Global Speculators

A billionaire and a Nobel laureate want to fix international trade agencies. Why bother?


George Soros on Globalization, by George Soros, New York: PublicAffairs, 191 pages, $20

Globalization and Its Discontents, by Joseph E. Stiglitz, New York: W.W. Norton & Co., 282 pages, $24.95

When the International Monetary Fund (IMF) and World Bank held joint meetings in Washington, D.C., in September, nothing remarkable happened. Given the recent struggle over globalization, that was news. Starting with the 1999 meeting of the World Trade Organization (WTO) in Seattle, meetings of international groups concerned with trade and economic development attracted thousands of protesters, some of them violent. They aimed to make themselves heard, even if that meant stopping these organizations from doing business. Violence, property damage, and clashes with police became expected features of the anti-globalization movement.

But that was before September 11, 2001. Protests planned for the 2001 IMF-World Bank meeting in D.C. were canceled, and some observers said the anti-globalization movement was dead.

Organizers of the 2002 protests hoped to show their movement was very much alive and announced that 20,000 protesters would show up. But the police and the public are still much less tolerant of the behavior protesters displayed in Seattle and other cities. The September meetings in Washington drew barely 2,000 protesters, who quickly found themselves outnumbered and outmaneuvered by police. Property damage was limited to a single smashed window and some graffiti.

But globalization criticism hasn't gone away. Indeed, it has gained some support from surprising quarters, including prominent businessmen and respected economists. These more economically literate critics point to some very real problems with the way globalization has taken place. In particular, they focus on the problems caused by organizations such as the World Bank and the IMF. Unlike the street demonstrators, these critics don't call for a halt to globalization and economic integration. They simply want it to be guided by right-minded individuals. But their criticisms of the institutions charged with guiding economic integration carry more power than they seem to realize, calling into question the very prescriptions they put forth.

Financier George Soros certainly understands a thing or two about how markets work. (In December a French court convicted the billionaire of insider trading and fined him $2.3 million.) And he certainly understands how trade helps nations become wealthier. In George Soros on Globalization, he admits, albeit in a footnote, that a World Bank study found developing countries with the biggest increases in trade as a share of gross domestic product have experienced higher and faster growth compared to their "pre-globalization" years as well as to "non-globalizing countries."

"Globalization," Soros writes, "is indeed a desirable development in many ways." But Soros is a strong critic of globalization, at least as it has taken place so far. He gives three basic reasons: "First, many people, particularly in less developed countries, have been hurt by globalization without being supported by a social safety net; many others have been marginalized by global markets. Second, globalization has caused a misallocation of resources between private goods and public goods. Markets are good at creating wealth but are not designed to take care of other social needs. The heedless pursuit of profit can hurt the environment and conflict with other social values. Third, global financial markets are crisis prone."

For Soros, the real problem with globalization is that it hasn't gone far enough. "While markets have become global, politics remain firmly rooted in the sovereignty of the state," he complains. He proposes that we strengthen existing international organizations and create new ones devoted to "social goals such as poverty reduction and the provision of public goods on a global scale."

For example, Soros notes that "workers in the countries that offer cheap labor are often deprived of the right to organize and are mistreated in other ways. China is notorious in this respect." The problem, as Soros sees it, is that the International Labor Organization (ILO) lacks the teeth to enforce global labor standards. Developed nations such as the U.S. haven't lined up as solidly behind the ILO as they have behind the WTO. Soros wants the West, especially the U.S., to put more effort into strengthening the ILO and obeying its edicts.

He also wants the West to offer more aid to developing nations. Yes, he says, trade and globalization can help raise the standard of living in such nations, but they aren't doing so quickly enough. To speed things up, Soros offers a complex proposal. Every year, he says, the IMF should issue "Special Drawing Rights," a special kind of reserve money. Developing nations would keep their SDRs as part of their foreign currency reserves to draw upon in times of need, but developed countries would contribute their SDR allocation to the provision of global public goods.

Although Soros calls for new and more powerful international organizations, he's quite critical of the way existing institutions have used the powers they already have. According to him, the rules of the WTO are slanted to favor developed nations and multinational corporations over Third World nations.

That may be an overly harsh criticism, but it contains more than a kernel of truth. Soros argues that the WTO made a major mistake when it became involved in the protection of intellectual property. You may not agree with his assessment that intellectual property law in the West has tilted too far toward protecting the interests of big corporations. But he has an undeniable point when he argues that this issue takes the WTO outside its core mission of reducing global trade barriers. He also has a point that this issue is of greater concern to Western nations and multinational companies than it is to Third World nations.

The Third World would rather the WTO focus on removing the trade barriers that block their agricultural goods from Western plates and try to find ways to reduce the subsidies Western nations give their farmers. Those subsidies cause the global market to be flooded with farm products, driving down prices and making it harder for Third World farmers to make a living. But the WTO has yet to open up talks on freeing up the agriculture sector. Powerful farm interests in the U.S. and Europe have fought their governments' participation in such talks.

