A L S O B Y J O S E P H E . S T I G L I T Z
MAKING
The Roaring Nineties
Globalization and Its Discontents
GLOBALIZATION
WORK
J O S E P H E . S T I G L I T Z
W . W . N O R T O N & C O M P A N Y
N E W Y O R K L O N D O N

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Copyright © 2006 by Joseph E. Stiglitz
For Anya, forever
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Making globalization work / Joseph E. Stiglitz. — 1st ed.
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CONTENTS
Preface ix
A c k n o w l e d g m e n t s x i x
C H A P T E R I
Another World Is Possible 3
C H A P T E R 2 T h e P r o m i s e o f D e v e l o p m e n t 2 5
C H A P T E R 3
Making Trade Fair 61
C H A P T E R 4
Patents, Profits, and People 103
C H A P T E R 5
Lifting the Resource Curse 133
C H A P T E R 6
Saving the Planet 161
C H A P T E R 7 T h e M u l t i n a t i o n a l C o r p o r a t i o n 1 8 7
C H A P T E R 8 T h e B u r d e n o f D e b t 2 1 1
C H A P T E R 9 Refor ming the G lob al Reserv e S ystem
CHAPTER I0 Democratizing Globalization 269
Notes 293
I n d e x 3 3 9

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PREFACE
My book Globalization and Its Discontents was written just
a f t e r I l e f t t h e W o r l d B a n k , w h e r e I s e r v e d a s s e n i o r v i c e
p r e s i d e n t a n d c h i e f e c o n o m i s t f r o m 1 9 9 7 t o 2 0 0 0 . T h a t
book chronicled much of what I had seen during the time I was at the
Bank and in the White House, where I served from 1993 to 1997 as a
member and then chairman of the Council of Economic Advisers under
President William Jefferson Clinton. Those were tumultuous years; the
1997-98 East Asian financial crisis pushed some of the most successful
of the developing countries into unprecedented recessions and depres-
sions. In the former Soviet Union, the transition from communism to
the market, which was supposed to bring new prosperity, instead
brought a drop in income and living standards by as much as 70 per-
cent. The world, in the best of circumstances, marked by intense com-
petition, uncertainty, and instability, is not an easy place, and the
developing countries were not always doing the most they could to
advance their own well-being. But I became convinced that the
advanced industrial countries, through international organizations like
the International Monetary Fund (IMF), the World Trade Organization
(WTO), and the World Bank, were not only not doing all that they
could to help these countries but were sometimes making their life more
difficult. IMF programs had clearly worsened the East Asian crisis, and
IX

