Globalization Has Increased the Wealth Gap

Nobel prize-winning economist Joseph Stiglitz talks about what’s gone wrong with globalization.

January 15, 2007  |  Globalization was meant to be the great equalizer. Goods would flow easily across borders. Standards of living in poor countries would be raised. Governments would become more stable. Instead it has brought citizen protests, greater economic disparities between first- and third-world nations, and a complex trade regime that may well benefit only the richest in richest countries. What went wrong?

In his new book, “Making Globalization Work,” Nobel-prize winning economist Joseph Stiglitz argues that the special interests of governments, corporations, and international organizations like the IMF and the World Bank have thrown globalization off its proper path. But he doesn’t stop there. He offers a practical vision for making globalization the equalizing force he believes it was always meant to be.

Joseph Stiglitz, University Professor at Columbia University, was chairman of the Council of Economic Advisers during the Clinton administration and later chief economist and senior vice president of the World Bank. His book, “Globalization and Its Discontents,” was translated into 35 languages and has sold more than 1 million copies worldwide.

Why did you become an economist?

JS: Like one of the first Nobel-prize winners and one of the greatest economists of the 20th century, Paul Samuelson, I grew up in Gary, Indiana. When you grow up seeing the problems of the economy — problems of poverty, discrimination, unemployment — it’s hard not to want to do something about them.

But why did you decide that an economist was someone who could do that?

JS: Well, maybe that was optimistic … but it was always my hope that if I could understand the nature of the problems, maybe I could make them better.

In layperson’s terms, what were you awarded the Nobel for?

JS: For 200 years or more, economists have constructed models to analyze the economy, under the assumption that there was perfect information. Not that they really believed there was perfect information, but they didn’t know how to analyze markets where information was imperfect, at least not with the precision of the mathematical models that were fashionable.

I figured out how to do this in a rigorous way, focusing particularly on the problem of “asymmetric information.” That just means when one person knows something that others don’t, which, of course, is the way everything is in the real world. The startling result was that a world with imperfect or asymmetric information was very, very different from a world of perfect information.

Anyone who’s bought a used car, anyone who’s bought a house, probably anyone who’s bought a salami, knows that people have differing amounts of information, and more or less accurate information. The fact that such an unrealistic assumption was embedded in economics for hundreds of years is a very strange thing.

JS: I thought so too. And it had some very strange implications. For instance, it implied that there was no such thing as unemployment. Now, remember, I had entered the field of economics because I wanted to understand unemployment. Yet the standard models I was taught as a graduate student implied that the problem I was interested in didn’t exist.

How did you end up becoming interested and identified with the problems of globalization?

JS: I was always interested in the problems of developing countries, the poorest of the poor. Just out of graduate school, I was asked by the Rockefeller Foundation to go to newly independent Kenya and help them think about their economic policies. That experience gave me an enormous number of ideas that have influenced my thinking for the rest of my life.

Later, the major turning point came in 1996, when, after winning a second term, President Clinton asked me to stay on as a member of his cabinet and his economic adviser. At the same time I was approached by the World Bank to become its chief economist. I thought long and hard about it. At that point America was doing very well, and I finally decided that the real economic challenges of the world were in the very poor countries. Moving to the World Bank brought me into the center of an entirely new set of problems.

That led to your book, “Globalization and Its Discontents”. Although you’ve written a book on fair trade in the interim, this new book is really the next big development, isn’t it?

JS: That’s right. My earlier book focused very particularly on the two major international institutions, the IMF and the World Bank. They help govern the international financial institutions and help direct how development occurs. In the United States we don’t typically pay much attention to these institutions. But if you lived in a developing country, you would understand the power they have over your government to dictate economic policies, and how often the policies that they dictate are misguided.

That first book was directed at the discontent that these institutions had generated. My new book broadens the issue to take in a much wider set of problems. “Making Globalization Work” begins by saying that globalization isn’t working in some very important ways. It tries to diagnose what went wrong and, on the basis of the diagnosis, to figure out how we can make it work better.