The WTO isn't the only international economic agency Soros finds fault with. He targets the World Bank and the IMF as well. World Bank loans flow to central governments, Soros argues, thus reinforcing the power of corrupt or repressive central regimes in developing nations. Again, that conclusion seems difficult to argue with. And his claim that the IMF creates a "moral hazard" in international credit markets has been well documented.

Lenders have come to believe that the IMF will bail them out when developing nations run into trouble repaying loans. Such lenders become less averse to risk, pumping money into nations with poor fiscal and monetary policies when they otherwise would not. Thus the IMF aggravates global financial crises. The IMF itself has admitted in reports on the Asian economic crises of the late 1990s that its policies may create a moral hazard.

Strident as it is, Soros' indictment of international institutions such as the IMF and World Bank pales beside that offered by Nobel Prize-winning economist Joseph E. Stiglitz in Globalization and Its Discontents. Stiglitz served as the World Bank's chief economist from 1997 to 2000, and his tenure left him with little good to say about that agency or any other major international economic institution. The policies of such organizations, as he sees them, are based on a perverse blend of bad economics and naked special interest politics. Such policies not only fail to reduce Third World poverty, but often increase the suffering of the peoples of developing nations. Stiglitz casts a jaundiced eye on all the major institutions, but none comes in for more criticism than the IMF.

"IMF structural adjustment policies—the policies designed to help a country adjust to crises as well as to more persistent imbalances—led to hunger and riots in many countries; and even when results were not so dire, even when they managed to eke out some growth for a while, often the benefits went disproportionately to the better-off, with those at the bottom facing even greater poverty," he writes.

The IMF, argues Stiglitz, lacks detailed, hands-on knowledge of the countries it deals with. That, along with a strong "market fundamentalist" ideology, leads it to prescribe one-size-fits-all solutions for every crisis it deals with. Sometimes its prescription works, but more often it makes things worse. The East Asian crises of the late 1990s are perfect examples of that problem.

"The Fund recognized that the underlying problems in East Asia were weak financial institutions and overleveraged firms; yet it pushed high interest rate policies that actually exacerbated those problems," Stiglitz writes. "The consequences were precisely as predicted: The high interest rates increased the number of firms in distress; and thereby increased the number of banks facing nonperforming loans."

Stiglitz also condemns developed nations, especially the United States, for blatant hypocrisy. Such nations demand that developing nations open up their markets to manufactured goods and protect the patents of the software and drugs made by multinational corporations. Yet they are unwilling to end the agricultural subsidies or import barriers that hammer Third World farmers.

Like Soros, Stiglitz paints himself as an economic Cassandra whose constant (and constantly correct) predictions of the harm brought on by IMF policies are always ignored. Yet like Soros, he ends up calling for more and more powerful international institutions to deal with the distress globalization can cause.

Stiglitz admits that markets do a great job of creating wealth, but they can also disrupt people's lives, and the benefits of capitalism, he claims, don't flow evenly to everyone. At the national level, we did not allow markets "to develop willy-nilly on their own." Governments passed minimum wage laws and antitrust laws. Governments provided public goods and promoted infant industries.

"Unfortunately, we have no world government, accountable to the people of every country, to oversee the globalization process in a fashion comparable to the way national governments guided the nationalization process," Stiglitz complains. He would like to take us closer to that world government.

Given their powerful condemnations of existing institutions, how can Soros and Stiglitz call for new and even more powerful international organizations? They clearly believe that existing institutions are simply run by the wrong people or have been badly designed. If the right people were to redesign and run those institutions—people such as George Soros and Joseph Stiglitz—they wouldn't do as much damage and would do a great deal of good.

Critics of globalization aren't the only ones who say that a reformed and more powerful ILO, World Bank, and IMF can and should play a vital role in overseeing the process of globalization. Columbia University economist Jagdish Bhagwati is best known as an advocate of free trade; his new book Free Trade Today is a brief but excellent defense of trade against protectionist attacks. But even he gives lip service to the idea that international agencies such as the ILO and World Bank are needed. Are they?

Soros and Stiglitz condemn the way that special interest politics influences IMF and WTO decision making, but apart from calling for more "openness" in these institutions, they offer few specifics on how to remove the self-interest or the politics from the policy making. But is openness—giving the public greater access to the decision-making processes—really a cure for what ails the IMF and WTO and other international agencies?

Economist Anthony Downs has shown that most voters are ignorant, and rationally so, when it comes to political issues. One individual is unlikely to have any real impact on an election or on the course of government policy. So it makes little sense for most people to be well informed about what their government is doing. If one person can't affect his government, how much less influence will he have over large international institutions? No matter how "open" we make the IMF or the World Bank, the vast majority of the world's people will still have little reason to follow their policies very closely.

