The Values of the Market

Whether "globalization" is a useful concept remains open to doubt. Semantically, it is empty when it lacks critical detail: globalization of what? For some the answer is the free market, and globalization has become a lightning rod for praise and blame of laissez-faire. For others, it is culture and communication, and globalization means either homogeneity or new forms of cosmopolitanism, hybrid identities, and diaspora sensibilities. Still others take globalization as an ethical fact -- more acts than ever before affect faraway people -- and it has been the occasion for much talk about the obligations imposed by interdependence. A certain intellectual opportunism unites much that is said on the topic. Suddenly, the free market as such is up for debate, social democracy is dusted off and put back in play with no visible updating, and much is said by many with little effect about the importance of democracy, efficiency, openness, and other venerable but imprecise principles. Globalization provides a playing field so vast and unmapped that its explorers can get away with reckless degrees of abstraction.

That said, Joseph Stiglitz and George Soros have chosen the term for their new books, and their attempts to do it justice show where one part of the globalization conversation has moved. The two mean roughly the same thing by "globalization." Soros, in a typically succinct definition, calls it "the free movement of capital and the increasing domination of national economies by global financial markets and multinational corporations" (p.1). Stiglitz is less precise, but his concern is the same as Soros's: how governance of global economic integration has failed, and how it might be improved. The two appear to think well of each other. Soros offers high praise on Stiglitz's dust jacket, and Stiglitz has expressed unstinting admiration of Soros in the New York Review of Books (May 23,2002). They are also well qualified as commentators in an area too forgiving of amateur reasoning. Stiglitz was chair of President Clinton's Council of Economic Advisers and then chief economist of the World Bank, and so sat near the center of global economic policy in the 1990s. Soros, of course, is the financier-turned-philanthropist-and-philosopher who has funded civil-society projects in the world's toughest places while applying a thief's expertise to criticizing the laws that enabled him to make billions of dollars in currency speculation.

The two also belong to a growing liberal consensus around globalization, which includes figures as diverse as New York Times columnist Thomas Friedman and another heterodox Nobel economist, Amartya Sen. In its essentials, this position is a reprise of the American Progressive and New Deal responses to laissez-faire capitalism. Its main contentions are as follows: The idea that markets arise naturally and always work efficiently is a myth; markets are products of legal, political, and institutional work, including property rules, contract enforcement, financial regulation, and of course the courts, police forces, and banks that put them into practice. The governance of markets must include "non-market values" such as distributive justice, solidarity, and stability. When properly governed, free markets represent a great expansion of human freedom and well-being. Improperly governed, they can bring crises and forms of exploitation that undermine their legitimacy and inspire destructive rebellions.

Stiglitz's argument that economic governance went badly in the 1990s, with consequences that will take decades to unfold. He places the blame at the feet of a doctrine he calls "market fundamentalism" -- in brief, the belief in natural and naturally efficient markets that the liberal globalizers reject. Stiglitz asserts that the International Monetary Fund (IMF) was in thrall to market fundamentalism through the 1990s, and diagnoses its aggressive policies as having failed because of their adherence to market dogma. He is so focused on this theme that he devotes more than thirty pages -- and one of only two sustained case studies -- to IMF policy in Russia, which is not usually taken as an instance of globalization, but which is as good an example as any of market fundamentalism.

The IMF's sins are many. According to Stiglitz, IMF reforms have missed the basic point that markets work only in a framework of institutions. The IMF has pushed for banking deregulation in African countries, such as Kenya, that lack a mature banking system, producing corruption, waste, and collapse. It encouraged open capital markets in East Asia, allowing speculators' dollars to flow in unregulated -- and then flow out in panic in 1997 and 1998, causing the financial crisis that devastated some of the region's strongest economies. Because fundamentalists believed that markets automatically get things right, they were blind to the bubble that, when it finally burst, wrecked Indonesia and left Thailand, Malaysia, and South Korea reeling.

The most damning story comes from Russia, where IMF advisers encouraged the government to sell off state-owned enterprises and to charter private banks, even though Russia had neither regulation nor a business culture to encourage ordinary competition. Not surprisingly, the Russians behaved like corrupt apparatchiks (or Enron executives). Managers stripped and sold the assets of their companies. Bankers printed money for their friends and their own enterprises. Liberal capital markets, the culprits in the East Asian Crisis, helped the new elite to shuffle their money into foreign bank accounts rather than reinvesting it in Russia. After more than a decade of reform, Russia's gross domestic product is two-thirds of what it was at the end of the communist period, its best-educated young people are leaving for the West, and its democracy is corrupt and fragile.

In addition to damaging vulnerable economies and societies, Stiglitz argues, global economic governance persistently favors the rich countries and the financial industry. The IMF's post-crisis policies in East Asia, which are now generally agreed to have exacerbated the region's collapse, ensured that local debtors could maintain payments to Western creditors -- at the cost of draining the countries of capital, driving interest rates up to prohibitive levels, and deepening an epidemic of bankruptcy and unemployment, some of it unrelated to the basic soundness of the Asian economies. In general, Stiglitz argues, the IMF's interventions to prevent national currencies from falling give foreign investors time to get their money out of those countries on favorable terms, before the roof caves in. Moreover, the IMF emphasis on liberal financial markets in the 1990s fit comfortably with Wall Street's interest in finding new destinations for exploding investments during the stock market boom.

