Joseph Stiglitz: Globalization and the Search for Balance

Joseph Stiglitz: Globalization and the Search for Balance

by / February 4, 2004 0
Joseph E. Stiglitz, winner of the 2001 Nobel Prize in Economics, was a member of the Council of Economic Advisers during the Clinton administration from 1993 to 1997, serving as chairman from 1995 to 1997. From 1997 to 2000, he was senior vice president and chief economist of the World Bank.

His book
Globalization and Its Discontents, published in 2001, was translated into 20 languages and is an international best seller. He subsequently published The Roaring Nineties in 2003, which was also a best seller.

Stiglitz helped create a new branch of economics called "The Economics of Information," and made major contributions to macroeconomics, monetary theory, development economics, trade theory, theories of industrial organization and rural organization, theories of welfare economics, and income and wealth distribution.

His work helped explain the circumstances in which markets do not work well, and how selective government intervention can improve their performance.

He is now professor of economics and finance at Columbia University in New York.

GT: Clearly your expertise is not simply technology, but relates to the broad picture of how governments should view technology deployment. For example, CIOs and technologists in government often operate as change agents, and government strategies for deploying technological solutions frequently involve re-engineering processes. When one is engaged in this kind of endeavor, it is helpful to have a balanced vision for long-term progress and improvement.

Stiglitz: There is another link with technology in my book. One of the criticisms I level is we pushed deficit reduction a little too far. In the excessive pursuit of deficit reduction, there were important investments that were cut back, and you have to balance out the benefits of the deficit reduction with the cost in terms of what you have to sacrifice. If you have to sacrifice high-return technology, then it is having an adverse effect on the economy. In fact, there were a number of instances where I saw this vividly. One example was the excessive focus on deficit made it difficult to put into place an air traffic control system that used new technology and was absolutely essential. Eventually we did do it, but it was shocking to see the state of the technology. We were using Polish vacuum tubes. We had computers that were several generations out of date. That is an important message in my book -- that you have to balance out the benefits and costs of deficit reduction.

GT: I also wanted to touch on your earlier book, Globalization and Its Discontents, because it is where you make the strongest case for an open debate on globalization -- a debate everyone must participate in. By extrapolation, that would include local and state governments, as well as citizens everywhere. In particular, you argue that the way globalization has been managed to date must be radically rethought.

Stiglitz: I think one of the points I described in that book might be of interest to your readers. I was in the high Andes in an indigenous Indian village. The mayor was describing how globalization was being managed was adversely affecting him. But even more interesting, he was saying he was going back to traditional Indian democracy -- a much more participatory democracy. What you had was this joining of this remote village thinking about how colonialism had taken away a lot of their autonomy, and they, in some ways, were chucking some abuses and reasserting their autonomy. They were going back to their roots of local self-government. At the same time, they saw themselves affected by globalization. They were aware of how, at that moment, the Brazilian exchange rate was going down and making it much more difficult for them to export some of their products. So that was a very interesting experience that showed how these various forces were at play.

GT: And in a very remote place.

Stiglitz: Remote yes, but still they were touched. In another village I sat having breakfast with 30 villagers, and they were all asking questions about what I thought was going to happen to the Eurodollar exchange rate. You realize while we think of globalization touching our lives, it is touching the lives of people in remote places.

GT: So the real message is that globalization is a fact of life, and there is no turning back?

Stiglitz: One of the points I make in one of the books is that while there is no turning back, if it is abused, there can be a backlash that will, in a sense, set us back. After World War I, there was a reversal of globalization. The world was, in some ways, more economically integrated at the end of the 19th century or the early 20th [century] than in the interwar period. So it isn't one of those things that will necessarily go on whatever you do. I think we have been seeing that very forcefully with what has been happening at the WTO [World Trade Organization] discussions. The developing countries are saying, "We can't go forward if you don't have a more balanced agenda."

GT: There now seem to be negative impacts on the United States in terms of jobs and job loss. More and more citizens in the United States are affected as jobs are exported overseas.

