ETHICS AND THE ECONOMICS OF GLOBALIZATION

ETHICS AND THE ECONOMICS OF GLOBALIZATION Joseph E. Stiglitz 2004 Tanner Lectures Oxford

OUTLINE • IS THERE AN ETHICAL DIMENSION TO ECONOMIC BEHAVIOR? • THE RIGHTS PERSPECTIVE • ETHICAL DIMENSIONS OF GLOBALIZATION: PRINCIPLES • ETHICAL DIMENSIONS OF GLOBALIZATION: TRADE • ETHICAL DIMENSIONS OF GLOBALIZATON: FINANCE • ETHICAL DIMENSIONS OF GLOBALIZATION: ADVICE • CONCLUDING REMARKS

IS THERE AN ETHICAL DIMENSION TO ECONOMIC BEHAVIOR? ADAM SMITH’S INVISIBLE HAND: INDIVIDUAL’S, IN PURSUING SELF-INTEREST, PROMOTE GENERAL INTEREST • Arrow and Debreu showed sense in which (“Pareto efficiency”) and conditions under which Adam Smith was correct—Fundamental Theorem of Welfare Economics

ADAM SMITH’S INVISIBLE HAND • IMPLICATION: INDIVIDUAL’S ONLY NEED TO THINK ABOUT SELF-INTEREST • BUT ONLY LEADS TO EFFICIENCY: ETHICAL ISSUES REMAIN ABOUT DISTRIBUTION OF INCOME

MARKET FAILURE AND THE FAILURE OF ADAM SMITH’S INVISIBLE HAND • WHEN THERE ARE “MARKET FAILURES” THE PURSUIT OF SELF-INTEREST WILL NOT LEAD TO ECONOMIC EFFICIENCY • MARKET FAILURES ARE PERVASIVE

MARKET FAILURES ARE PERVASIVE • Externalities—environmental pollution • Lack of competition—exploiting the use of market power • Incomplete markets—poor countries bear risk, rather than risk being transferred to those most able to bear it • Information problems

MARKET FAILURES ARE PERVASIVE • WHEN INFORMATION IS IMPERFECT AND MARKETS INCOMPLETE—THAT IS ALWAYS—REASON THAT INVISIBLE HAND OFTEN APPEARS INVISIBLE IS THAT IT IS NOT THERE

WHEN INFORMATION IS IMPERFECT INVISIBLE HAND FAILS Greenwald-Stiglitz theorem: market economy is essentially never constrained pareto efficient—taking into account costs of information --trade liberalization may lead to Pareto inferior outcomes (Newbery Stiglitz) --capital market liberalization increases risk and lowers welfare American corporate CEO’s pursuit of greed (stock options, IPO’s, etc.) did not enhance economic efficiency; lead to bubble which burst, at great cost to American economy

WHEN INFORMATION IS IMPERFECT INVISIBLE HAND FAILS PRINCIPLE AGENT PROBLEM • Agent has opportunity to act in ways which are not in interests of those for whom he works • Not motivated by “moral obligation” • Only by incentives • Economic problem is to find best incentive schemes

PRINCIPLE AGENT PROBLEM BUT GENERAL WELFARE MAY BE ENHANCED IF INDIVIDUALS’ BEHAVIOR IS GUIDED BY NORMS AND VALUES, NOT JUST BY SELF-INTEREST • Norms can be “enforced” by social sanctions • But is this just a broader definition of acting in “self-interest”? • Still, goes well-beyond narrow Smithian conception • Particularly clear in case of externalities (littering) • And in case of agency: “fiduciary responsibility”

