitz restates the importance of good governance, saying, “The governance of international affairs is at the heart of the failures of globalization. The problems of unfairness start in the beginning: with the setting of the agenda. We have seen how the past focus on manufacturing has moved to high-skill services, capital flows, and intellectual property rights. A development-oriented trade agenda would be markedly different"(97). Several times, Stiglitz also suggests the creation of justifiably, independent international panels to oversee many collaborations, including the drafting of treaties to prevent any more unproductive bilateral agreements.

               

Technology in The World is Flat is on display in amazing caliber almost everywhere that Friedman journeys, and just as well,   in Making globalization Work , Stiglitz reaffirms the magnitude of possibility brought by technology can provide to the developing countries how are yet to enjoy it. Under the fourth chapter topic “Patents, Profits and People”, Stiglitz exposes the powerful peoples’ exploitation of patents and other intellectual property rights to make excessive profits in the name of giving merit where it is due.   Intellectual property rights vary immensely from physical property rights =, because the former protects an intangible asset, making the boundaries of justice and injustice   difficult to ascertain, he explains. In particular, the U.S and the E.U are using intellectual property rights to prevent developing nations from partaking in innovation, in order to extend the time span of profits and even to create monopolies. These intricacies may not have been obvious to Friedman as he surfed on a Japanese laptop available with only Microsoft software, but beyond the amazing flattening across the world, destructive factors like those discussed by Stiglitz continue to favor flattening in the favor of the prosperous.

                

As if the developing countries did not have enough challenges to rise above, Making Globalization Work reveals a distressing phenomenon; ‘the Natural Resource Curse’. It is a curse that befalls developing countries which are rich in natural resources, often richer than the developed countries’, but are unable to utilize these resources to rise to the same echelon. Paradoxically, Stiglitz describes these countries as being “wealthy countries with poor people”, something which he says ‘provides greater insight into the failures of globalization and its possible remedies’ (135). He goes on to diagnose the curse as typically having two major causes; the misappropriation of public wealth, often followed by the reckless investment of the garnered wealth by the few who control it. The prescription bears seven measures that address everything from environmental damage to eliminating the great evil; corruption. 


More on Friedman

TBC...

The World is Flat- Part 4 of 6

GLOBALIZATION; SUCCESS OR FAILURE?

  

In this way..  

After noting these five issues with globalization, Stiglitz goes on to discuss the underlying forces and the institutions behind these issues, and each time following the discourse with a section titled “Making Globalization work”. This section contains Stiglitz’ suggestions on reforming the particular globalization problem in discussion, and the first problem tackled by Stiglitz is the effect, or lack thereof, of globalization on poverty. A positive effect on poverty is seen in China where millions of people have been lifted out of poverty. Stiglitz attributes the booming country’s progress, to its semi-conservative, slow movement to open up its markets to imports, and to what the book refers to as “hot speculative money”- that which seeks high returns in the short run, rushing into a country during a short wave of optimism and rushing back out at the first hint of trouble (pg 10).This view differs from Friedman’s, which points to China’s rapid adaptation of technologies such as wireless connectivity and cell-phone use per capita, even suggesting that the U.S. is lagging behind in these exact areas. 

Stiglitz pays special attention throughout his book, to the existing and necessary international institutions that are and should govern he various aspects of a successfully globalizing world. Friedman gives statistical data on present and future job losses and recommends that that nations and their work forces find methods of catching up to avoid being ‘creamed’ by the flatteners. Stiglitz on the other hand does a spectacular job of offering theoretical proposals intended to change the way that we think about the issue first, and then practical measures which can be implemented on a new way of thinking. For example, in reforming the effect of globalization on poverty, Stiglitz first asks that we consider the pervasiveness of poverty. We are asked to recognize that simply opening up markets in developing countries will not eradicate the issue of poverty. In this case, reasonably conditional foreign assistance and debt relief from truly committed global leaders is necessary to provide developing countries a clean slate to base their new policies on. Furthermore, given all the aid available, these countries will not flourish unless they literally clan, which is why Stiglitz stresses correcting the problem in trade liberalization by making international trade agreements fair.