Stiglitz: That's right. One of the things I try to argue is that this is a consequence of macro-mismanagement. There is a difference for our economy and a less developed country. In our country, if we are managing things well, we should not have that fear as a country. That is to say, it should be possible to create jobs for every American who wants a job. We have not done a good job of that in the last three years. But the general economic principle is pretty clear. That doesn't mean particular individuals won't lose their jobs.

We need retraining programs, which is an important role for government, to try to help people move from areas where there is going to be job loss. So it is not necessarily going to be easy, but I emphasize that if we are debating how hard it is for us, imagine what it is like for a less developed country with 25 percent unemployment. There if you lose your job, you are talking about real family devastation.

GT: You mention that many policies you advocated in the White House and the work you did at the World Bank stemmed from earlier work you did on the economics of information.

Stiglitz: You might say my earlier research was either part of, or anticipating, Zeitgeist. I did my work on the economics of information in the late '60s and early '70s, before information became the buzzword it has been. But obviously people were beginning to think about those issues. What was so fascinating was the '90s were really a decade in which information problems came to the fore. Not only was it information technology, which everyone thinks about, but other aspects of what went wrong and what went right were related to information problems.

Underlying the bubble were distorted incentives for providing information. Stock options, [for example]. The way accountants presented information didn't enable most shareholders to know the extent to which their shares were being diluted, [and] accountants had misplaced incentives to do the kind of accounting work that had traditionally been done. So in a sense, a lot of the failures of the '90s we see today through the lens of information and problems with information.

The shareholders were getting bad information from the analysts. So in instance after instance, one sees that the problem of the '90s was people did not have the right incentive to provide accurate information. We most surely would have had a bubble, but it would not have been as bad as it was.

GT: So you are talking about increased transparency. You also argue the need for that in government as an important reform. You mention the U.S. Treasury specifically.

Stiglitz: That's right. Having spent my research years focusing on information, it was interesting to realize that in the '90s, it not only became the buzzword of the economy -- information technology -- but also of political discourse. People start talking about transparency and realizing without access to information, citizens have little control over what their government officials are doing.

In developing countries, that is particularly problematic because many have high levels of corruption. Government officials behind closed doors can rob and steal. In the United States, dishonesty of that kind isn't quite a problem. But there are the roles of special interests. There are hidden agendas you can see pursued over and over again behind closed doors. One of the things I have argued is that this undermines democratic processes.

GT: Going back to the founding fathers -- that was the role seen for a free press.

Stiglitz: Yes. But not fully appreciated is while a free press is necessary, it clearly is not sufficient. If the press doesn't have access to information, it won't have anything to disseminate.

GT: Or it ends up disseminating spin.

Stiglitz: Exactly. It becomes an object of control -- government controlling individuals rather than individuals controlling the government.

GT: Another point I found interesting is you said politicians need to behave more like scholars and engage in scientific debate based on hard facts and evidence. In other words, ideology, the way it has come to the fore in many policy decisions ...

Stiglitz: That's right. That was true both in what I saw in the White House and in the international arena. It was particularly difficult for me coming from academia, where I thought that was what we were supposed to be doing -- providing the intellectual basis for policy-making. Over and over again, that kind of stuff was ignored -- not always, but too frequently. The dramatic example is the issue of capital market liberalization, where the IMF [International Monetary Fund] and the U.S. Treasury forced countries to open their capital markets to speculative capital flows, which for a small developing country can have devastating effects.

GT: We have covered economic development in the past, in part, because technology was seen as such an integral part of this now -- the New Economy. You emphasize that there must be a review of the relationship between markets and government -- that neither can solve the problems alone.

Stiglitz: That's right. This is particularly interesting in the area of technology. We depend on government, in the first instance, to support most basic research. That includes not only the foundations of mathematics, for instance, but the development of the Internet by the federal government. All the basic science underlying medical drugs and all that was basically done by government-supported research through the National Institutes of Health.

We sometimes forget that, because we rely on the markets to bring goods to people. We think the market does everything, but what it does is build on a basis of strong roles for government. In the United States, that has been part of our history, going back to the telegraph. The first telegraph line was built and paid for by the federal government. And going back to our land grant policies that were the basis of the enormous increase in agriculture in the 19th century.

