Q & A with Joseph Stiglitz

from The Internationa Herald Tribune

Today we’re delighted to have answers to another round of your questions from Professor Joseph Stiglitz, author of Making Globalization Work.

I think there are several topics here for us to discuss further, such as Professor Stiglitz’s comparison of the various administrations in South America and his criticism of the North American Free Trade Agreement. In the next month or two, we’ll have a return appearance by Professor Jeffrey Sachs and two more very special guests. So please stay tuned, and keep your questions coming.

Q. Why might trade sanctions represent the most effective incentive for settling political disputes; barring war, is there no legal alternative to dealing with repressive sovereign nations?

Lorenzo Ferlazzo
Italy

A. The problem is that there is no alternative enforcement. Actions by one country can have enormous effects on others; there is a need for collective action. Trade sanctions can work. They were effective in bringing an end to apartheid. The Montreal Convention eliminating the usage of ozone-destroying gases (that allow cancer-causing radiation to get through the atmosphere) was effective, partly because it did not just rely on good will; those that did not comply faced the threat of sanctions. I have argued in Making Globalization Work that we need to use trade sanctions to enforce a global agreement to reduce emissions of greenhouse gases. Without such sanctions, there are actually incentives not to go along with a global agreement; any country that did not go along with a global agreement to reduce emissions would have a competitive advantage over rivals. In this case, trade sanctions are required if we are to have a level playing field.

Q. Do you agree with the view that although globalization is increasing relative poverty in the rich countries, it is in fact abolishing absolute poverty in the poor ones?

João de Faria
Brazil

A. You are right that globalization is increasing relative poverty in the rich countries, but the effect of globalization on the poorer countries is more complex. By helping countries like China and India grow more rapidly, it is contributing to the reduction of poverty. But unfair trade agreements - such as the Uruguay Round, which allowed the United States and European Union to continue their massive agriculture subsidies - have contributed to poverty in some developing countries. These subsidies drive down agricultural prices, and many of the poorest in the poor countries depend directly or indirectly on agriculture for their livelihood. The North American Free Trade Agreement contributed to rural poverty in Mexico; among the poorest Mexicans are small corn farmers, and NAFTA led to the fall of the price of corn. Mexican farmers are forced to compete with American corn farmers, who can more accurately be described as farming Washington rather than farming the soil, with half of their income derived from subsidies. Moreover, in many countries, globalization has been associated with an increase in volatility, as speculative capital rushes in and out, and it is often the poor that bear the brunt of that volatility.

Also, you have been a strong advocate of the benefits of providing foreign aid and a great critic of the Bush Administration as well. Recently, the Center for Global Development reported that “under President Bush U.S. assistance to Africa has sharply increased, reaching $4.2 billion in 2005, nearly four times the level of 2000, and more than twice the level of any previous administration.” Furthermore, the word “poverty” was finally inserted into the administration’s core objective for foreign aid, as stated in the revised Strategic Framework for Foreign Assistance. What are your views on that? Do you have mixed feelings about it?

I congratulate Bush on his increase in assistance, but it would be even better if he lived up to the commitments that he made at Monterrey. Some of the assistance is for AIDS medicines, but this money would go a lot further if the administration took a more active stance in promoting compulsory licensing for generic medicines. In fact, in some cases, the administration has put pressure on countries not to issue compulsory licenses, even when they are fully compliant with trade-related aspected of intellectual property (TRIPs).

Q. Inflated and imperfect real estate markets, driven by speculation, have emerged as a defining characteristic of globalization. Is it time for a global housing regulator, or something approaching a transparent global housing regime? Who will stem the speculative tide?

Hasan Jafri
Hong Kong

A. Throughout history, capitalist economies have been marked by booms and busts. At this juncture, it is hard to conceive of how a global regulator could work, but there is much that regulators within each country can do, for instance by adjusting requirements on downpayments of housing and other terms of mortgages, and increasing capital gains taxes. Regulators can dampen these fluctuations, even if they do not eliminate them.

What the international community can do, though, is to stabilize the flow of speculative money that helps feed these bubbles. Most importantly, the international community should give countries enough “policy space” to allow them to undertake stabilizing actions, for instance, the imposition of Chilean-style taxes on capital inflows, or the imposition of stabilizing prudential regulations.

Q. Indian companies have been losing oil and natural gas contracts, notably to China. On the one hand these Indian companies (both private and public) are being watched and judged on the ethics of their dealings and will soon be criticized if they continue dealing with pariah states such as Sudan and Iran. But, on the other hand, the country needs energy to secure and sustain its growth, and gets to compete only in marginalized countries due to competition from major players such as the United States and China. What do you think is the answer to India’s dilemma of maintaining this balance between energy security in the global competitive markets and doing business in accordance with ethical standards?