                

Stiglitz accurately insists that poverty is so globally pervasive, that it heightens the need to help millions of poverty-stricken citizens immediately. For the foreign aid to work and international agreements to become fair, fundamental principles must also be reviewed, one of which Is the recognition of the limitations of trade liberalization. The main limitation of liberalization is the fact that it will not work for every country and every economy. When the U.S and Europe saw success with trade liberalization, they were convinced that this model would lead progressive economies to success as well. The result of this assumption came to be the Washington Consensus, a broader policy framework whose key components were trade and market liberalization and which was forged on consensus of the IMF, the World Banks and the U.S Treasury. The consensus was supposed to represent a set of policies that would best promote development; however, it remained a failure for Argentina and other hopeful Latin American countries. 

Early on, in Making Globalization Work , Stiglitz starts to weigh the importance of easily overlooked tenets such as governance in a collaborative process. He states, “There is a consensus, at least outside the U.S. on the dangers of unilateralism and on the 'democratic deficit' in the international economic institutions. WWI made clear our growing global interdependence”(18). Stiglitz goes on to assess the progression of various developing countries under the advice of the Washington Consensus and free-market capitalism, and fearlessly charges the IMF with failure in its goal of stabilizing the world economy. Countries that have followed the advice of the IMF and the World Bank have not prospered as expected.  More Friedman TBC...

The World is Flat- Part 3 of 6

GLOBALIZATION; A SUCCESS OR FAILURE? 

And so..
Compared to the sober, earnest voice of Joseph Stiglitz beguiling his readers to view the world through the forgotten lens of the have-nots, Thomas Friedman’s tone is a striking contrast of the same topic; globalization. Friedman conjures up an image of a child at an amusement park, amazed to see all sorts of new, thrilling rides that are nothing similar to the familiar backyard swing; this young child sees many opportunities for unexplored fun before him, and begins to visualize just how much ‘fun’ is to be had as he skips through the park. On the other hand, Stiglitz conjures up the image of an older child, an early teen perhaps, who although excited about being at the park, has already been on many of the rides and is read to offer suggestions as to how to make the rides more fun. Stiglitz takes a completely different approach to globalization; he speaks as a former Chief Economist of the World Bank and Chief of Council of Economic Advisors during the Clinton administration. 

Albeit the fact that both books likely relied heavily on research, The World is Flat is written more in the character of a educating charge, while Making Globalization Work reads like the analysis of a veteran amidst a long mission, after exposure to both sides of a conflict. The most striking element of Stiglitz’ writing voice is his sincere concern for the citizens of developing countries; those who have been bypassed by globalization. These are global citizens whose corners of the world were either not flattened by Friedman’s forces, or who have not had a chance to reap the benefits of the flattening.  

             

Stiglitz determines that globalization began about 150 years ago when nation-states across the globe began to strengthen in identity and boundaries. In the U.S. this strengthening was realized as the government took a more central role in the regulating the economy and developing the country’s infrastructure and young technologies. This ‘version’ of globalization seems to stem from a mostly economic necessity for the nation-state to assert its position, and then evolving to accommodate the changing societal and political spectrums. In effect, as we are able to look back over more recent years, Stiglitz proclaims, “ Economic globalization has outpaced political globalization” (20).   In following Stiglitz’ discussion of globalization, it is extremely important   to note one component of his discourse; that there is a serious problem with the way globalization had played out so far, and the clock on reform is ticking. The general problem with globalization as Stiglitz sees it, is that it is producing “unbalanced outcomes both between and within countries…and these global imbalances are morally unacceptable and politically unsustainable” (8).

                

Having first-hand experience in making economic and political assessments allows Stiglitz to pinpoint the problems in globalization. He identifies the unfair rules of the global ‘game’, stating that they are specifically designed to benefit the advanced industrial countries (the U.S. & Europe).In distinguishing between developed and developing countries as they are affected by globalization, Stiglitz notes that the sovereignty of developing countries has been taken away…and as a result, democracy has been undermined. 