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PREFACE
Preface
the "shock therapy" they had pushed in the former Soviet Union and its
of Economic Advisers and as a member of his cabinet. I declined,
satellites played an important role in the failures of the transition.
because I thought that the task of designing policies and programs that
I covered many of these topics in Globalization and Its .Discontents. I
would do something about the abject poverty which plagued the less
felt I had a unique perspective to bring to the debate, having seen poli-
developed world was a far more important challenge. It seemed terri-
cies being formulated from inside the White House, and from inside
bly unfair that in a world of richness and plenty, so many should live
the World Bank, where we worked alongside developing countries to
in such poverty. The problems were obviously difficult, but I felt con-
help develop strategies to enhance growth and reduce poverty. Equally
fident something could be done. I accepted the World Bank's offer, not
important, as an economic theorist, I spent almost forty years working
only because it would give me new opportunities to study the problems
to understand the strengths, and limitations, of the market economy.
but because it would provide me a platform from which I could sup-
My research had not only cast doubt on the validity of general claims
port the interests of the developing countries.
about market efficiency but also on some of the fundamental beliefs
In my years at the World Bank, I came to understand why there was
underlying globalization, such as the notion that free trade is necessar-
such discontent with the way globalization was proceeding. Though
ily welfare enhancing.
development was possible, it was clear that it was not inevitable. I had
In my earlier book, I described some of the failures of the interna-
seen countries where poverty was increasing rather than decreasing,
tional financial system and its institutions, and showed why globaliza-
and I had seen what that meant—not just in statistics but in the lives
tion has not benefited as many people as it could and should have. And I
of the people. There are, of course, no magic solutions. But there are a
sketched out some of what needs to be done to make globalization work—
multitude of changes to be made—in policies, in economic institu-
especially for the poor and developing countries. The book included
tions, in the rules of the game, and in mindsets—that hold out the
some proposals for reforming the world financial system and the
promise of helping make globalization work better, especially for the
international financial institutions that govern it, but space did not
developing countries. Some changes will occur inevitably—China's
allow me to flesh out these proposals.
entry into the global scene as a dominant manufacturing economy and
Just as my time in the White House and at the World Bank put me
India's success, in outsourcing, for instance, are already forcing changes
in a unique position to understand globalization's problems, so too has it
in policies and thinking. The instability that has marked global finan-
provided me with the basis for this sequel. During my years in Washington,
cial markets during the past decade—from the global financial crisis of
I traveled the world and met many government leaders and officials,
1997-98 to the Latin American crises of the early years of the new mil-
as I studied the successes and failures of globalization. After I left
lennium, to the falling dollar beginning in 2003—has forced us to
Washington to return to academia, I remained involved in the
rethink the global financial system. Sooner, or later, the world will have
globalization debate. In 2001, I received the Nobel Prize for my earlier
to make some of the changes I suggest in the following chapters; the
theoretical work on the economics of information. Since then, I have
question is not so much whether these or similar changes will occur, but
visited dozens of developing countries, continued my discussions with
when—and, more important, whether they will occur before another
academics and businesspeople, with prime ministers, presidents, and
set of global disasters or after. Haphazard changes that are done quickly
parliamentarians on every continent, and been involved in fora debat-
in the wake of a crisis may not be the best way to reform the global eco-
ing development and globalization involving every segment of our
nomic system.
global society.
The end of the Cold War has opened up new opportunities and
When I was about to leave the White House for the World Bank,
removed old constraints. The importance of a market economy has
President Clinton asked me to stay on as the chairman of his Council
now been recognized and the death of communism means that govern-

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XII
PREFACE
Preface
XIII
even more troubled to learn that Clinton's own Treasury was pushing
ments can now turn away from ideological battles and toward fixing
the problems of capitalism. The world would have benefited had the
these policies.)
United States used the opportunity to help build an international eco-
My economic research had shown the deep underlying flaws in IMF
nomic and political system based on values and principles, such as a
economics, in "market fundamentalism," the belief that markets by them-
trade agreement designed to promote development in poor countries.
selves lead to economic efficiency. Intellectual consistency—consistency
Instead, unchecked by competition to "win the hearts and minds" of
with my earlier academic work—impelled me to voice my concerns
those in the Third World, the advanced industrial countries actually
that the policies which they were pushing in, for instance, East Asia,
created a global trade regime that helped their special corporate and
might only make matters worse. To do any less would have been a dere-
financial interests, and hurt the poorest countries of the world.
liction of my responsibilities.
Development is complex. Indeed, one of the main criticisms leveled
What we had fought for while I was in the Clinton administration
against the IMF and other international economic institutions is that
was relevant, not just to Americans but to the rest of the world as well.
their one-size-fits-all solutions do not—can not—capture these com-
As I moved from the Clinton administration to the World Bank, I con-
plexities. Yet, out of the myriad of global economic narratives, some
tinued to push for the right balance between the private and public sec-
general principles do arise. Many of the successful developing countries
tors and to advance policies promoting equality and full employment.
have some policies in common, which each adapted to its own situa-
The issues I raised during my tenure at the World Bank—which
tion. One of this book's objectives is to explain these points in common.
received a warm reception by many of the economists there—are the
I should say a word about the relationship between my earlier
same ones I raised in Globalization and Its Discontents.
research, especially that connected with the work that led to the Nobel
The passions evoked by the global financial crises and the difficult
Prize, my policy positions during my years in Washington, and my
transitions from communism to a market economy have now faded.
subsequent writings, especially in Globalization and Its Discontents and in
Today, these matters can be looked at more calmly and, as I describe in
The Roaring Nineties.'
chapter 1, on many of the pivotal issues there is an emerging consen-
My earlier academic work on the consequences of imperfect and
sus that resembles the ideas put forth in Globalization and Its Discon-
limited information and imperfect competition led me to an awareness
tents. That book helped change the debate about how globalization
of the limitations of markets. Over the years I, and others, have
should be reshaped. A number of these ideas are widely accepted now,
extended that work into macro-economics. My work in the economics
and even the IMF has come round to my point of view that allowing
of the public sector had emphasized the need for balance between the
unfettered flows of speculative capital is extremely risky. Of course, as
government and the market—perspectives close to those of the Clin-
the continuing clashes between the Left and Right in the United States
ton administration, and which I helped articulate in the annual Eco-
and elsewhere remind us, there remain large areas of disagreement
nomic Report of the President in the years I served on the Council of
about both economics and basic values. Indeed, one of my main criti-
Economic Advisers. When I came to the World Bank, I was troubled
cisms of the international economic institutions is that, regardless of
by what I saw: the Bank—and, even more, the IMF—pushing conser-
the circumstances, they have supported one particular economic per-
vative economic policies (such as the privatization of social security)
spective—one which I think, in many ways, is misguided.
that were exactly the opposite of those for which I had fought so hard
This book reflects my faith in democratic processes; my belief that
when I was at the White House. Worse, they were using models that
an informed citizenry is more likely to provide some checks against the
my theoretical work had done so much to discredit. (I was, of course,
abuses of the special corporate and financial interests that have so dom-