Shirin M Tejani
India

A. All countries today need to be concerned about their energy security, but that does not necessarily mean owning or controlling energy sources abroad. Indeed, ownership abroad is never secure; witness the wave of nationalizations that are now occurring in Latin America. With few exceptions, owning a source of supply does not lead to the availability of resources at below market-prices. Instances of “rationing” have indeed been rare.

So, what does energy security entail? First, it entails reducing the dependence on energy, especially energy sources from outside the country. Conservation is the key. Second, it entails diversifying sources of energy, especially from outside the country, but also from within. Diversification is the most important strategy for risk mitigation. An important new direction for diversification is bio-fuels. Thirdly, it may entail buying insurance, e.g. buying energy in futures markets, or, more expensively, creating internal reserves.

Q. I would like to hear your analyses of Latin America’s leftists. What do you make of Venezuela’s economics? Are Venezuelan policies sustainable over the long term? Is Chile truly the holy grail of development economics?

Paul Escobar
Canada

A. Chile has had impressive success over the past 15 years, after a major recession brought on by excessive faith in free market economics under Pinochet through insufficiently regulated banking. But there are alternative interpretations/explanations of that success. Chile did not follow many key elements of the Washington Consensus during its most successful years. It imposed capital controls. It only privatized part of its copper mines, and the privatized mines arguably did not perform better than the nationalized ones, though the profits were sent abroad, while the profits of the nationalized mines could be used in the nation’s efforts to develop. Government and foundations lay behind many of its successful development projects (such as its fisheries) - the kind of industrial policies that the Washington Consensus railed against. And unlike the Washington Consensus, Chile put considerable emphasis on social policies.

Chile did two things that were part of the Washington consensus - it liberalized trade and it limited its government deficits. The lesson is similar to that of the successful countries of East Asia: Globalization can help bring prosperity, but countries have to manage globalization on their own terms, in their own way. Chile did this. The countries that followed the Washington Consensus mantra have, by and large, not done so well.

It is the failures of these policies that have provided the impetus for the new movements in Latin America. Venezuela is the country in Latin America with the richest resources, but it is a rich country with poor people; before Chavez came to power, between two thirds and 80 percent of the people were in poverty. The riches of the country went to the rich, who did not want to share them with the vast majority of the citizens. Countries like Ecuador, Bolivia and Venezuela signed agreements with foreign oil, gas and mining companies that were generous to the foreign companies but cheated the country out of what was rightfully theirs.

There is an ongoing debate about whether it was the result of corruption or incompetence of previous Administrations, or the consequence of pressure to privatize these resources quickly. But for the impoverished people of these countries, these distinctions may matter little. All they know is that their country is getting less than it should. The new governments have been able in many cases to cut a better deal. They know that they need the expertise of the foreign oil companies. They have been explicit in saying that these companies should get a fair return on their investment. Indeed, these companies are getting a very, very high return on their investment. These countries are only asking that they get a larger share.

In many cases, these countries have put into place health and education policies that are already working, bringing health and education to the poor barrios for the first time. It is these successes that partly account for the popular support of these governments. Some critics label such policies as populist, but if populism results in the poor getting education and health services for the first time, isn’t that what democracy is supposed to produce?

The countries are also putting into place longer-run growth policies. Some of these policies and projects make enormous sense. But how successful these policies and projects will be will depend partly on how they are implemented. It is too soon to make a clear verdict.

Q. Is it technology or globalization that has reduced the growth in wages in United States?

Tom Hansen

A. Most economists believe that both technology and globalization have played a role in the reduction in the growth of wages (in recent years, median real wages have stagnated, and wages at the bottom have fallen). Technology has increased the demand for skilled relative to unskilled labor. Globalization has meant that, in effect, unskilled Americans are competing with similar unskilled workers all over the world.

To see this, imagine what a world would be like with perfect markets and perfect globalization (that is, no trade barriers). As I point out in Making Globalization Work, in such a world real wages of unskilled workers all over the world would be the same; unskilled workers in America and Europe would get the same real wages that unskilled workers in India and China get - and that wage would probably be much lower than their current wage.

We are nowhere near this “ideal,” but globalization is bringing into play strong forces exerting downward pressure on unskilled wages. (Economists refer to this as “factor price equalization.” My teacher, and one of the world’s most distinguished economists, Paul Samuelson, wrote about this more than 50 years ago. At the time he wrote, the assumptions required for factor price equalization were far from being satisfied, but globalization has meant that they are more nearly satisfied today.)

Of course, even if technology has contributed more to the fall in real wages, most citizens feel there is very little they can do about technology. But they feel they can do something about globalization. I have argued that unless globalization is reshaped, so that there are more winners and fewer losers, we risk a backlash against globalization. Globalization is not inevitable. In terms of how it is conventionally measured, say the ratio of trade to gross domestic product, it was stronger prior to World War I than in the interwar period. There was a backlash against globalization after World War I, and it can happen again.

