two essays

MAKING
GLOBALIZATION

WORK

A L S O B Y J O S E P H E . S T I G L I T Z

The Roaring Nineties

Globalization and Its Discontents

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

Copyright © 2006 by Joseph E. Stiglitz

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For Anya, forever

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

CHAPTER 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

CHAPTER 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 187

CHAPTER 8 T h e B u r d e n o f D e b t 2 1 1

CHAPTER 9 Reforming the Global Reserve System

CHAPTER I0 Democratizing Globalization 269

Notes 293

I n d e x 3 3 9

X V I I I P R E F A C E

to capitalism would have grown. By the same token, I believe that
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-
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-
gence of China and India have all redefined the globalization debate in
ways that I will discuss.

This book is as much about how politics has been used to shape the
economic system as it is about economics itself. Economists believe
that incentives matter. There are strong incentives—and enormous
opportunities—to shape political processes and the economic system
in ways that generate profits for some at the expense of the many.

Open, democratic processes can circumscribe the power of special
interest groups. We can bring ethics back into business. Corporate gov-
ernance can recognize the rights not only of shareholders but of others
who are touched by the actions of the corporations.’° An engaged and
educated citizenry can understand how to make globalization work, or
at least work better, and can demand that their political leaders shape
globalization accordingly. I hope this book will help make this vision a
reality.

ACKNOWLEDGMENTS

y list of those to whom I am indebted for my understanding
of globalization has grown much longer over the past four
years since writing Globalization and Its Discontents. In addi

tion to those at the international economic institutions, and especially
the World Bank, that I noted in that book, I now need to add Nick Stern
and Francois Bourguignon, who succeeded me as chief economists at the
World Bank and with whom I have continued to engage in discussions
about the development process. I’d like to thank Supachai Panitchpakdi,
former head of the World Trade Organization, with whom I have had
innumerable discussions concerning the direction of the development
round; Leif Pagrotsky, Sweden’s education minister, who was at the fore-
front of arguing for a fairer trade regime when he served as Sweden’s
trade minister; Pascal Lamy, formerly EU commissioner for trade (now
head of the WTO), especially for discussions on the Everything But
Arms initiative; Kemal Dervis, with whom I worked closely at the World
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

ACKNOWLEDGMENTS

Argentina, Ethiopia, Thailand, Korea, China, Russia, Colombia,
Philippines, Indonesia, Mexico, Vietnam, Ecuador, India, Turkey, and
Brazil—to see how things had changed. I also went back to a few coun-
tries I had visited only briefly before, such as Bangladesh and Nigeria,
as well as some that I had not had a chance to see, including Bolivia,
Madagascar, Venezuela, and Azerbaijan. I owe a great debt to the
numerous government officials (from the prime minister or president
to their finance ministers and economic advisers on down), to the aca-
demics and businesspeople, and to those in the donor community and
in civil society (NGOs) who gave so generously of their time. Many
will see their ideas reflected in the discussions here.

Various versions of some of the ideas presented here have been dis-
cussed and presented at seminars through the world. I particularly
want to thank George Papandreou, former foreign minister of Greece,
who convenes an annual seminar of academics and political leaders
(the Symi Symposium) in which globalization issues have often come
to the fore; the Vatican Academy of Social Sciences, at which some of
the ideas concerning debt were discussed; the Commonwealth, which
asked me to undertake a study with Andrew Charlton of the London
School of Economics on what a true development round of trade nego-
tiations might look like, and which helped finance that study. I want
to thank the president of the UN General Assembly, the Common-
wealth finance ministers, the WTO, the Center for Global Develop-
ment, and the World Bank for inviting me to present the findings of
that study. I have similarly benefited from the airings that the ideas in
each of the chapters have received in seminars and international meet-
ings around the world. The ideas on reforming the global financial sys-
tem were presen ted before th e UN Co mmittee on Econo mic and
Social Affairs, the American Economic Association meetings in Boston
in January 2006, at a seminar in Sweden (with George Soros) in
December 2001, and at the annual meeting of the Spanish Association
of Economists in La Coruna in September 2005. The problems in the
intellectual property regime and the proposed reforms were discussed at
a ministerial meeting for the least developed countries held by the
World Intellectual Property Organization in Seoul in October 2004
and at an international conference sponsored by the Initiative for Pol-

Acknowledgments

icy Dialogue (IDP) at Columbia University in June 2005. Some of the
ideas in chapter 1 were presented and discussed in the Tanner Lectures
delivered at Oxford University in the spring of 2004. I want to thank
the CIDOB Foundation in Barcelona, which in the fall of 2004 co-
sponsored a conference on the “post—Washington Consensus consen-
sus,” at which many of these ideas were further developed.