GLOBALIZATION MAY HAD ADVERSE EFFECTS ON EFFICIENCY • BEYOND MARKET FAILURES ASSOCIATED WITH INCOMPLETE MARKETS AND IMPERFECT INFORMATION • NON-MARKET INSTITUTIONS PLAY AN IMPORTANT ROLE • AND GLOBALIZATION MAY WEAKEN THESE NON-MARKET INSTITUTIONS • Families provide insurance and other non-market services • Market insurance weakens role of family • General equilibrium analysis (converse of Arnott-Stiglitz which showed how non-market institutions may weaken market institutions and lower social welfare) • Globalization may undermine other forms of social capital

BEYOND EFFICIENCY TO SOCIAL JUSTICE • Rawls—behind veil of ignorance (though not necessarily max-min) • ethical aspects of the exploitation of market power • motivated concerns about usury • Particularly important when considering intergeneration equity—environment

SOCIAL JUSTICE FOCUSES NOT JUST ON OUTCOMES, BUT ON PROCESSES OPPORTUNITY

PROCESSES Difficulty of ascertaining and ensuring fairness of outcomes May be easier to ascertain fairness of process Includes participation, voice in decision Helps mitigate agency problems

OPPORTUNITY Way of reconciling concerns about incentives, individual responsibility

CAPITALISM/MARKET ECONOMY “WORKS” BECAUSE UNFETTERED CAPITALISM IS TEMPERED By • Awareness of market failures • “Social contract” ensures modicum of social justice

II. THE RIGHTS PERSPECTIVE INCREASING EMPHASIS ON RIGHTS • Include economic rights • Not just property rights • Debate about whether rights are just, or at least largely, instrumental: property rights important because they enhance economic efficiency

HOW DOES ONE RECONCILE “RIGHTS” PERSPECTIVE WITH TRADITONAL ECONOMICS PERSPECTIVE? • Is there a lexicographic ordering? • With rights given “priority”? • What is nature of “economic rights”—right to medicine, education, housing? • Standard economics emphasizes trade-offs, no absolutes • Can’t be “absolute rights” (at least with respect to economic rights): Poor countries cannot afford standards that would be viewed as below “minimal” is advanced developed country

IN PRACTICE, ECONOMIC RIGHTS ARE OFTEN TREATED AS PRIOR TO OTHER RIGHTS • Intellectual property rights “trumps” right of access to life-saving medicines • But public policy inconsistent: Anthrax and Ciprio • Emphasis on certain economic rights (property rights, rights of free capital mobility) over other rights and values (right to medicine, environmental rights, labor rights) part of objection to globalization

III. ETHICAL DIMENSIONS OF GLOBALIZATION: PRINCIPLES Will take a look at “practical ethics” Based on principles of social justice • Economic institutions, rules, practices which disadvantage the poor will be viewed as unethical • Ethical behavior requires “progressivity”: the poor should benefit disproportionately As well as other ethical principles • Hypocritical behavior viewed as unethical • Advisers who are not “fully honest” viewed as unethical

GLOBALIZATION OF POLITICS, SENSE OF SOCIAL JUSTICE NOT KEPT PACE WITH ECONOMIC GLOBALIZATION Adam Smith’s invisible hand only applied to market behavior • Globalization debate involves political behavior • Choice of institutions, policies, rules to govern globalization Neither politics nor “morals” temper unfettered capitalism—recognition of market failures and social contract • Failure of democracy at international level, lack of voice of poor, makes emphasis on “morals” all the more important • But there is a moral failure as well as a political failure

But there is a moral failure as well as a political failure Think differently about poor abroad, at home • Job destruction at home bad, even if more job creation abroad, among people who are poorer • Not consistent with any “anonymous” equalitarian social welfare function • Hard to Reconcile with, say, Rawlsian principles of social justice • Ideals of social justice, social solidarity stop at the border

RELATIONS BETWEEN COUNTRIES DICTATED BY PRINCIPLES OF ECONOMIC POWER, NOT ETHICAL PRINCIPLES Trade ministers instructed to get best deal for special interests in their country, not to get “fair” agreement

