What I learned from “Globalization and its Discontent”?
Globalization and its discontent by Joseph Stiglitz was possibly the first macroeconomics book that I have finished. The book highlights the adverse effects of liberalization and market fundamentalism on the poor in developing countries and how international organizations especially IMF(International Monetary Fund) has so far been insensitive to their plight.
So here are my takeaways from this well-written book —
1 — What’s Globalization?
Globalization is a situation where hitherto independent and separate countries come in contact with one another because of reduced transportation cost and enhanced communication services. The condition results in a scenario where each of these countries gets exposed to new/competing goods, ideas, capital sources, etc.
2 — How to manage Globalization: Protectionism vs. Liberalization?
A country can either shun the goods and services from foreign countries by using artificial barriers such as tariffs, bans, etc. and, thus, force its population to use domestic products only. It is called Protectionism.
Pros — The country can successfully limit the impact of the foreign encounter on its economy. It can protect the domestic industries from foreign competition.
Cons — The population is unable to make use of better-quality and low-cost goods available elsewhere(say modern medicines). Practically speaking, if the foreign products are cheaper and better, a black market for these goods will appear within the country which is detrimental to the economy.
Alternatively, the country can accept these goods and services and allow them to compete with domestic produce freely. Theoretically, it results in the reduction of cost for the end customers. It is what we call Liberalization.
Pros — It leads to the reduction of cost due to competition. Liberalization also leads to re-orientation of labor involved in inefficient industries to more efficient ones. So, if the foreign country can produce clothes at a low cost no matter what than the domestic clothing industry will slowly disappear and the labor will migrate to something the state can do better — say making cars.
Cons — Liberalisation inevitably leads to job cuts and reduced wages which is painful for the poor. Liberalization may also lead to total destruction of the domestic industry especially if the foreign manufacturers have massive capital and technological advantages. This situation leads to foreign monopoly which is often worse than a domestic monopoly.
Most countries often adopt a mix of two — liberalizing some industries while protecting other critical ones. The author believes that liberalization is beneficial for all parties in the long run.
3 — Challenges with Current Globalization
Under the sway of developed countries, international institutions led by the IMF (International Monetary Fund) have been pushing developing countries for rapid liberalization.
However, this approach has proved detrimental for the developing nations as well as the Global economy because —
1 — Developing countries do not have private industries. Effective liberalization requires well functioning private companies.
2 — Developing countries do not have a robust domestic market. Thus the domestic manufacturers are crumbling by the entry of a foreign giant.
3 — Developing countries do not have regulatory bodies to ensure fair trade and competition.
4 — Developing countries do not have strong financial institutions in place to provide loans for setting up new businesses. As a result, there is no alternative available for displaced labor resulting in unemployment.
5 — Developing countries do not have the infrastructure and the entrepreneurship required for the creation of new industries.
5– Developing countries do not have strong financial regulation to manage/control the foreign investments which are volatile.
As a result, the unrelenting and inconsiderate push from IMF and developed countries for liberalization has proved devastating for some of these countries as they now face massive unemployment, enormous foreign debts and a rapid deterioration social capital leading to mass distrust against govt institutions and riots.
4 — The way forward
Stiglitz advocates some fundamental reforms in the book such as
1 — More representation of developing nations in IMF and other international organization
2 — Increased transparency in the IMF’s policy recommendation process
3 — Developing a participatory framework where IMF helps developing countries in choosing their path to liberalization
4 — Increased focus by IMF and international agencies on managing side-effects of liberalization such as unemployment etc.
5 — Better sequencing and pacing of the liberalization process by first focusing on strengthening of the domestic regulatory and financial framework
6 — Prioritising the social needs of developing country over the interests of the developed countries
5 — More Questions
Good books never leave you with all the answers. On the contrary, they often leave you with more questions. This book too has introduced me to some of the fundamental macroeconomic questions that I plan to investigate further.
- Why is liberalization better and for whom? What are the alternatives?
- What is the role of government in determining market efficiency?
- Is trade deficit bad for a nation?
- What is the role between inflation and unemployment? Should central banks aim for zero inflation?
- What is the best way to fight an economic downturn — fiscal austerity or market stimulation?
- Should Govt encourage more saving and how?
Globalization and its discontent has been a great kickstart to my macroeconomic journey and I am curious to see where it will take me. My next stop is at the beginning of it all — “ An inquiry into The Wealth of Nations” by Adam Smith. Ahoy!