This book covers a wide range of ideas. Many of the topics are areas
on which I have been engaged in research for more than three decades,
and in that time have accumulated a huge reservoir of intellectual
debts. The discussions of trade policy in chapter 3 owe a great deal to
Peter Orszag, with whom I worked closely on the problems of dump-
ing while I was at the Council, and to Alan Winters, Michael Finger,
and Bernard Hoeckman at the World Bank. For the discussions of
intellectual property in chapter 4, I am particularly in debt to Jamie
Love, Michael Cragg, Paul David, Giovanni Dosi, Mario Cimoli,
Richard Nelson, Ha Joon Chang, and all the participants at the IPD
intellectual property task force meetings, as well as my several co-
authors in the general theory of innovation, Richard Gilbert, Carl
Shapiro, David Newbery, and Partha Dasgupta. Several of these also
worked with me on problems on natural resources and the environ-
ment. Kevin Conrad and Geoff Heal at Columbia and Prime Minister
Somares of Papau New Guinea and Environment Minister Rodriguez
have been at the center of the Rainforest Coalition described in chap-
ter 6. Michael Toman, Alan Krupnick, and Ray Squitieri worked
closely with me at the Council of Economic Advisers on the problems
of global warming; and Ruth Bell was good enough to read an earlier
version of chapter 6. On the issue of debt, David Hale, Barry Herman,
Kunibert Raffer, Michael Dooley, Roberto Frenkel, Jurgen Kaiser, and
Susan George deserve thanks, as well as all the participants at the IPD
sovereign debt task force meetings. The global reserves proposal, the
Chang Mai Initiative, and the failed attempt to create an Asian Mon-
etary Fund have been discussed at meetings, seminars, and colloquia in
Stockholm, Washington, and elsewhere, and I wish to thank the par-
ticipants of those seminars, especially George Soros, who put forward a
similar proposal of his own. I have also benefited from discussions
with Andrew Sheng and Eusake Sakikabara on these topics.

XXII ACKNOWLEDGMENTS Acknowledgments XXIII

I learned firsthand about the problems of oil company practices in
work I did for the states of Alaska, Texas, Louisiana, and California,
and I am gr eatly indebted to my collabor ator in that work, Jeff
Leitzinger. The challenge of maintaining market competition has been
an abiding concern, both in my theoretical and policy work; Steven
Salop, Jason Furman, Barry Nalebuff, and Jon Orszag are among my
many collaborators who have influenced my thinking.

There is another set of rather special debts that I wish to acknowl-
edge. The debate about globalization and the question of the limits of
the market economy, of which the globalization debate has become a
central part, has now been going on for a long time. There are some
(should I say many?) who disagree with the views presented here; I
have tried to listen to their arguments carefully, to appraise the evi-
dence, to understand the models, to ascertain the underlying source of
disagreement. I spent years at the Hoover Institution, one of the more
conservative think tanks in the world, with such luminaries as Nobel
Prize winners Milton Friedman, George Stigler, and Gary Becker. I
wish to acknowledge my gratitude to all of them for their patience and
tolerance. I fear that they sometimes found it trying to have someone
question what they considered obvious or proven beyond a reasonable
shadow of doubt. Too often, I fear, the combatants in these debates
slide past each other, each simply asserting their positions. They are
more engaged in rallying their troops than in winning converts. I sus-
pect that I may not win many converts, but I have, I think, made an
effort to engage on the issues, to uncover the differences in underlying
assumptions and values.

The public debate about globalization has been especially lively
within the last half decade, with important contributions by Martin
Wolf (Why Globalization Works), Jagdish Bhagwati (In Defense of Glob-
alization), Bill Easterly (The Elusive Quest for Growth), Jeff Sachs (The
End of Poverty), and Thomas Friedman (The World Is Flat). Onstage
and offstage, we have continued these debates with each other, and I
believe we have all benefited—even if we have not been able to con-
vince each other of the merits of our positions. Our democracies have
given us the opportunity-1 would say the responsibility—to engage

in these debates, which hopefully will play a role in shaping public pol-
icy in this vital area.