“RULES OF GAME” ARE SET BY COUNTRIES, NOT BY MARKET FORCES: CANNOT IGNORE ETHICAL DIMENSION, EVEN IF THERE WERE NO MARKET FAILURES • Lack of social justice even in processes by which rules are set • Market failures are pervasive • Poor countries forced to bear risk of exchange rate and interest rate fluctuations • And ethical globalization ought to deal with the consequences of these market failures on the poor

PRINCIPLES OF ETHICAL GLOBALIZATION • Fair procedures for determining the rules of the game • Fair outcomes • Rules, institutions, outcomes which disadvantage poor (poor countries, poor people within country) should be viewed as unethical

PRINCIPLES OF ETHICAL GLOBALIZATION CENTRAL THESIS: CURRENT RULES, INSTITUTIONS, PRACTICES DISADVANTAGE THE POOR

IV. ETHICAL DIMENSIONS OF GLOBALIZATION: TRADE PROCEDURES DISADVANTAGE POOR COUNTRIES • “Green room” bargaining behind closed doors • Arm twisting, threats, etc. REFLECTED IN PAST OUTCOMES

REFLECTED IN PAST OUTCOMES • Average tariffs by developed countries against developing country products higher than against developed country products • Even with “preferences” • Uruguay round: poorest region of world, Sub-saharan Africa actually worse off • Developed countries allowed to continue agricultural subsides, restrictions, harming poor agricultural producers, but developing countries were circumscribed in their development strategies

MORE FUNDAMENTAL ISSUES RAISED BY TRIPS (INTELLECTUAL PROPERTY REGIME) • Effectively transfer of income from developing countries to developed • Research public good—should be paid for by rich • Denied access to life saving drugs to poorest people in world • Lead to bio-piracy • Contrast: Western governments strive to ensure access to health care • Contrast: During Anthrax scare, U.S. uses compulsory licensing

BROADER ISSUES RAISED BY TRADE AGENDA Agenda itself shows ethical lapse Defined by what is in interests of advanced industrial countries, regardless of impact on poor • Labor market liberalization would contribute more to global economic efficiency • Yet capital market liberalization remains at center of agenda • Even though there are questions whether capital market liberalization even contributes to economic growth • And there is strong evidence that it contributes to instability and poverty

BROADER ISSUES RAISED BY TRADE AGENDA • Dumping duties argued for on basis of “fair competition” • Yet double standard: fair competition among domestic firms and foreign firms • Should be single standard

V. ETHICAL DIMENSIONS OF GLOBALIZATON: FINANCE • OTIOSE DEBTS • BANKRUPTCY (STANDSTILLS) • GLOBAL RESERVE SYSTEM

OTIOSE DEBTS Western governments and financial institutions helped sustain repressive dictators (Megistu in Ethiopia, Mobutu in Congo) • But today country’s face burden of paying back debts incurred • Even when money went, effectively, to suppress fight for democracy and human rights Lenders should be put on notice—positive incentive effects Many difficult cases: Russia in 1997/1998

BANKRUPTCY (STANDSTILLS) Excessive payments abroad Lender is as much at fault at debtor • Especially when lender is supposed to have more expertise—failed development project Many problems due to market failure—developing countries are forced to bear brunt of exchange rate and interest rate risk • With enormous adverse consequences • Latin American lost decade • Moldova • International institutions and developed countries had a moral obligation to help markets work better

BANKRUPTCY (STANDSTILLS) Principle of “fresh start” well established • More “humane” that debtor prisoners, military interventions of earlier period • But IMF has often left countries more indebted through bail-outs • IMF finally recognized importance of sovereign debt restructuring mechanism

IMF finally recognized importance of sovereign debt restructuring mechanism But failed to recognize that creditor institution (IMF) could not play impartial role And failed to recognize important difference between public and private restructurings (chapter 9 vs. chapter 11 of U.S. Bankruptcy code) • With importance of implicit creditors (pensioners, education. Etc)