You write, “This book is as much about how politics has been used to shape the economic system as it is about economics itself. Economists believe incentives matter. There are strong incentives — and enormous opportunities — to shape political processes and the economic system in ways that generate profits for some at the expense of the many.” Not news to a lot of us, but can you say a few words about that?

JS: One of the themes of the book is that economic globalization has outpaced political globalization. Because we are more interdependent, there’s a greater need to take collective action and work together. But our political institutions and our mindsets have not really kept pace. We do have certain international political institutions, but they are very removed from democratic processes.

The World Trade Organization and the like –?

JS: Exactly. There’s been a heavy engagement in these institutions by the multinational corporations who know how to shape the policies in ways that benefit themselves.

The WTO was basically created by them, wasn’t it?

JS: Not really. The idea that you would have a rule of law in international trade is a very old idea, and actually …

— not the notion perhaps, but it’s always seemed to me that the system of secret tribunals, for instance, in which a corporation is basically able to take a government to court, was set up to serve the multinationals.

JS: Very much so. But I want to point out that this is not inherent in globalization. The idea that a rule of law would govern international trade relations is a very important idea that many idealists thought was good. Back in the ’20s one of the factors that contributed to the Great Recession was a series of trade wars, and one of the ideas behind the establishment of the WTO was to try to prevent that from ever happening again.

But you’re exactly right; the agenda got seized. In the book I talk about how in the last round, patents and intellectual property rights got shoved into the WTO. The result was that access to generic medicines was reduced, forcing poor countries to pay very high prices that they cannot afford. That agreement, signed in Marrakesh in 1994, was in effect a death warrant for thousands and thousands of people in sub-Saharan Africa.

And as folks like Vandana Shiva point out, it has led to “bio-piracy,” the patenting by corporations of things which were native to certain cultures for millennia.

JS: One of the most amusing ones I talk about is the patent on basmati rice, or on the medicinal use of turmeric. In the latter case it was actually an Indian doctor working in America that took out the patent. These are examples of what I call an unbalanced intellectual property regime. Interestingly, I was on the Council of Economic Advisers at the time, and in the office of science and technology policy, we thought these intellectual property provisions were not good for even the United States. They weren’t good for science in America or for global science, and we opposed them. But in the end the drug companies and the entertainment industry prevailed.

Tell me if I’m wrong, but since 1999, very little has actually been agreed to … ?

JS: The problem is, as you suggested, that Europe and the United States have both reneged on the commitment that they made in Dohar, November 2001, to remedy the problems of the past. There’s been some progress on the particular issue of access to drugs. But that progress has been undone by the United States in a large number of bilateral trade agreements. These are not done at the WTO but country by country.

If a multinational’s agreements within the WTO don’t play out as planned, then they switch to bilateral ones, right?

JS: Exactly, and there the imbalance of power is even greater than in the multilateral context. So the United States is making agreements with small countries like Qatar or Chile. The good news is that none of them have involved a significant fraction of global trade. But for the people of these particular countries, these agreements have potentially been a disaster.

I was having dinner the other night with one of the main trade negotiators of the Morocco agreement. He was opposed to it, and pointed out it was hardly a negotiation. The United States made demands, which Morocco had to either accept or reject. Morocco was hopeful that signing it would at least lead to a burst of new growth, but it hasn’t. All it did was reduce access to AIDS medicines.

Changing subjects, what is your take on the potential economic crisis facing the United States at this time — the enormous amount of debt we carry as households and as a nation, our trade and budget deficits, the extent to which we’re in hock to China and a few other countries? Some of your peers, Paul Krugman among them, are alarmed, but it seems under the radar to most Americans. How serious do you think this is, and if you have to guess, how do you think it’s going to play out?