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XIV
PREFACE
Preface
xv
Mated the globalization process; that ordinary citizens of the advanced
they stood for too long. More broadly, Wall Street's perspective, which
industrial countries, as well as of the developing world, share a com-
is often shortsighted, is being recognized as antithetical to develop-
mon interest in making globalization work. I hope that this book, like
ment, which requires long-term thinking and planning.
its predecessor, will help transform the globalization debate—and, ulti-
There is also a growing recognition that there is not just one form of
mately, the political processes which shape globalization.
capitalism, not just one "right" way of running the economy. There are,
for instance, other forms of market economies—such as that of
Globalization is the field on which some of our major societal
Sweden, which has sustained robust growth—that have led to quite
conflicts—including those over basic values—play out. Among the
most important of those conflicts is that over the role of government
different societies, marked with better health care and education and
and markets.
less inequality. While Sweden's version may not work as well elsewhere,
or may not be appropriate for a particular developing country, its suc-
It used to be that conservatives could appeal to Adam Smith's "invis-
cess demonstrates that there are alternative forms of effective market
ible hand"—the notion that markets and the pursuit of self-interest
economies. And when there are alternatives and choices, democratic
would lead, as if by an invisible hand, to economic efficiency. Even if
political processes should be at the center of the decision making—not
they could admit that markets, by themselves, might not engender a
socially acceptable distribution of income, they argued that issues of
technocrats. One of my criticisms of the international economic insti-
efficiency and equity should be separated.
tutions is that they tried to pretend that there were not trade-offs—a
In this conservative view, economics is about efficiency, and issues of
single set of policies made everyone better off—while the essence of
equity (which, like beauty, so often lies in the eyes of the beholder)
economics is choice, that there are alternatives, some of which benefit
should be left to politics. Today, the intellectual defense of market fun-
some groups (such as foreign capitalists) at the expense of others, some
damentalism has largely disappeared.2 My research on the economics of
of which impose risks on some groups (such as workers) to the advan-
information showed that whenever information is imperfect, in partic-
tage of others.
ular when there are information asymmetries—where some individu-
Among the central choices facing all societies is the role of govern-
als know something that others do not (in other words, always)—the
ment. Economic success requires getting the balance right between the
reason that the invisible hand seems invisible is that it is not there.3
government and the market. What services should the government
Without appropriate government regulation and intervention, markets
provide? Should there be public pension programs? Should govern-
do not lead to economic efficiency.'
ment encourage particular sectors with incentives? What regulations, if
In recent years we have seen dramatic illustrations of these theoreti-
any, should it adopt to protect workers, consumers, and the environment?
cal insights. As I described in my book The Roaring Nineties,' the pur-
This balance obviously changes over time, and will differ from country to
suit of self-interest by CEOs, accountants, and investment banks did
country. But I shall argue that globalization, as it has been pushed, has
not lead to economic efficiency, but rather to a bubble accompanied by
often made it more difficult to obtain the requisite balance.
massive misallocations of investment. And the bubble, when it burst,
I also hope to show that while globalization's critics are correct in
led, as they almost always do, to recession.
saying it has been used to push a particular set of values, this need not
Today, by and large, there is (at least among economists, if not
be so. Globalization does not have to be bad for the environment,
among politicians) an understanding of the limitations of markets. The
increase inequality, weaken cultural diversity, and advance corporate
scandals of the nineties in America and elsewhere brought down
interests at the expense of the well-being of ordinary citizens. In Mak-
"Finance and Capitalism American Style" from the pedestal on which
ing Globalization Work, I attempt to show how globalization, properly