But those who can gain the most from the actions of these agencies—multinational corporations, Third World leaders, and others—will have a strong incentive to remain informed about them and to try to influence their decisions. These persons and firms will likely still wield a disproportionate influence over international economic institutions. We may change the rules and the structure of these institutions, but we can't change human nature.

Markets, imperfect as they are, tend to direct our often self-serving behavior toward ends that benefit others. In a purely free market, corporations must earn money by providing goods and services that consumers demand. But when subsidies or special protection are available from either governments or international agencies, corporations will tend to compete for them. The only winners in that game are the victorious companies and the bureaucrats who aid them.

Nor is there any reason to believe that we can solve the knowledge problems that Stiglitz highlights. Stiglitz rightly points out that the IMF and other international organizations lack detailed knowledge of local economies. They aren't sufficiently familiar with the customs and traditions of developing nations. Their ignorance, combined with poor economics, leads them to prescribe policies that often do little to help developing nations, and sometimes make things much worse.

It's no surprise that information doesn't move up through large institutions very well. Nor is it a surprise that large bureaucracies favor cookie-cutter solutions that may not apply to any given problem. Soros and Stiglitz each offer ideas on how to make these institutions adapt their programs to individual nations' needs.

Soros, for example, calls for giving the directors more autonomy and reducing middle-management positions. But such changes aren't exactly thoroughgoing. In the end, neither Soros nor Stiglitz give us any reason to believe that large international organizations will ever acquire or use the sort of detailed, localized approaches to problems that they call for.

Indeed, Soros and Stiglitz amass quite a bit of evidence that the best solution to many of the problems they highlight, especially in the developing world, may be through a decentralized, nongovernmental approach. Soros lets us know time and again about all of the good work his foundations have done across the globe. For example, his International Science Foundation paid the salaries of some 35,000 scientists in the former Soviet Union, allowing them to keep working at a time of state cutbacks. Soros also underwrote the treatment of tuberculosis in Russian prisons, an experience that led to further efforts against the disease.

"We mobilized the best experts in the field and commissioned Partners in Health in Boston to prepare a study on the global impact [of multi-drug resistant TB]," he writes. After that, he put together a coalition of 190 organizations and governments in an effort to wipe out TB worldwide.

Soros' foundation network has helped develop a certification process for aid organizations around the world. Companies, governments, and other foundations can give to those groups in confidence that they will use that money well on projects that will probably make a difference in the lives of citizens of developing nations.

Stiglitz also notes that private groups have often been better able than the IMF and World Bank to help nations overcome economic problems. One notable success story happened in Botswana, which averaged a 7.5 percent GDP growth rate from 1961 until 1997. That nation turned to the Ford Foundation for advice on how to develop needed infrastructure and build sound government policies.

"Unlike the IMF, which largely deals with the finance ministry and central banks, the advisers openly and candidly explained their policies as they worked with the government to obtain popular support for the programs and policies," Stiglitz writes. "They discussed the program with senior Botswana officials, including cabinet ministers and members of Parliament, with open seminars as well as one-to-one meetings." The Ford Foundation advisers took the time to study local conditions when developing their proposals and they took the time to explain those proposals and build a consensus for them politically. That's what made the policies a success, Stiglitz argues.

In sum, Stiglitz and Soros think the IMF, the World Bank, and other international agencies should act more like private organizations and foundations. But the weight of the evidence they present suggests another conclusion: The world, especially the developing world, doesn't need a "reformed" IMF or World Bank; what it needs is more Ford Foundations and more Soros foundations.

Soros and Stiglitz concede that free trade and economic globalization are, on the whole, good things. They admit that the arguments for trade are largely valid. They also admit that globalization isn't the cause of all the world's problems, as some of its economically illiterate critics sometimes suggest. The TB epidemic in Russia and the AIDS epidemic in sub-Saharan Africa, for instance, have complex causes. But free trade doesn't seem to be among the factors leading to those problems.

If you look closely at the problems Soros and Stiglitz cite, however, it isn't clear that any of them are caused by globalization. Stiglitz rightly notes, for instance, that the IMF and World Bank pushed an agenda of privatization on Russia when what it really needed was secure private property rights and the rule of law. Without those institutional supports, privatization simply became a way for the politically connected to loot the country. But the core problem in Russia was the lack of property rights, not free trade, or even the wrongheaded prescriptions offered by the IMF and World Bank. At most, Russia's economic problems were a failure of global economic agencies, not of globalization itself.

Globalization will remain a contentious subject, but its critics, at least its more economically literate critics, have conceded much: They admit that free trade and economic integration are good. The only serious globalization argument remaining, it seems, is about the terms on which globalization takes place.