There are four particular debts that I wish to highlight. The first is
to my colleagues in the Initiative for Policy Dialogue, a network of
economists from the developed and developing world dedicated to
exploring alternative approaches to development and globalization and
to working to ensure that these alternatives get a hearing in public
debates. While I hesitate to single out any individuals, I would be
remiss if I did not mention Jose Antonio Ocampo, former head of
CEPAL (the UN Commission for Latin America) and now undersec-
retary of the UN for economics; K. S. Jomo, now assistant secretary of
the UN for economics; Deepak Nayyar, professor of economics at
Jawaharlal Nehru University; Dani Rodrik, of Harvard University; Eric
Berglof, chief economist, European Bank for Reconstruction and
Development (EBRD); Patrick Bolton, professor of business and eco-
nomics at Columbia University; Ha-Joon Chang, of Cambridge Uni-
versity; Ricardo Ffrench-Davis, also of CEPAL; Akbar Noman, with
whom I worked closely on the problems of Africa; and especially Shari
Spiegel, director of IPD. IPD has received financial support from the
Ford, Charles Stewart Mott, John D. and Catherine T MacArthur, and
Rockefeller Foundations; the Canadian International Development
Agency (CIDA); the Commonwealth Secretariat; the Open Society
Institute; the Rockefeller Brothers Fund; the Swedish International
Development Agency (SIDA); and the United Nations Development
Programme. To all of these I am deeply grateful.

The second debt is to Bruce Greenwald, my colleague at Columbia,
with whom I did much of my pioneering work in the economics of
information, and with whom I have taught, for the past four years, a
course on Globalization and Markets. As always, Bruce has challenged
my ideas, enriched my thinking, and brought original perspectives on
every aspect of globalization. His influence is evident throughout, but
especially in chapter 9.

The third is to Andrew Charlton, co-author of our report to the
Commonwealth, with whom I have worked closely, especially in the
areas of trade.

ACKNOWLEDGMENTS

T h e f o u r t h i s t o C o l u mb i a U n i v e r s i t y a n d i t s p r e s i d e n t , L e e
Bollinger, who has helped the university focus so much of its attention
on the issues of globalization and help make it a global center of
knowledge and learning, creating a university-wide Committee on
Global Thought, which I chair. Colleagues like Jeff Sachs and Merit
Janow (now serving on the appellate panel of the WTO) have com-
bined a commitment to academia with a deep involvement in the sur-
rounding world. The diversity of students and faculty at Columbia is a
microcosm of the world. Like any great center of learning, it has pro-
vided an environment that encourages a flourishing debate among
competing ideas. I, and this book, have benefited enormously from the
challenges to my ideas.

I am indebted to my assistants at Columbia University, including Jill
Blacksford—and especially to Maria Papadakis for going above and
beyond on so many occasions. I would like to thank my research assis-
tants for their hard work on the book, including Hamid Rashid, Anton
Korinek, Dan Choate, Josh Goodman, Megan Torau, Jayant Ray, and
Stephan Litschig. Sharon Cleary assisted with the research and editing,
and managed the enormous task of bringing everything together at the
end. Alan Brown, Sheridan Prasso, and Gen Watanbe helped edit the
final drafts of the book.

At Norton, my longtime editor Drake McFeely grasped the impor-
tance of this book from the start and worked tirelessly on the first two
drafts of the manuscript. The support team—capably led by Nancy
Palmquist and Amanda Morrison, and including Allegra Huston,
Brendan Curry, and Don Rifkin—performed miracles under tight
deadlines. And my very special thanks go to Stuart Proffitt of Penguin,
with whom the idea for this book was hatched over lunch and whose
close comments on the manuscript were also invaluable.

My wife, Anya Stiglitz, was involved from the beginning. A reporter
who had spent years in the developing world, Anya’s trained eye helped
me see more clearly what was going on in these countries, to see, as we
traveled together for months on end, how globalization affected the
everyday lives of the people—to see beyond the narrow boundaries to
which academic disciplines inevitably draw one. Her curiosity about
why things were the way they were forced me to try harder to explain

Acknowledgments

the underlying forces. She is, if anything, even more committed to the
idea that another world is possible, one in which globalization might
live up more closely to its potential of enhancing the well-being of the
poor—and she challenged me to go beyond diagnosing the problems
to showing how that world might be created. But she was willing to go
from these lofty aspirations to the mundane, hard, and often tedious
work of shaping this manuscript, as she read through each draft and
had the patience to edit and reedit them.