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XVI
PREFACE
Preface
XVII
managed, as it was in the successful development of much of East Asia,
parents (the "sperm lottery"),' or the luck of buying a piece of real
can do a great deal to benefit both the developing and the developed
estate in the right place at the right time (just before oil is struck, or
countries of the world.
before a local real estate bubble develops).' Those who are less con-
Attitudes toward globalization, and the failures and inequities asso-
cerned feel that wealth is a reward for hard work. In this view, redistri-
ciated with the way it has been managed, provide a Rorschach test for
bution of income not only takes away incentives for work and savings
both countries and their people, revealing their fundamental beliefs
but is almost immoral, for it deprives individuals of their just rewards.
and attitudes, their perspectives on the role of government and the
Paralleling these positions are stances on a host of other issues.
market, the importance they attach to social justice, and the weight
Those who are less concerned about inequality and more concerned
they put on noneconomic values.
about economic efficiency tend to be less concerned with noneco-
Economists who place less importance on reducing income inequal-
nomic values such as social justice, the environment, cultural diversity,
ity are more prone to think that the actions governments might take to
universal access to health care, and consumer protection. (There are
reduce that inequality are too costly, and may even be counterproduc-
many exceptions, of course—conservatives, for instance, who worry
tive. These "free market" economists are also more inclined to believe
about the environment.)
that markets, by themselves, without government intervention, are
I emphasize these connections between economic and cultural atti-
efficient, and that the best way to help the poor is simply to let the
tudes to emphasize how much it matters to whom we entrust key
economy grow—and, somehow, the benefits will trickle down to the
aspects of economic decision making. If one delegates decision making
poor. (Interestingly, such beliefs have persisted, even as economic
to "conservatives," almost inevitably one will get economic policies and
research has undermined their intellectual foundations.)
outcomes that reflect their political interests and cultural values.' This
On the other hand, those who, like me, think that markets often fail
book obviously reflects my own judgments and values; at least, I
to produce efficient outcomes (producing too much pollution and too
hope to be transparent, and present both sides of the ongoing eco-
little basic research, for instance) and are disturbed by income
nomic debates.
inequalities and high levels of poverty; also believe that reducing that
inequality can cost less than the conservative economists predict. Those
SAVING GLOBALIZATION FROM ITS ADVOCATES
who worry about inequality and poverty also see the enormous costs of
not dealing with the problem: the social consequences, including alien-
Some seventy years ago, during the Great Depression, the British econ-
ation, violence, and social conflict. They are also more sanguine about
omist, John Maynard Keynes, formulated his theory of unemploy-
the possibilities for government interventions; while governments
ment, which detailed how government action could help restore the
sometimes, or even often, are less efficient than one might have hoped,
economy to full employment and growth. Keynes was vilified by con-
there are notable instances of success, several of which I discuss in the
servatives, who saw his prescription as increasing the role of govern-
pages that follow. All human institutions are imperfect, and the chal-
ment. They seized on the budget deficits that inevitably accompany a
lenge for each is to learn from the successes and failures.
downturn as an occasion to cut back on government programs. But
These perspectives on the importance of dealing with inequality and
Keynes actually did more to save the capitalist system than all the pro-
poverty are mirrored in differences in views about their origins. By and
market financiers put together. Had the advice of the conservatives
large, those who are concerned about inequality see much of it as aris-
been followed, the Great Depression would have been even worse; it
ing out of luck—the luck of being born with good genes or with rich
would have been longer and deeper, and, the demand for an alternative