JS: I’m very strongly in agreement with Paul Krugman’s analysis. I think we are in a precarious position. We might be lucky and wander our way through this mess. There is a significant probability, however, that global interest rates could rise. If that happened, households with a large amount of debt would find it very difficult to meet their mortgage payments, and home prices would go down, which would lead to a reduction in consumption. Last year Americans consumed more than their income, something that is obviously not sustainable. The only way they could get away with it was by taking out money from their houses. But if home prices go down, they won’t be able to do that any more. So there is a significant risk of a large economic slowdown. And government, by piling on so much debt and having such a large deficit, does not have much room to maneuver.

In terms of housing, an awful lot of people bought or refinanced with innovative mortgages over the last few years. Some of their five-year balloon payments or rate changes are going to happen in 2007.

JS: That’s what I’m worrying about too. When it comes to refinance, if interest rates are high, they’re going to be in a difficult squeeze. They could almost pray for a global slowdown to keep interest rates low, but that’s not good for the American economy either.

Though some numbers say the economy is healthy, growth has not been shared, and it has been propped up by the housing and mortgage market. I saw a study the other day that said, housing, pharmaceuticals and healthcare are the only things that have been growing.

JS: I would emphasize that the growth is not widely shared. The income of the median American household — half the people are richer, half are poorer — is lower today than it was five years ago. More broadly, for 30 years people at the bottom have seen their real wages not only stagnate but actually fall. Part of that has to do with globalization, but only part of it.

Let’s return to globalization. What are some of the key issues for which you prescribe solutions?

JS: On the issue of health, access to medicines and intellectual property, one of the proposals we put forward here is a medical price fund. Right now the developing countries have to pay high prices and get essentially nothing for it. The drug companies spend more on advertising and marketing than they do on research. More on research for lifestyle drugs than lifesaving drugs, and almost nothing on lifesaving drugs for malaria and other diseases of tropical countries.

When your primary objective is shareholder value and short-term profit, these decisions make sense.

JS: Exactly, but if your concern were the diseases that are causing enormous losses of life and productivity, that’s not necessarily where you’d direct your research.

How would you solve that?

JS: By offering a prize for innovations that lead to vaccines or cures for diseases that affect lots of people in very serious ways.

In other words, an incentive beyond the profit motive?

JS: We wind up paying the drug companies one way or another. We pay through Medicare or Medicaid, but under the current monopoly system, the drugs are only made available at very high prices. Under this alternative system, first you provide the incentives to do the research. Then you use market competition to make these things as available as possible at as low a price as possible.

You’re not only saying globalization is not the problem, but also that market forces are not the problem. It’s really comes down to their wise use.

JS: Exactly. The primary lesson of economics is that incentives are important. Markets don’t always provide the right incentives, so in those cases you have to reshape them.

It also sounds like it’s about timing — an incentive that rewards controlling the drug for its lifetime versus meaningful incentives that reward discovery and licensing.

JS: Exactly, it makes a lot more sense to have the incentive linked to the discovery rather than to driving up the price and spending all this money on marketing.

Finally, how would you deal with the enormous power of multinational corporations?

JS: Corporations have brought forth many of the benefits of globalization, and I should make clear that there have been benefits. Some of the countries of the world, China and India, for example, have been growing very rapidly. China’s been growing at 9.7 percent for 30 years, India for over 5 percent for a quarter of a century. Millions of people have moved out of poverty as a result.

Corporations have been an important vehicle for the transfer of technology and access to global markets that have improved the lives of people in these countries. The corporations also are a source of a lot of the problems. When they take natural resources out of countries, they often leave environmental devastation behind. They’re often associated with bribing governments and contributing to corruption.

Here again, one of the simple ideas is to try to make incentives work better. Right now the only incentive for corporations is the bottom line, and that means if bribing a government official will get the natural resource at a lower price, that’s what they’re going to do.

I could argue that political forces also have to have the right incentives. There needs to be more understanding of these issues and more citizen engagement, in order to put pressure on our government officials to do the right thing. Because it will take government action to alter the incentives structures corporations face.

And I can’t imagine that happening until we change how we finance political campaigns.

JS: Once again it comes down to incentives.

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