Expert Comment

Cause for customised liberalisation

Joseph E. Stiglitz

Trickle-down economics became discredited for an obvious reason: it was not true. Sometimes growth helps poor people, but sometimes it does not. By some measures poverty increased in Latin America in the 1990s, even in many countries where there was growth. It was not just that well-off people gained disproportionately from growth: some of their gains may even have been at the expense of poor people.

Though there are a number of technical problems with these recent studies, the most telling problem is that they asked the wrong question: globalisation and growth are endogenous, the result of particular policies. The debate is not about whether growth is good or bad, but whether certain policies — including policies that may lead to closer global integration — lead to growth; and whether those policies lead to the kind of growth that improves the welfare of poor people. A look at the most successful countries, in growth and poverty reduction, shows how misleading these studies are.

China and other East Asian countries have not followed the Washington consensus. They were slow to remove tariff barriers, and China still has not fully liberalised its capital account. Though the countries of East Asia "globalised", they used industrial and trade policies to promote exports and global technology transfers, against the advice of the international economic institutions. Perhaps most important, unlike the Washington consensus, policies promoting equity were an explicit part of their development strategies. So too for perhaps the most successful country in Latin America, Chile which during its high-growth days of the early 1990s effectively imposed a tax on short-term capital inflows.

The policy issue is not "to globalise or not to globalise" or "to grow or not to grow". In some cases it is not even "to liberalise or not to liberalise". Instead the issues are: to liberalise short-term capital accounts — and if so, how? At what pace to liberalise trade, and what policies should accompany it? Are there pro-poor growth strategies that do more to reduce poverty as they promote growth? And are there growth strategies that increase poverty as they promote growth — strategies that should be shunned?

For instance, neither theory nor evidence supports the view that opening markets to short-term, speculative capital flows increases economic growth. But there is considerable evidence and theory that it increases economic instability, and that economic instability contributes to insecurity and poverty. So, such forms of capital market liberalisation might in some ways increase "globalisation". But they do not enhance growth — and even if growth increases slightly, this form of it might increase poverty, especially in countries without adequate social safety nets.

Similarly, trade liberalisation is supposed to allow resources to move from low-productivity protected sectors to high-productivity export sectors. But what if export markets in areas of comparative advantage (such as agriculture) are effectively closed, or credit is not available (or available only at exorbitant interest rates) to create the new export-related jobs? Then workers simply move from low-productivity protected sector jobs to unemployment. Growth is not enhanced, and poverty is increased.

There are policies that in the long run may enhance growth and reduce poverty, such as enhancing education opportunities for disadvantaged groups, which allows countries to tap into vast reservoirs of underused talent. But the returns to investments in pre-school education today will not manifest themselves for two decades or more — not the kind of results that show up in typical econometric studies.

Hidden beneath the surface in these econometric studies of globalisation is another subtext; because globalisation has proven so good for growth and poverty reduction, critics of globalisation must be wrong. But these cross-sectional studies cannot address the most fundamental criticisms of globalisation as it has been practiced: that it is unfair and that its benefits have disproportionately gone to rich people. After the last round of trade negotiations, the Uruguay Round, a World Bank study showed that Sub-Saharan Africa was actually worse off. Asymmetric liberalisation studies suggest that Africa has suffered because it has not globalised. That may be partly true. But it is also true that Africa has suffered from the way globalisation has been managed.

Thus these econometric studies on globalisation, growth and poverty have been a misleading distraction, shifting the debate away from where it should be — on the appropriateness of particular policies for particular countries on how globalisation can be shaped (including the rules of the game) and on international economic institutions, to better promote growth and reduce poverty in the developing world. The anti-globalisation movement has often been charged with being unthinking in simply asking whether globalisation is good or bad. But the econometric studies, for all the seeming sophistication of their statistics, are equally guilty.