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X V I I I
P R E F A C E
to capitalism would have grown. By the same token, I believe th
at
unless we recognize and deal with the problems of globalization, it will
be difficult to sustain its current momentum.
Globalization, like development, is not inevitable—even though
there are strong underlying political and economic forces behind it. By
most measures, between World War I and World War II, both the pace
and extent of globalization slowed, and even reversed. For example,
measures of trade, as a percentage of GDP, actually declined.' If glob-
ACKNOWLEDGMENTS
alization leads to lower standards of living for many or most of the
citizens of a country and if it compromises fundamental cultural
values, then there will be political demands to slow or stop it.
The path of globalization will, of course, be changed not only by the
force of ideas and experiences (ideas about whether trade or capital
market liberalization will improve growth and the actual experiences
with these reforms, for example) but also by global events. In recent
years, 9/11 and the war on terrorism, the war in Iraq, and the emer-
y list of those to whom I am indebted for my understanding
gence of China and India have all redefined the globalization debate in
of globalization has grown much longer over the past four
ways that I will discuss.
years since writing Globalization and Its Discontents. In addi
This book is as much about how politics has been used to shape the
tion to those at the international economic institutions, and especially
economic system as it is about economics itself. Economists believe
the World Bank, that I noted in that book, I now need to add Nick Stern
that incentives matter. There are strong incentives—and enormous
and Francois Bourguignon, who succeeded me as chief economists at the
opportunities—to shape political processes and the economic system
World Bank and with whom I have continued to engage in discussions
in ways that generate profits for some at the expense of the many.
about the development process. I'd like to thank Supachai Panitchpakdi,
Open, democratic processes can circumscribe the power of special
former head of the World Trade Organization, with whom I have had
interest groups. We can bring ethics back into business. Corporate gov-
innumerable discussions concerning the direction of the development
ernance can recognize the rights not only of shareholders but of others
round; Leif Pagrotsky, Sweden's education minister, who was at the fore-
who are touched by the actions of the corporations.'° An engaged and
front of arguing for a fairer trade regime when he served as Sweden's
educated citizenry can understand how to make globalization work, or
trade minister; Pascal Lamy, formerly EU commissioner for trade (now
at least work better, and can demand that their political leaders shape
head of the WTO), especially for discussions on the Everything But
globalization accordingly. I hope this book will help make this vision a
Arms initiative; Kemal Dervis, with whom I worked closely at the World
reality.
Bank, and who has now become head of the UNDP; and Juan Somavia,
head of the ILO, who convened the World Commission on the Social
Dimension of Globalization, whose report represents an important land-
mark in the changing perspectives on globalization.
In preparing to write this book, I revisited many of the countries
that I had visited, studied, and written about earlier—including

