Globalization And Its Discontents Revisited

1. Globalization's promise has been unfulfilled for many

The critics of globalization accuse Western countries of hypocrisy, and the critics are right.

Broken promises. Globalization was supposed to bring unprecedented prosperity to developing countries, but the reality has often been disappointing. While global trade has increased dramatically, the benefits have not been evenly distributed. Many developing countries have seen their poverty rates increase and inequality widen.

Hypocrisy in trade policies. Western countries have pushed for developing nations to open their markets while maintaining protectionist policies for their own sensitive industries, particularly agriculture. This has prevented many poor countries from competing fairly in global markets and reaping the promised benefits of free trade.

Uneven playing field. The rules of globalization have been largely written by and for the benefit of developed countries and multinational corporations. This has resulted in:

• Unfair trade agreements
• Intellectual property rules that favor large pharmaceutical companies over access to affordable medicines
• Financial deregulation that has made developing countries vulnerable to economic crises

2. IMF policies exacerbated economic crises in developing countries

IMF programs not only failed to stabilize the situation but in many cases actually made matters worse, especially for the poor.

One-size-fits-all approach. The IMF often prescribed the same set of policies regardless of a country's specific circumstances:

• Austerity measures (cutting government spending)
• High interest rates
• Rapid privatization of state-owned enterprises
• Elimination of subsidies and price controls

Contractionary effects. These policies frequently deepened economic downturns instead of promoting recovery:

• High interest rates crushed businesses and increased unemployment
• Cutting government spending reduced demand in already weak economies
• Removal of subsidies on basic goods hurt the poor disproportionately

Lack of social safeguards. The IMF focused primarily on macroeconomic indicators while paying insufficient attention to the social costs of its policies. This led to increased poverty, inequality, and social unrest in many countries undergoing IMF programs.

3. Trade liberalization and capital market deregulation had unintended consequences

Forcing a developing country to open itself up to imported products that would compete with those produced by certain of its industries, industries that were dangerously vulnerable to competition from much stronger counterpart industries in other countries, can have disastrous consequences—socially and economically.

Premature trade liberalization. Many developing countries were pressured to rapidly open their markets before their domestic industries were ready to compete globally. This led to:

• Destruction of local industries
• Job losses in manufacturing and agriculture
• Increased economic instability

Dangers of capital market liberalization. The IMF pushed for free movement of capital across borders, but this exposed developing countries to volatile "hot money" flows:

• Sudden inflows created asset bubbles
• Rapid outflows during crises devastated economies
• Countries became more vulnerable to speculative attacks on their currencies

Asymmetric risks. While developed countries had the institutional capacity to manage these risks, developing countries often lacked:

• Strong financial regulatory systems
• Diversified economies to absorb shocks
• Adequate foreign exchange reserves

4. East Asian financial crisis revealed flaws in IMF's approach

The IMF programs—with all of their conditions and with all of their money—failed. They were supposed to arrest the fall in the exchange rates; but these continued to fall, with hardly a flicker of recognition by the markets that the IMF had "come to the rescue."

Misdiagnosis of the problem. The IMF treated the East Asian crisis as if it were caused by government overspending and loose monetary policy, when in fact the root causes were different:

• Excessive short-term borrowing by private companies
• Weaknesses in financial sector regulation
• Contagion effects from speculative attacks on currencies

Counterproductive policies. The IMF's prescribed remedies often made the crisis worse:

• Insistence on maintaining overvalued exchange rates
• Dramatic increases in interest rates that bankrupted companies
• Forced closure of banks that sparked panic
• Fiscal austerity that deepened recessions

Alternatives ignored. Countries that deviated from IMF prescriptions often fared better:

• Malaysia's capital controls helped stabilize its economy
• South Korea's more gradual approach to restructuring was more successful
• China's maintenance of capital controls insulated it from the worst effects

5. Russia's transition to capitalism was mismanaged

For the majority of those living in the former Soviet Union, economic life under capitalism has been even worse than the old Communist leaders had said it would be.

"Shock therapy" approach. Russia's rapid transition to a market economy, advocated by Western advisers and the IMF, led to disastrous outcomes:

• Collapse in industrial production
• Massive increase in poverty and inequality
• Creation of a small class of oligarchs who captured state assets

Institutional vacuum. The dismantling of the old Soviet system without adequate new institutions in place resulted in:

• Widespread corruption and crime
• Weak property rights and contract enforcement
• Dysfunctional financial markets

Social costs ignored. The focus on rapid privatization and macroeconomic stabilization neglected the human impact of transition:

• Unemployment soared as state enterprises closed
• Social safety nets were dismantled
• Life expectancy declined dramatically

6. Reforming global economic institutions is crucial for equitable development

Underlying the problems of the IMF and the other international economic institutions is the problem of governance: who decides what they do.

Democratic deficit. The IMF, World Bank, and WTO are dominated by developed countries, particularly the United States:

• Voting power is based on economic size, not population
• Leadership positions are filled by U.S. and European nominees
• Decision-making processes lack transparency

Narrow focus. These institutions often prioritize the interests of financial markets and multinational corporations over broader development goals:

• Emphasis on inflation control over employment and growth
• Push for policies that benefit foreign investors over local stakeholders
• Neglect of environmental and social concerns

Need for reform. To promote more equitable globalization, reforms should include:

• More diverse representation in decision-making bodies
• Greater transparency and accountability
• Expanded mandates to address poverty, inequality, and sustainability

7. Alternative approaches to globalization can promote shared prosperity

There are alternative strategies—strategies that differ not only in emphases but even in policies; strategies, for instance, which include land reform but do not include capital market liberalization, which provide for competition policies before privatization, which ensure that job creation accompanies trade liberalization.

Gradual, sequenced reforms. Successful developing countries like China have taken a more measured approach to economic liberalization:

• Experimentation with market reforms in specific sectors or regions
• Maintaining some capital controls while gradually opening to trade
• Strengthening domestic institutions before full liberalization

Active industrial policy. Governments can play a positive role in promoting development:

• Targeted support for emerging industries
• Investment in education and infrastructure
• Promotion of technological learning and innovation

Social protections. Ensuring that the benefits of globalization are widely shared:

• Maintaining safety nets during economic transitions
• Investing in public health and education
• Promoting labor rights and environmental standards

Democratic ownership. Allowing countries to choose their own development paths:

• Respecting policy space for developing countries
• Encouraging broad-based participation in economic decision-making
• Recognizing that there is no one-size-fits-all approach to development

Last updated: September 29, 2024