GLOBAL RESERVE SYSTEM Allows richest country in world to live well beyond its mean • Borrowing almost $2 billion a day And entailing large transfers from developing countries to U.S. And contributing to global instability • The costs of which are largely borne to poor

VI. ETHICAL DIMENSIONS OF GLOBALIZATION: ADVICE SHOULD BE “IMPARTIAL” “SCIENTIFIC” “HONEST” • PROVIDING ASSESSMENT OF RISKS • AND IDENTIFYING LIMITATIONS OF KNOWLEDGE YET MUCH OF ADVICE PROVIDED BY IFI’S HAS • NOT INDICATED UNDERLYING ASSUMPTIONS, • NOT IDENTIFIED LIMITATIONS OF KNOWLEDGE, • NOT DESCRIBED RISKS ASSOCIATED WITH ALTERNATIVE POLICIES, • NOT DESCRIBED POTENTIAL ADVERSE EFFECTS ON POOR, • NOT EMPHASIZED DISTRIBUTIONAL CONSEQUENCES

MORAL DIMENSIONS OF ADVICE PROBLEM IS NOT JUST THAT THE PREDICTIOINS HAVE BEEN WRONG • BY FAILING TO CALL ATTENTION TO DISTRIBUTIVE CONSEQUENCES HAVE EFFECTIVELY CONTRIBUTED TO WORSENING OF WELL-BEING OF POOR

MORAL DIMENSIONS OF ADVICE ABUSE OF POLITICAL POWER: • THE POLITICAL POWER OF THE IMF (OTHER DONORS WILL NOT PROVIDE AID IF IMF WITHHOLDS; CRITICISM BY IMF MAY HAD ADVERSE EFFECTS ON ACCESS TO PRIVATE CAPITAL) MAKES “MORAL SHORTFALL” OF IMF EVEN MORE SERIOUS

CONCLUDING COMMENTS • GLOBALIZATION HAS NOT LIFE UP TO ITS POSITIVE POTENTIAL • GLOBALIZATION MAY HAVE EVEN HAD ADVERSE EFFECTS ON MANY POOR COUNTRIES, AND, MORE BROADLY, ON THE POOR WITHIN DEVELOPING COUNTRIES

WHY THE FAILURES? KEY EXPLANATION: DOMINANCE OF DOCTRINES OF “MARKET FUNDAMENTALISM” • A BELIEF IN AN ALMOST UNFETTERED CAPITALISM • UNTEMPERED BY THE FORCES WHICH MAKE CAPITALISM WITHIN COUNTRIES WORK

UNTEMPERED MARKET FUNDAMENTALISM A FAILURE TO RECOGNIZE • THE PERVASIVENESS OF MARKET FAILURES • THAT EVEN WHEN MARKETS ARE EFFICIENT, THEY DO NOT ENSURE SOCIAL JUSTICE

UNTEMPERED MARKET FUNDAMENTALISM • THERE IS AN IMPORTANT ROLE OF GOVERNMENT • THERE IS A ROLE FOR “MORALS” AND ETHICS IN ECONOMIC LIFE WITHIN COUNTRIES • BUT THERE IS EVEN A GREATER NEED FOR MORALS AND ETHICS TO GOVERN MARKET RELATIONS THAT GO ACROSS BORDERS

NEED FOR MORALS AND ETHICS TO GOVERN MARKET RELATIONS THAT GO ACROSS BORDERS • BUT IN FACT, ETHICAL FAILINGS ARE EVEN GREATER • UNLESS WE RECOGNIZE THESE FAILINGS, THE DISCONTENT WITH GLOBALIZATION WILL PERSIST • GLOBALIZAITON WILL CONTINUE TO FAIL TO LIVE UP TO ITS POTENTIAL • AND WILL CONTINUE TO HAVE THE ADVERSE EFFECTS THAT HAVE BEEN SO WIDELY CRITICIZED

ETHICS AND THE ECONOMICS OF GLOBALIZATION