In Other Words
Joe Stiglitz’s Bum Rap
Journal of Policy Modeling Vol. 25, No. 5, July 2003, New York The new article by Columbia University economist Joseph Stiglitz — "Globalization and Growth in Emerging Markets and the New Economy," appearing in the Journal of Policy Modeling — deserves wide discussion in the economics profession. But it won’t get it. Stiglitz’s arguments are ...
Journal of Policy Modeling
Vol. 25, No. 5, July 2003, New York
The new article by Columbia University economist Joseph Stiglitz — "Globalization and Growth in Emerging Markets and the New Economy," appearing in the Journal of Policy Modeling — deserves wide discussion in the economics profession. But it won’t get it. Stiglitz’s arguments are so out of line with the prevailing zeitgeist that most of his colleagues will happily seize on the author’s more intemperate remarks about the U.S. Treasury and the International Monetary Fund (IMF) as an excuse to disregard his substantive points. Such is the lot of the celebrity economist: Stiglitz now is categorized as an enfant terrible, celebrated for the conceptual work that won him the 2001 Nobel Prize in economics, and ignored on everything else.
His article argues that globalization can be a positive force, but that "one must face up to the downside risks, and design programs, policies, and institutions" to address them. Put simply, the state must regulate integration of a national economy into the global economy so that market forces will generate wider benefits and fewer costs. Stiglitz advances this line against those who peddle "almost unfettered globalization" for developing countries with little more than rhetorical qualifications about the need for accompanying safeguards and sound financial regulation.
As evidence, Stiglitz highlights the contrast between recent economic development in Latin America and East Asia. Latin America has followed the precepts of globalization, but its economic growth from 1980 to 2000 was roughly half the rate it had been in the two decades before the implementation of pro-market reforms. On the other hand, East Asia harnessed the growth and poverty-reduction benefits of joining the global economy, contends Stiglitz, but policymakers in the region did so by regulating the globalization process. "They took pragmatic policies," he explains, "not influenced by the ideologies of… neo-liberal doctrines." Only in the 1990s did they succumb to pressure and rapidly open their capital markets, with the Asian currency crisis of 1997-98 as the predictable result. Stiglitz points to China as convincing proof that "one could attract enormous amounts of foreign direct investment without having full capital market liberalization."
Standard economic theory argues that job creation — key to both economic growth and poverty reduction — requires eliminating trade barriers so that resources can move to where they are most productive. "But all too often," Stiglitz observes, "what seems to happen is that old jobs in the protected industries are eliminated before new jobs are created. Resources do not move from low productivity uses to high productivity uses, but from low productivity uses to zero productivity unemployment. Doing so increases poverty and decreases [gross domestic product]."
Two subsequent essays in the same volume reveal how far from the mainstream Stiglitz’s views fall. First, Harvard University President Larry Summers badly misrepresents Stiglitz’s article as arguing that "the way to have more investment is to have controls that keep capital out." No surprise there, since while he was U.S. deputy treasury secretary and then treasury secretary during the Clinton administration, Summers pushed hard to free capital flows in developing countries.
Second, Fordham University economist Dominick Salvatore examines economic growth in the G-7 (Group of Seven) countries and hails the United States for its competitiveness and flexible labor markets. But his criteria relate exclusively to narrow notions of efficiency and return on capital. "General merchandise retailing is twice as efficient in the United States than in Japan," he writes, ignoring how shopping malls have hollowed out many cities in the United States whereas, thanks in part to their allegedly inefficient retail system, many Japanese cities retain a vibrancy that produces better public services and higher quality of life. Salvatore praises U.S. labor policies that leave companies "much freer to hire, fire, reorganize, and use labor and other resources where they are most productive." Such practice "makes life difficult for U.S. workers, who can lose their jobs when caught in a competitive squeeze," Salvatore acknowledges, "but it also enhances firm efficiency and labor productivity."
He also scolds Japan for using its capital less efficiently than the United States. "Japan keeps massive electrical generating capacity idle most of the time in order to meet peak demand in hot summer days," he writes, "while the United States avoids this great capital waste by utilizing time-of-day and summer-electricity pricing schemes that discourage usage at peak times." Tell that to the millions of people in the United States and Canada who lost power during the 2003 summer blackout.
Summers and Salvatore speak for the mainstream economics profession; compared to their remarks, the innovation in Stiglitz’s arguments becomes evident. Should Stiglitz harness the brainpower that won him the Nobel Prize to develop his arguments more analytically than he has to date, his peers will be less able to dismiss them.