Making globalisation work by Joseph Stiglitz

Joseph Stiglitz, the Columbia University professor and Nobel Prize-winning economist, talks about globalisation's role in growing inequalities

Globalisation has been a double-edged sword. To those able and willing to seize the opportunities and manage globalisation on their own terms, it has provided the basis of unprecedented growth. China and India, two countries with, together, 2.4 billion people, have for more than a quarter century been growing at historically unprecedented rates with hundreds of millions of people moving out of poverty. They have taken advantage of globalisation of knowledge and globalisation of markets.

Tom Friedman has written a very influential book, entitled “The World is Flat.” But the world isn’t flat and in many ways is getting less flat. Where Friedman is right is that there has been a huge change in the global economic landscape. China and India had the education, the technology, the resources, to take advantage of the new technology, to close the gap between them and the advanced industrial countries.

But elsewhere, matters have not worked out so well. There is growing disparity between the richest countries and the poorest countries and growing inequalities within most countries around the world and globalisation, as it is managed, has played an important role in both of these disturbing trends. The number of people in poverty in Africa has doubled in the last two decades and globalisation has contributed to these problems. Africa was left, by its colonial legacy, with neither resources nor the education, for instance, to take advantage of the new technologies that make such a difference in India and China. But making matters worse is the fact that the last trade agreement – the Uruguay round, signed in Marrakesh in the spring of 1994 - was so unfair that the poorest countries of the world, including sub-Saharan Africa as a region, were actually made poorer. The North insisted that the South remove their trade barriers, open up their markets to the goods produced in the North and eliminate their subsidies, but the North did not fully reciprocate.

Of particular concern is agriculture. Seventy per cent of the people in the developing world depend directly, or indirectly, on agriculture. The massive subsidies in the North serve to depress the incomes of those in the South and increase the poverty. To give a couple of examples: the United States subsidises cotton to the tune of $3 billion to $4 billion a year. Twenty five thousand very rich cotton farmers divide that money, most of the money going to about five thousand of these farmers. But the consequence is that the United States, which would not be exporting cotton at all, has become the world’s largest exporter and as it exports more, global prices of cotton fall and 10 million people in sub-Saharan Africa suffer as a result. But it’s not just the United States, Europe also is to blame. The average cow in Europe receives a subsidy of, by some estimates, in excess of $2 a day – a number which has considerable resonance, because $2 a day is the World Bank’s definition of poverty. Some 40 per cent of those in the developing world live on less than $2 a day. So, it is better to be a cow in Europe than to be an average person in the developing world.

In the North, global competition has helped drive down wages of unskilled workers, exacerbating similar trends coming from changes in technology and the weakening of labour unions.

Economic theory never said that everyone would gain as a result of globalisation. In fact, it warned that there could be losers; that, as I mentioned before, unskilled workers from the North would face competition from the South and that competition would have the effect of lowering wages. To see this most clearly, think about a world in which there is perfect economic integration; in which barriers between developed and less developed countries were removed; in which goods and services flowed freely and in which markets worked perfectly. Of course we’re nowhere near that so-called ideal state. But in that so-called ideal state unskilled workers everywhere in the world would be exactly the same, and that would mean unskilled workers in the United States and Europe would receive exactly the same wage as unskilled workers in India and China, and the level of those unskilled wages would be much closer to that today prevailing in India and China, than that prevailing in the United States and Europe today.

What globalisation said was that winners could compensate the losers – not that they would. And they haven’t. In fact, globalisation has often been used as an excuse for taking away social protections. When, last spring, young workers in France went on protest concerning their low wages and weakening job protections they were told globalisation demands it. But then they asked, “you told us that globalisation was going to make us better off. How can lower wages, weakened job benefits, make us better off?” Occasionally the response would come back, “well, in the long run you’ll be better off”. But then, the quip of Keynes comes to mind: “in the long run, we’re all dead”.

In the United States, wages at the bottom have not only been stagnating, they’ve been falling. In fact, wages at the bottom are today about thirty per cent below what they were thirty years ago. More disturbing is that even in the middle wages have begun to decline. Today, real income of the median American family is lower than it was five or six years ago.

Some say that globalisation is inevitable, but that is simply wrong. The extent of globalisation, as conventionally measured for instance by the ratio of trade or capital flows to GDP, was actually stronger before World War I than in the inter-war period and, unless we ensure that globalisation has more winners and fewer losers, there can be a backlash against globalisation. Indeed, in many quarters, especially here in the United States, one can already see such a backlash taking shape.

As I said, often globalisation is used as an excuse for weakening job protections, undermining the welfare state. Scandinavia has shown, however, that there is an alternative. Scandinavia, is a region of Europe, a region of the world, that is perhaps more open than any other but it has managed globalisation in ways to ensure that the benefits are shared more equally to ensure that health and education is provided for all; to ensure that as citizens lose their jobs assistance is provided to help move them in to new jobs. The result of this is that there is greater capacity for undertaking risk and Scandinavian countries have had among the highest rates of growth in the world, the highest penetration of the new technologies. True, they have amongst the highest

tax rates, but what that shows is that taxes by themselves do not necessarily discourage economic growth and economic prosperity. It depends on how those tax dollars are spent and in Scandinavia, by and large, they manage to spend these dollars well.

The result of this is that in the broader measures of well-being, these countries stand towards the top of the list. The UNDP has a measure called the Human Development Indicator, which includes not just GDP per capita., income per capita, but also measures of health, longevity, education, and in those measures the United States is about tenth on the list.

It would be unfortunate if there was a backlash against globalisation because we did not make globalisation work for more individuals. It would be unfortunate both for those in the developed and the developing countries. Standard economic theory emphasises that opening up markets provides opportunities for each country to take advantage of its comparative advantage and provides enhanced scope for efficiency gains from economies of scale. But there is an even more compelling argument for globalisation – the encounters between different cultures, the new opportunities which globalisation brings, as well as the enhanced competition that accompanies, all mean that globalisation can be a tremendous spur for innovation and creativity.

An alternative world is possible. Globalisation can be managed differently. In my recently published book, “Making Globalisation Work”, I explain not only what has gone wrong and why it has gone wrong but, on the basis of this diagnosis, I explain how globalisation can be made to work, or at least work a lot better, for a lot more people.

The problems that have been encountered are not inevitable. They are a consequence of the particular way that globalisation has been managed or, more accurately, mismanaged, especially in the post-Cold War world. I lay out a set of reforms - some small, some large, some that will take years to be brought about, some that are already in the process of being made that will at least make globalisation work better. With these reforms globalisation has a chance of living up to its promise and its potential for improving the living standards not just only for the richest countries of the world, but of the rich and the poor in both the developing and the developed world.