GT: In recent years, at least through the '90s, the hype seemed to be that the market had to be unregulated. The free market was seen as the solution for many ideologists -- some earlier promoters of the Internet, for instance. Now we seem to be coming back to a view that there is a role for regulation. There is a balance necessary.

Stiglitz: The thing I try to emphasize is the issue of that balance is never definitively answered. Changes in the economy and technology are going to necessitate reassessing that balance. One of the problems, say in telecommunications -- the world revolution in technology meant many of the regulations we had were out of date, and we needed a new telecommunications bill. There was absolutely no doubt about that.

But also in other areas, for instance, in accounting, as I jokingly put it, it used to be that accountants did mostly accounting. But in the '80s and early '90s, they wound up doing mostly consulting. That presented new conflicts of interest that had to be addressed. Sometimes self-regulation works, but often it doesn't, as we see in the problems with the New York Stock Exchange. So there is a role for regulation, and industry benefits from it.

The story I often use to illustrate that is back in the early 1900s, Upton Sinclair wrote this wonderful book called The Jungle where he described the stockyards so graphically many people stopped eating meat. The meat industry turned to the federal government and said, "Give us standards to reassure consumers." That was viewed as necessary to revive the meat industry. It is a little bit the same things today. I think confidence would be increased in the securities market if people thought they were better regulated.

GT: You put all this beautifully in The Roaring Nineties: "Today, the challenge is to get the balance right, between the state and the market, between collective action at the local, national and global levels, and between government and nongovernment action. As economic circumstances change, the balance has to be redrawn. Government needs to take on new activities, and shed old ones."

How might that particularly apply to state and local governments? They are as much as an effect of globalization and have less of a voice in terms of its direction.

Stiglitz: There are ways, although this is less so in the United States than in Europe. In Europe, in a way, globalization has lessened the role of the nation state and increased the role of the local community. But generally we are thinking more and more about what things need to be done at the national level and the international level. In that process, we are recognizing there are lots of things, like education, where the variation across communities is large and the demographic advantages of having things at a more local level are great.

GT: So in terms of action from a local level in this process, what would you suggest?

Stiglitz: I would argue they need to make a case of what needs to be done at the national level, what needs to be done at the international level, and the residual should be done at the local level. There is a presumption of great democratic control at the local level, at least in terms of responsiveness.

But obviously national defense is going to be done at the national level. Research is almost always going to be done at a national and global level because it benefits everybody around the world. But for education, where you are responding at least to the backgrounds, nuances and situation in each community, there is a persuasive argument that much of this should be done under local control.

GT: This involves assessing where the responsibility sensibly should lie and ensuring policies at that level are set properly, and are not being set by the international community.

Stiglitz: Exactly. The debate about globalization highlights that. There are some things the multinationals are trying to do at the international level that they haven't been able to do at a national level. The question is whether that is legitimate. If you need regulation, when do you need that regulation to be uniform? There are some cases where standardization is important, and then there is a case for getting that done at an international level. But if standardization is not necessary, there is no reason why the different communities can't have different regulations.

GT: That is one lesson of technology, that diversity is often advantageous. Diversity, at times, helps fuel innovation and builds prosperity.

Stiglitz: Some of the new technologies have enabled more diversity. You can have more radio stations now because the cost has come down.

GT: In terms of diversity, look at the protests against the WTO and other international organizations.

Stiglitz: Technology has enabled the creation of what might be called virtual communities. There may only be a few people in each community interested in some of the debates on the environment, but they can get together over the Internet and make their voice heard by having a march or launching some kind of campaign. Before, communities were place based -- we are now getting communities that are no longer restricted to that place-based nature, which is a fantastic change in global and civil society.

GT: Concerning globalization, you also suggest the United States focuses so much on its own economic mythology and managing globalization to its own short-term benefits that it did not see what it was doing to itself and the world. In other words, we haven't been handling globalization very well.

Stiglitz: That's right. The point I was trying to raise was that often we are rather shortsighted. I had in mind some of the hard bargaining we would do at the WTO and NAFTA [North American Foreign Trade Agreement], with Mexico or with other developing countries, and we feel proud that we bargained hard and got a good deal for American pharmaceuticals or the American entertainment industry, not realizing what really matters is not today's deal, but the long run.