While Friedman talked about the exposure of free-market capitalism to more people after the collapse of the Berlin Wall, Stiglitz highlights that economic systems have been forced upon developing countries- typically the Americanization of economic policy & culture. Part of the problem is also that “globalization advances material values rather than values such as environmental concern or concern for life itself”, and the culmination of these issues results in more losers than winners in the benefits of globalization (9). 

More Friedman

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The World is Flat- Part 2 of 6

GLOBALIZATION; A SUCCESS OR FAILURE? 

As I was saying.. 
The collapse of the Berlin Wall most symbolically represented the collapse of the Soviet Empire and Communist rule, after which democracy would become the dominant political system. The contrasting systems both advocate their own economic policies, supposedly aimed at equality, but as Friedman notes, “Communism was a great system for making people equally poor, while Capitalism made people unequally rich” (52). While the wall was toppling down brick by brick, the United States was making large strides in the information revolution, marked by the introduction of the personal computer in 1985.

It is interesting that Friedman separates the various parts of the information revolution as different forces, rather than clustering two or three into one. In the case of the second flattener, the introduction of the first mainstream internet browser, Netscape, the emphasis is on the transformation of a novel technology used exclusively by scientists and computer experts, to a mainstream technology with a user-friendly interface. Netscape made it possible and easier for the average computer novice to access and use the internet. Symbolically, this indicated the beginning of accessible modern innovations which would typically be restricted to academics and government agencies, to the general public. In fact, this increasing transparency of information is evident is confirmed by an officer in Baghdad who lamented the flattening of the military hierarchy. As a result of the ever increasing use of technology and the respective need for people to monitor the technology, more information is available to lower-level officers than was the case before.

After the introduction of an internet browser that makes the Internet a more useful information channel for the public, it is necessary to take technology one step further, to enable changes that further flatten the globe. Workflow software is extremely sophisticated, and seeks to synchronize business processes with the goals of efficiency, labor cost reduction and capital cost reduction in mind. Friedman credits work flow software with “enabling business processes to flow not only between companies, but between continents as well, with an explosion of experimentation and innovation expected to produce many new products and services, as well as a demand for more tailored, proprietary software and IT systems to drive them forward” (91). A great example of this demand and the response in the form of global, interconnected business processes astounds Friedman when he interviews the CEO of an animation studio in San Francisco. The typical animation project starts with design and direction in the San Francisco where the studio is located, the writers’ network in from their homes (Florida, London, New York, Chicago, L.A and San Francisco) and the animation of the characters is done in Bangalore, with edits from San Francisco (79). At this point, Friedman notes that the first three flatteners create a “rudimentary platform” upon which the remaining seven forces emerge.

‘Uploading’, the fourth flattener, is another marker that Friedman uses to emphasize the ever-increasing accessibility of the Internet’s capabilities to global consumers. While the Internet provided connectivity, and Netscape allowed users to design, display, and manage data, the ‘uploading’ milestone marked the balancing of the producer/consumer scale in terms of information. Where most users had been consumers, utilizing the tools that were presented them on the web, uploading tipped the scale so that consumers could become producers of media as well, uploading their own content to share with their global neighbors. Both in the western world and in Asia’s up and coming countries, this transition has been fronted by malleable and tech-savvy youth. The residual flattening forces represent the tremendous changes in the manufacturing, human resources, and information arenas, each one heralded by a particular country or even company. 

China, the leading beneficiary in both outsourcing and off-shoring, has manufacturing advantages said to have benefited U.S. consumers in the form of billions of dollars in cost savings, and benefiting the Federal Reserve by helping it keep interest rates down longer, thus allowing more capital into the economy. It is unfathomable that China can have such effects on the American economy but these are just the effects of a flatter world; the more we communicate and create inter-dependent social, economic and political systems,, the more it seems, we are likely to sneeze and contaminate another country with our cold.

More Friedman

TBC..