CHAPTER I

Another World Is Possible

In a vast field on the outskirts of Mumbai, activists from around the
world gathered for the World Social Forum in January 2004. The
first Forum to be held in Asia, this meeting had a very different feel
from those held in Porto Alegre, Brazil, in the four previous years. Over
100,000 people attended the week-long event, and the scene was, like
India itself, a colorful crush of humanity. Fair trade organizations
staffed rows of stalls selling handmade jewelry, colorful textiles, and
housewares. Banners strung along the streets proclaimed, “HANDLOOM
IS A BIGGEST EMPLOYMENT SOURCE IN INDIA.” Columns of demonstra-
tors banged drums and chanted slogans as they wended their way
through the crowds. Loincloth-clad groups of dalit activists (members
of the castes that used to be known as untouchables), representatives of
workers’ rights organizations and women’s groups, the UN and non-
governmental organizations (NGOs) all rubbed shoulders. Thousands
gathered in temporary meeting halls the size of aircraft hangars to hear a
program of speakers that included former Irish president Mary
R o b i n s o n ( f o r me r U N H i g h C o m m i s s i o n e r f o r H u ma n R i g h t s ,
1997-2002) and Nobel Peace Prize winner Shirin Ebadi. It was hot
and humid and there were crowds everywhere.

Many conversations took place at the World Social Forum. There
was debate about how to restructure the institutions that run the world

4 M A K I N G G L O B A L I Z A T I O N W O R K Another World Is Possible 5

and how to rein in the power of the United States. But there was one
overriding concern: globalization. There was a consensus that change is
necessary, summed up in the motto of the conference: “Another world
is possible.” The activists at the meeting had heard the promises of
globalization—that it would make everyone better off; but they had
seen the reality: while some were in fact doing very well, others were
worse off. In their eyes, globalization was a big part of the problem.

Globalization encompasses many things: the international flow of
ideas and knowledge, the sharing of cultures, global civil society, and
the global environmental movement. This book, however, is mostly
about economic globalization, which entails the closer economic inte-
gration of the countries of the world through the increased flow of
goods and services, capital, and even labor. The great hope of global-
ization is that it will raise living standards throughout the world: give
poor countries access to overseas markets so that they can sell their
goods, allow in foreign investment that will make new products at
cheaper prices, and open borders so that people can travel abroad to be
educated, work, and send home earnings to help their families and
fund new businesses.

I believe that globalization has the potential to bring enormous ben-
efits to those in both the developing and the developed world. But the
evidence is overwhelming that it has failed to live up to this potential.
This book will show that the problem is not with globalization itself
but in the way globalization has been managed. Economics has been
driving globalization, especially through the lowering of communica-
tion and transportation costs. But politics has shaped it. The rules of
the game have been largely set by the advanced industrial countries—
and particularly by special interests within those countries—and, not
surprisingly, they have shaped globalization to further their own inter-
ests. They have not sought to create a fair set of rules, let alone a set of
rules that would promote the well-being of those in the poorest coun-
tries of the world.

After speaking at the World Social Forum, Mary Robinson, Delhi
University chancellor Deepak Nayaar, International Labour Organiza-
tion president Juan Somavia, and I were among the few who went on
to the World Economic Forum in Davos, the Swiss ski resort where the

global elite gather to mull over the state of the world. Here, in this
snowy mountain town, the world’s captains of industry and finance
had very different views about globalization from those we heard in
Mumbai.

Th e World So cial Foru m had b een an open meeting, bring ing
together vast numbers from all over the world who wanted to discuss
social change and how to make their slogan, “Another world is possi-
ble,” a reality. It was chaotic, unfocused, and wonderfully lively—a
chance for people to see each other, make their voices heard, and to
network with their fellow activists. Networking is also one of the main
reasons that the movers and shakers of the world attend the invitation-
only event at Davos. The Davos meetings have always been a good
place to take the pulse of the world’s economic leaders. Though largely
a gathering of white businessmen, supplemented by a roster of govern-
ment officials and senior journalists, in recent years the invitation list
has been expanded to include a number of artists, intellectuals, and
NGO representatives.

In Davos there was relief, and a bit of complacency. The global
economy, which had been weak since the bursting of the dot-corn bub-
ble in America, was finally recovering, and the “war on terror” seemed
to be under control. The 2003 gathering had been marked by enor-
mous tension between the United States and the rest of the world
over the war in Iraq, and still earlier meetings had seen disagreement
over the direction which globalization was taking. The 2004 meeting
was marked with relief that these tensions had at least been modulated.
Still there was worry about American unilateralism, about the world’s
most powerful country imposing its will on others while preaching
democracy, self-determination, and human rights. People in the
developing world had long been worried about how global
decisions—decisions about economics and politics that affected their
lives—were made. Now, it seemed, the rest of the world was worried also.