If, in getting a better bargain by using our economic and political power today, we engender so much resentment to the United States and the market economy, we are defeating the values we stand for. Unfortunately we did that too much during the '90s, and it has gotten even worse in the last three years. There is a lack of sensibility. So you ask, how reversible is the damage?

There is going to be a whole generation growing up in a post-Cold War world in which they see the United States not as the benevolent superpower, but as the superpower using its power to get more for itself and its companies, and that is going to take a long time to undo. The perspective people get growing up can stay with them a lifetime, so there is a whole generation growing up who, quite rightly, have seen the United States not exercising moral leadership in a whole set of areas, but rather using its power for its own narrow interests.

GT: Which seems to indicate we don't understand globalization. We don't understand how interconnected the world is becoming. With environmental issues and many other things, no country can act out of its own self-interest first and foremost any longer.

Stiglitz: Global warming is one example. We have galvanized the rest of the world against us. Look at the number of people who died in Europe recently [due to last summer's horrific heat wave]. How closely that may be related to global warming is debatable, but clearly people see there is a problem. The scientific community has almost unanimously concluded this is serious, and yet the United States refuses to do anything about it because of its commercial interests.

GT: Which ties back to the point you made already. You can't just look at the short-term, and where it might have worked once for countries to pursue their own self-interests, that doesn't work today.

Stiglitz: We are relatively insulated in some sense, being the richest country in the world -- we sort of feel like we control everything. Yet, even given the control, we complain how it is affecting our job losses. If that is the case, you can imagine what other countries must feel, where the forces are so much beyond their control.

GT: Yet there seems to be a growing sense in America that we have to look out for America first.

Stiglitz: In one sense it is understandable, but in another sense it is shortsighted. It is like someone living in a community and refusing to pay taxes because he says, "I have to take care of my family." Yes, but you live on roads provided by the community and you use hospitals provided by the community. We live in a community where we are interdependent.

GT: All this leads to what you described in your last book as a broad vision, which is relevant to technology as well as other areas, and certainly to what governments should work toward. That vision, you say, "entails a balanced role for government, an attempt to achieve social justice at all levels -- at the global level as well as the local -- at the same time, promotes a sense of individual and national responsibility. It envisions strengthening individual opportunity, at the same time, that it embraces democratic collective action." Some people believed technology and the Internet might help forward many of these things.

Stiglitz: That's right. But it can only live up to those potentials if there are other preconditions satisfied, particularly if you are in a developing country where your livelihood is being taken from you. There, the autonomy provided by new technology isn't going to be very helpful. That's why there is so much concern about the digital divide.

GT: So what role of technology is helping to bring this about in the United States?

Stiglitz: Technology plays a number of distinct roles, and we have talked about them already. It allows for new communities to be created. It allows for faster mobilization. The point you began with is among the most important, which is that as we think about how to employ new technology, we rethink everything we do.

As we rethink everything we do, it becomes an important force for change. So for developing countries, it has been a force that enabled them to leap forward enormously. A student in India today can have access to information as well as any student in America. The computers are the same. The Internet is the same. Our students today do most of their research on the Internet. So we've equalized access to knowledge in a way. I'm not going to say everything is fully equal, but for those who have access to the computer, it has been a greatly equalizing force.

GT: And that trend will continue?
Stiglitz: Yes, but it also means that for those who do not have access, disparities will increase, and that is a particular concern for Africa. The other point I was going to make is it also gives us tools for addressing some problems we haven't been able to adequately address. For example, one of the problems in many developing countries is corruption. In some countries, new technologies have enabled us to curb corruption enormously in, say, tax collection because you have records that enable you to interact with the taxpayer. When you have only one person, you can bargain. When you have many people, it is much more difficult to engage in that kind of corruption.

GT: In a similar way in the United States, you mentioned the problem of lobbyists and behind-the-scenes politicking that citizens aren't aware of.

Stiglitz: Yes, technology has made information just much more available. So in principle, it provides much more direct access to and control of government than we've ever had before. But that is why it has to be accompanied, in some ways, by strong right-to-know legislation.
Blake Harris Contributing Editor