Q. I just would like you to share your opinion of the North American Free Trade Agreement with us. Did Carlos Salinas (the Mexican president) really do his homework, signing the contract? Wouldn’t a border fence cause even more problems and damages to both economies? Furthermore, was the American side at its best, signing the NAFTA?

Benedikt M Orzelek
Germany

A. The North American Free Trade Agreement is neither a free trade agreement, nor a fair trade agreement. If it was a free trade agreement, it would be a short agreement, a few pages, as each country promises to eliminate its tariffs, its non-tariff barriers, and its subsidies. A few additional pages would define the pace in which these barriers would be eliminated. But the agreement runs for hundreds of pages. It is a managed trade agreement, and managed in many ways to protect special interests, like America’s agricultural interests. American subsidized corn depresses the price of corn in Mexico, which is one of the reasons that NAFTA has contributed to the growth of rural poverty. The agreement keeps in place a host of non-tariff barriers, which have been repeatedly used to keep Mexican goods out of the American market.

Equally troublesome, however, is the fact that NAFTA represents an intrusion into areas that go well beyond trade. Chapter 11, which is supposed to be a provision ensuring investor protection, threatens the ability of the member state to impose effective environmental and other regulations. The Clinton Administration successfully opposed such initiatives, when they were proposed by anti-environmentalists in the U.S. Congress. Yet virtually without discussion, the provision became law, snuck in “under the radar screen” in NAFTA.

NAFTA has been a disappointment. The advocates hoped that it would help Mexico grow, and by closing the disparity between incomes in the U.S. and Mexico, it would reduce migration pressure. But in the first decade of NAFTA, the disparity in incomes actually increased, and, as I explain in Making Globalization Work, NAFTA was at least partly to blame. Especially with incomes of the poor corn farmers falling as a result of NAFTA, migration pressure actually increased.

Nothing could generate much more ill will between America and its neighbors to the south than the wall which it is constructing, the new “iron curtain.” This is not the way to curtail the flow of people, who are desperate to have a job and earn a decent living. The way to reduce the migration pressure is to increase incomes in Mexico and the other countries of Latin and Central America. A true free trade agreement would do that. America would benefit too by eliminating (or at least severely curtailing) its agricultural subsidies. Taxpayers would be better off, and the environment would be better off. (But of course the large corporate farms would stand to lose the most.) Hopefully, in the not too distant future, America will be able to stop this hypocrisy and stand by its principles.

Q. The European Union is negotiating economic partnership agreements with African, Caribbean and Pacific countries to adapt current rules to World Trade Organization regulations. Many of these countries have huge informal sectors; they come out from political turbulence and they cannot compete globally because they don’t have robust industries and diversified enough economies. My fear is that these changes will not help them much to address their development problems. Do you think that WTO rules need to incorporate a revisited “development dimension,” and the EU to act with less rhetoric?

Alessandro Vitale

A. While many developing countries have benefited from access to the markets of advanced industrial countries that the WTO has helped bring about, WTO rules are clearly biased against developing countries. In fact, as I point out in Making Globalization Work, the last round of trade discussions, the Uruguay round, was so unfair that the poorest countries of the world - sub-Saharan Africa as a region - were actually made worse off.

Developed country tariffs against developing countries are four times higher than they are against other developed countries. The developed countries demanded that the developing countries open up their markets to the goods of the developed countries and eliminate their subsidies, but they did not fully reciprocate. They promised to reduce their agricultural subsidies, but under President Bush, agricultural subsidies have actually doubled. These agricultural subsidies increase output and exports of the U.S. and EU, and the increased exports lead to lower global agricultural prices, lowering incomes of poor farmers in Africa and elsewhere.

Making matters worse, the developed countries impose a structure of tariffs (called escalating tariffs) that make it more difficult for developing countries to move up from producing just raw materials to higher “value added” goods. These and other policies are designed to stymie the development of the poor countries.

At Doha, the advanced industrial countries promised to do better; they promised that this round of trade negotiations would rectify these imbalances of the past. That was why the round was called the “Development Round.” But the U.S. and the EU have now reneged on their promises. It is by now clear that whatever emerges from the Doha Round (if in fact anything emerges) is unlikely to be of much benefit to the developing countries.

There is another worry: that as the U.S. and EU see the failure of the Doha round of multilateral negotiations, they will turn to bilateral deals. These deals are undermining the very foundations of the multilateral trading system, which so many worked so hard to help create over the past 60 years. The single most important principle of that system is non-discrimination; but under the new regime, countries are divided into the “favored” (with whom one has a free trade agreement) and the rest. Moreover, because bargaining power is so unbalanced, these agreements are often very disadvantageous to the poor countries. Particularly worrisome are the provisions which will make access to generic medicines even more difficult - thousands of people will die, unnecessarily, as a result.