I have been going to the annual meetings at Davos for many years
and had always heard globalization spoken of with great enthusiasm.
What was fascinating about the 2004 meeting was the speed with
which views had shifted. More of the participants were questioning
whether globalization really was bringing the promised benefits—at

Another World Is Possible 7

sensed at the meeting. But at both events there was an understanding
that something had to be done. At Davos the responsibility was placed
squarely on the developing countries; at Mumbai, it was on the entire
international community.

THE TWO FACES OF GLOBALIZATION

In the early 1990s, globalization was greeted with euphoria. Capital
flows to developing countries had increased sixfold in six years, from
1990 to 1996. The establishment of the World Trade Organization in
1995—a goal that had been sought for half a century—was to bring
the semblance of a rule of law to international commerce. Everyone
was supposed to be a winner—those in both the developed and the
developing world. Globalization was to bring unprecedented prosper-
ity to all.

No wonder then that the first major modern protest against global-
ization—which took place in Seattle in December 1999, at what was
supposed to be the start of a new round of trade negotiations, leading
to further liberalization—came as a surprise to the advocates of open
markets. Globalization had succeeded in unifying people from around
the world—against globalization. Factory workers in the United States
saw their jobs being threatened by competition from China. Farmers
in developing countries saw their jobs being threatened by the highly
subsidized corn and other crops from the United States. Workers in
Europe saw hard-fought-for job protections being assailed in the name
of globalization. AIDS activists saw new trade agreements raising the
prices of drugs to levels that were. unaffordable in much of the world.
Environmentalists felt that globalization undermined their decades-
long struggle to establish regulations to preserve our natural heritage.
Those who wanted to protect and develop their own cultural heritage
saw too the intrusions of globalization. These protestors did not accept
the argument that, economically at least, globalization would ulti-
mately make everybody better off.

There have been many reports and commissions devoted to the
topic of globalization. I was involved in the World Commission on the
Social Dimensions of Globalization, which was established in 2001 by

MAKING GLOBALIZATION WORK

least to many in the poorer countries. They had been chastened by the
economic instability that marked the end of the twentieth century, and
they worried about whether developing countries could cope with the
consequences. This change is emblematic of the massive change in
thinking about globalization that has taken place in the last five years
all around the world. In the 1990s, the discussion at Davos had been
about the virtues of opening international markets. By the early years
of the millennium, it centered on poverty reduction, human rights,
and the need for fairer trade arrangements.

At a Davos panel on trade, the contrast in views between the devel-
oped and developing countries was especially marked. A former World
Trade Organization official said that if trade liberalization—the lower-
ing of tariffs and other trade barriers—had not fully delivered on its
promise of enhanced growth and reduced poverty, it was the fault of
the developing countries, which needed to open their markets more to
free trade and globalize faster. But an Indian running a micro-credit
bank stressed the downside of free trade for India. He spoke of peanut
farmers who could not compete with imports of Malaysian palm oil.
He said it was increasingly difficult for small and medium-sized busi-
nesses to get loans from banks. This was not surprising. Around the
world, countries that have opened up their banking sectors to large
international banks have found that those banks prefer to deal with
other multinationals like Coca-Cola, IBM, and Microsoft. While in
the competition between large international banks and local banks the
local banks often appeared to be the losers, the real losers were the local
small businesses that depended on them. The puzzlement of some lis-
teners, convinced that the presence of international banks would
unambiguously be better for everyone, showed that these businessmen
had paid little attention to similar complaints from Argentina and
Mexico, which saw lending to local companies dry up after many of
their banks were taken over by foreign banks in the 1990s.

At both Mumbai and Davos, there was discussion of reform. At
Mumbai, the international community was asked to create a fairer
form of globalization. At Davos, the developing countries were
enjoined to rid themselves of their corruption, to liberalize their mar-
kets, and to open up to the multinational businesses so well repre-

Another World Is Possible 9 8 M A K I N G G L O B A L I Z A T I O N W O R K

countries. The worry was that globalization might be creating rich
countries with poor people.

Of course, those who are discontented with economic globalization
generally do not object to the greater access to global markets or to the …