We have become rich countries of poor people

We have become rich countries of poor people
By Joseph Stiglitz
Copyright The Financial Times Limited 2006
Published: September 7 2006 20:08 | Last updated: September 7 2006 20:08


There were once hopes that globalisation would benefit all, both in advanced industrial countries and the developing world. Today, the downside of globalisation is increasingly apparent. Not only do good things go more easily across borders, so do bad – including terrorism. We see an unfair global trade regime that impedes development and an unstable global financial system in which poor countries repeatedly find themselves with unmanageable debt burdens. Money should flow from the rich to the poor countries, but increasingly, it goes in the opposite direction.

What is remarkable about globalisation is the disparity between the promise and the reality. Globalisation seems to have unified so much of the world against it, perhaps because there appear to be so many losers and so few winners. The Panglossian view of globalisation, that it would automatically benefit all, has impeded the ability to address its failures. Young French workers ask how globalisation is going to make them better off – if, as they are told, they must accept the resulting lower wages and weakened job protection. Growing inequality in the advanced industrial countries was a long predicted but seldom advertised consequence: full economic integration implies the equalisation of unskilled wages throughout the world. Although this has not (yet) happened, the downward pressure on those at the bottom is evident. Unfettered globalisation actually has the potential to make many people in advanced industrial countries worse off, even if economic growth increases.

While economic theory predicted there would be losers from globalisation, it also said that the winners could compensate the losers. Well-managed globalisation can make everyone, or at least most, better off. This has not happened. Instead, conservatives have argued that globalisation requires countries to become more competitive by cutting taxes and rolling back the welfare state. In the US, tax policies have become less progressive; the bulk of recent tax cuts went to the winners, those who had already benefited both from globalisation and changes in technology. Increasingly, we are becoming rich countries with poor people.

The Scandinavian countries have shown there is another way. Investment in education and research and a strong safety net can lead to a more productive and competitive economy.

At the core of many of globalisation’s failures is a simple fact: economic globalisation has outpaced the globalisation of politics and mindsets. We have become more interdependent; greater interdependence increases the need for co-ordinated action. But we still lack the institutional frameworks to do this effectively and democratically.

Perhaps not surprisingly, more attention is often placed on the concerns of developed countries and their special interests than those in the developing world. It is good news that we are finally doing something about the crushing debt burdens of the poorest countries but we have done little to ensure the debt problem does not arise again, and nothing to create a systematic mechanism for debt restructuring. The fact that so many countries end up with unmanageable debt burdens suggests that the problem is systemic. Global markets are highly volatile and too often the poor bear the brunt of exchange rate and interest rate changes. Yet nothing has been done about these underlying problems.

There are already numerous solutions on the table: some that could be adopted overnight, some that would take years but would at least make globalisation work better. If developing countries could borrow in their own currencies (or in baskets of correlated currencies), fewer countries would find themselves with massive debt burdens. Other reforms in debt management strategies could help further stabilise the global financial system. Consider, as another example of globalisation’s failure, the diseases that plague so many of the poor countries. The global intellectual property regime denies access to affordable life-saving drugs, even as the Aids epidemic ravishes so much of the developing world. Advocates of the current system say this is the price for providing incentives for research. But for those concerned about health in developing countries, the intellectual property regime has not worked. There is an alternative: a medical prize fund, financed by industrialised countries, could reward those who discover cures for diseases of the poor, provide incentives for research and award bigger prizes for key drugs. The medicines could then be provided to the poor at cost. Such a system would be both far more efficient and equitable than the current system.

Globalisation can be changed; indeed, it is clear it will be changed. The question is: will change be forced on us as the result of a crisis, or will we take control of the globalisation process? The former risks a backlash against globalisation or a haphazard reshaping in a way that only sets the stage for more problems. The latter holds out the possibility of remaking globalisation so that it can live up to its potential to improve living standards throughout the world.

The writer was awarded the Nobel Prize in economics in 2001; his latest book, Making Globalization Work (W.W. Norton/Penguin) is published this month