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Globalization and Its Discontents is a brilliant work by the renowned economist Joseph E. Stiglitz, who is most famous for developing the theory of information asymmetry in the market place. The author served on the Council of Economic Advisers under Clinton administration and as a chief economist and senior vice president at the World Bank. While he was at the World Bank, he saw firsthand the impact of globalization on the emerging markets, and various policies pushed by the IMF/US Treasury on the governments in developing countries which often lead to economic, social and political disasters. International organizations such as the IMF, World Bank and World Trade Organization were originally created to make globalization work for the well-being of the world economy. Over their recent history those organizations, the author claims, have failed to reduce poverty and ensure stability. The stagnation of standard of living in many African countries since their colonial independence, the financial crisis threatening the economy and stability of all developing countries In Asia and Latin America, the transition from communism into market economy bringing about unprecedented poverty In Russia, all testify to the alleged ineffectiveness and even adverse impact of those organizations on the global stability and development.

The author is no friend of the current world economic order. He believes the same as many liberal economist do, that the Western countries hypocritically pushed poor countries to eliminate trade barriers while keeping up their own, effectively driving out poor countries’ exports and reduce their income; that the Western countries pushed for removal of capital controls in Latin America and Asia, leading their banking system and currencies to suffer tremendously when speculative hot money flowed out.  The IMF has been the primary apparatus in pushing these policies, which allegedly only benefit the financial interests with developed countries. The author also criticizes the undemocratic and opaque decision making process within IMF that insulates it from outside criticism.  Also the US Treasury is under attack because it is the IMF’s largest shareholder and the only one with veto power.  

The author is obviously in favor of the Keynesian approach to macroeconomics. He writes nostalgically about the IMF’s Keynesian origin, which is to maintain global financial stability by providing liquidity for countries under such recession cycles. He is disappointed to see that over the years the IMF has changed markedly to favor market fundamentalism and provides funds only for those countries who engage in contractionary fiscal and monetary policy, such as cutting spending, raising taxes or raising interest rates. He wrote humorously that Keynes “would be rolling over in his grave” were he to see what happened to his brainchild.

The author holds very strong feeling against the IMF economics and other terms he used are “bad economics”, “textbook economics”. He complains that the IMF gives all the countries the same advice – opening up capital market, removing tariff, balancing budget, raising interest rates – regardless of the varied circumstances in different countries.  He talks sarcastically about the IMF economists’ ignorance of the market imperfection, as well as their carelessness about the reality of local economies.

In the case of the East Asian crisis, the author bashes the IMF prescription unrelentingly.  The author believes that capital account liberalization pushed on the East Asian countries in the late eighties and early nineties by the IMF and the US Treasury was the single most important factor leading to the crisis. The IMF pushed these policies despite the fact that East Asian countries have little need for foreign capital, and there was little evidence that such policies promoted growth and there was ample evidence that they imposed huge risks. The author thinks that the IMF conditions and advices, which include all the Washington Consensus strategies, exacerbates the downturn, spreads the contagion, and squashes the hope of a quick recovery, and the only beneficiaries, are foreign creditors and buy-out firms.

The author contrasts the experiences of China and Russia in their transition from communism to capitalism economy, highlighting the role of the IMF and US Treasury in shaping the Russian shock-therapy route.  It is the gradualists approach taken by Chinese leaders, the author asserts, that has ensured decades of stability and fast growth in China. He fails to point out what is underlying this divergence of routes. Russia has a much longer history of communism rule than China did, going back as far as 1917, while China only started from 1945. Most political leaders in Russia, including Yeltsin, are former communist party cadres rising through the rank and order of the party system, giving them no previous exposure to how capitalism works except those depicted in Marxism-Leninism theories. Among many others, there is a famous anecdote about Yeltsin’s reaction to a lady complaining about rising milk prices caused by high inflation from rapid price liberalization, “Fire the manager! This is a presidential decree!”, despite the fact that the store was no longer state-owned.  In contrast, a lot of Chinese communist party leaders, notably Deng Xiaoping, were educated in the West in the 20s and 30s, and have a good understanding of how the early phase of capitalism works. Also in Russia, after the Bolshevik lost power, the ensuing political reform considerably weakened the Russian state power, while in China the communist party has firmly asserted control over political power. This gap in leadership and level of state political control is what made the difference – Russia could only blindly follow the market fundamentalist advice given by the West and rely on the political whims of the Kremlin to implement them, while China could develop its own time table for transition and address the new problems arising in the process.

The author praises those countries who implemented policies opposite to those advanced by the IMF, in particular India and China. By keeping capital market control, their financial systems are less vulnerable to the speculation money. By gradually removing trade barriers with sequencing and pacing, they are able to foster their domestic industries. The author, however, did not further point out that the “size” implications. Both countries could largely be free to dictate their own terms because of their size. When a downturn hits, they would be able to adjust more quickly by reducing imports and producing these goods domestically, which they could do because they have larger resources. Smaller economies such as Korea would not be in a good position to use this strategy, due to resource constraints. Also, in the case of China, the enormous foreign currency reserve built up from huge annual trade surpluses made the yuan well-endowed to face any threat of devaluation, if there is any at all.

But in recent years, China, the author’s model student, has also faced increasing economic challenges. In fact, China’s mostly state-owned banking system has been loaded with bad loans, for decades even before the East Asian crisis, which has been a serious problem for the stability of its financial system. The recent banking reform in China, however, showed exactly what the author worries about – bringing in foreign shareholders and relaxing capital controls. In recent years, speculative hot money has rushed in, fueling real estate bubbles all over the country and a quick stock market boom and bust, driving up inflation to new heights in a decade. China’s central bank, unwilling to raise interest rates for fear of rapid appreciation of the yuan, has been hiking bank reserves requirement in an attempt to capture the excess liquidity. Private businesses cannot get access to credit to expand and many turned into speculation instead. It remains to be seen whether the author’s model student – China, could overcome these recent challenges and maintain spectacular growth.