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ACKNOWLEDGMENTS
Acknowledgments
Argentina, Ethiopia, Thailand, Korea, China, Russia, Colombia,
icy Dialogue (IDP) at Columbia University in June 2005. Some of the
Philippines, Indonesia, Mexico, Vietnam, Ecuador, India, Turkey, and
ideas in chapter 1 were presented and discussed in the Tanner Lectures
Brazil—to see how things had changed. I also went back to a few coun-
delivered at Oxford University in the spring of 2004. I want to thank
tries I had visited only briefly before, such as Bangladesh and Nigeria,
the CIDOB Foundation in Barcelona, which in the fall of 2004 co-
as well as some that I had not had a chance to see, including Bolivia,
sponsored a conference on the "post—Washington Consensus consen-
Madagascar, Venezuela, and Azerbaijan. I owe a great debt to the
sus," at which many of these ideas were further developed.
numerous government officials (from the prime minister or president
This book covers a wide range of ideas. Many of the topics are areas
to their finance ministers and economic advisers on down), to the aca-
on which I have been engaged in research for more than three decades,
demics and businesspeople, and to those in the donor community and
and in that time have accumulated a huge reservoir of intellectual
in civil society (NGOs) who gave so generously of their time. Many
debts. The discussions of trade policy in chapter 3 owe a great deal to
will see their ideas reflected in the discussions here.
Peter Orszag, with whom I worked closely on the problems of dump-
Various versions of some of the ideas presented here have been dis-
ing while I was at the Council, and to Alan Winters, Michael Finger,
cussed and presented at seminars through the world. I particularly
and Bernard Hoeckman at the World Bank. For the discussions of
want to thank George Papandreou, former foreign minister of Greece,
intellectual property in chapter 4, I am particularly in debt to Jamie
who convenes an annual seminar of academics and political leaders
Love, Michael Cragg, Paul David, Giovanni Dosi, Mario Cimoli,
(the Symi Symposium) in which globalization issues have often come
Richard Nelson, Ha Joon Chang, and all the participants at the IPD
to the fore; the Vatican Academy of Social Sciences, at which some of
intellectual property task force meetings, as well as my several co-
the ideas concerning debt were discussed; the Commonwealth, which
authors in the general theory of innovation, Richard Gilbert, Carl
asked me to undertake a study with Andrew Charlton of the London
Shapiro, David Newbery, and Partha Dasgupta. Several of these also
School of Economics on what a true development round of trade nego-
worked with me on problems on natural resources and the environ-
tiations might look like, and which helped finance that study. I want
ment. Kevin Conrad and Geoff Heal at Columbia and Prime Minister
to thank the president of the UN General Assembly, the Common-
Somares of Papau New Guinea and Environment Minister Rodriguez
wealth finance ministers, the WTO, the Center for Global Develop-
have been at the center of the Rainforest Coalition described in chap-
ment, and the World Bank for inviting me to present the findings of
ter 6. Michael Toman, Alan Krupnick, and Ray Squitieri worked
that study. I have similarly benefited from the airings that the ideas in
closely with me at the Council of Economic Advisers on the problems
each of the chapters have received in seminars and international meet-
of global warming; and Ruth Bell was good enough to read an earlier
ings around the world. The ideas on reforming the global financial sys-
version of chapter 6. On the issue of debt, David Hale, Barry Herman,
tem were presented before the UN Committee on Economic and
Kunibert Raffer, Michael Dooley, Roberto Frenkel, Jurgen Kaiser, and
Social Affairs, the American Economic Association meetings in Boston
Susan George deserve thanks, as well as all the participants at the IPD
in January 2006, at a seminar in Sweden (with George Soros) in
sovereign debt task force meetings. The global reserves proposal, the
December 2001, and at the annual meeting of the Spanish Association
Chang Mai Initiative, and the failed attempt to create an Asian Mon-
of Economists in La Coruna in September 2005. The problems in the
etary Fund have been discussed at meetings, seminars, and colloquia in
intellectual property regime and the proposed reforms were discussed at
Stockholm, Washington, and elsewhere, and I wish to thank the par-
a ministerial meeting for the least developed countries held by the
ticipants of those seminars, especially George Soros, who put forward a
World Intellectual Property Organization in Seoul in October 2004
similar proposal of his own. I have also benefited from discussions
and at an international conference sponsored by the Initiative for Pol-
with Andrew Sheng and Eusake Sakikabara on these topics.

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Document Outline

• 00 Front Matter.doc
• 01 Another World is Possible.doc
• 02 Promise of Development.doc
• 03 Making Trade Fair.doc
• 04 Patents, Profits and People.doc
• 05 Lifting the Resource Curse.doc
• 06 Saving the Planet.doc
• 07 Multinational Corporation.doc
• 08 Burden of Debt.doc
• 09 Reforming Global Reserve System.doc
• 10 Democratizing Globalization.doc
• 98 Notes.doc
• 99 Index.doc

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