Stiglitz notes that when free-market principles are inconvenient to powerful American interests, they fall by the wayside. Agricultural subsidies are the most notorious example, and it is regrettable that Stiglitz finished his book before Congress's latest farm subsidy bill further inflated this form of corporate welfare and lifestyle subsidy. The United States and Europe together spend six times as much on these payments, which severely disadvantage farmers in the developing world who would like to sell to the rich countries -- as they do on foreign aid. Stiglitz also missed the Bush administration's protectionist stance on the American steel industry by a few months. Nonetheless, his time in government has left him with plentiful instances of American crony capitalism. After the collapse of the corrupt Suharto government in Indonesia, American representatives pressed the new government to honor disastrously inefficient electricity contracts with major American suppliers, which were structured around a complex system of bribes and kickbacks to the previous regime. When Stiglitz headed the Council of Economic Advisers, the Clinton administration followed the urging of Alcoa head and now Treasury Secretary Paul O'Neill to set up a global aluminum cartel to keep Russian aluminum manufacturers from underpricing the American company. As Stiglitz points out, American free-market rhetoric is constantly undercut by the lessons we teach in practice: government exists to fix markets on behalf of favored interests.

Stiglitz diagnosis points to both ideology and venality. Does one matter more than the other? At times Stiglitz favors ideology, noting that market fundamentalism gives continent-hopping consultants confidence that their models will hold equally true in Novosibirsk, Jakarta, and Addis Ababa. At other times he hints at venality, asserting outright that the IMF advances Wall Street's interests at the expense of the larger good but waffling on whether fund officials fully understand this. In the end, he appears to believe that IMF economists have so identified with the viewpoint of the financial community that ideology, interest, and the selective blindness of prejudice blend indistinguishably. The real dereliction is the failure to look beyond received attitudes, hear voices outside one's own circles, and consider the interests of people who are not likely to show up at one's conferences and dinner parties.

Like most obtuseness, this is a form of arrogance. Stiglitz is most perceptive in recognizing that arrogance as much as bad performance can cost a global reform agenda its legitimacy. Again and again Stiglitz notes that the leaders of developing countries feel humiliated, and their economists and other experts slighted, by the IMF's practice of dictating details of economic policy. The memory of colonialism is fresh in much of the world, kept alive by opportunistic local rhetoricians, but also reinforced by snubs like these. Stiglitz suggests several times that the habits of colonialism also survive -- in the attitudes of IMF economists. Resentment is one of the most powerful forces in politics, and exciting it in people whom one is trying to win over is unwise in the extreme.

Stiglitz's solution to the arrogance of American policy-makers is "democracy," by which he means several things that are not necessarily consistent. Sometimes he means it in its usual sense -- popular elections and free political expression, the sort that critical, civic-minded Americans might use to rein in the IMF. More often he means the use of self-determination by other countries to resist U.S. dictates, whether or not those countries are in fact democracies. At other times, "democracy" means elite consultation of elites with a broad range of people -- say, local economists and development experts -- rather than just one's IMF colleagues.

Stiglitz admires Chinese economic reform, which has proceeded gradually, encouraging new businesses to develop and going slowly on privatization while trying to develop rule of law -- thanks in part, Stiglitz reports, to Beijing's consultation with him and fellow Nobel winner Kenneth Arrow. In general, he praises East Asia's experience with government-guided growth. These models do exemplify national self-determination, and as for elite consultation, the Chinese in particular have imported a vast array of advisers, from legal academics to political consultants, to craft their reforms. The East Asian governments, however, were generally authoritarian when they devised their growth strategies, and China remains the paragon of undemocratic market reform. The Indonesian government that the IMF overrode and drove to collapse during the 1997-1998 crisis -- a move that Stiglitz calls an "undermining of democracy" -- was not at all democratic, and the abrupt rise of Indonesian democracy since has produced low-level chaos, crippling economic reform and hamstringing efforts at further political restructuring. This Indonesian experience of democracy has stiffened China's determination to remain undemocratic until the social disruption of economic reform has passed -- if the Beijing regime can ride that particular tiger successfully. Such paradoxes might have complicated Stiglitz's prescription of "democracy." Although economists specialize in studying tradeoffs, they do not always appreciate that political life also involves compromises among competing principles, and arrangements that are not just second-best -- an economics term for a sub-optimal solution -- but least worst.

George Soros has been thinking about politics longer than Stiglitz, and his ideas reflect several decades of experience in ambitious philanthropy. His short book, despite its title, is not a meditation "on globalization," but a set of policy proposals intended to make development and economic integration less crisis-prone and more equitable. Where Stiglitz relies mainly on aversive reasoning -- this was bad, avoid it in future! -- Soros sketches a map for improvement of social, political, and environmental conditions in developing countries.

Environmental protection and labor rights have been a major sticking point in trade politics. Unions and some progressives want to condition trade agreements on other countries' bringing their laws into line with American standards, to avoid the notorious "race to the bottom" in which governments weaken or ignore laws to attract investors. The trouble, as Soros points out, is that national governments resent the incursion on their sovereignty, and many cannot afford new social and environmental protections anyway. Soros's approach to this Gordian knot is straightforward and befits his professional background: move money. Rich countries should pay amply for environmental conservation in poor countries. They should do the same for childhood education, legal reform, and public health -- especially the campaigns against tuberculosis and AIDS that the United Nations launched after poor, mostly African countries showed themselves incapable of fighting the diseases with tiny budgets and weak political systems.

But Soros does not entirely get around the problem of sovereignty. On labor rights, for which one cannot write a check, he suggests that the International Labor Organization be strengthened to give its presently toothless standards some bite. In time this would mean sanctions against countries that ignored its prescriptions -- getting back to the dilemma that Soros means to buy his way out of in environmental and social spending Nonetheless, Soros's proposal is a refreshing rejoinder to a stale debate in the rich countries, in which all sides claim to support improved conditions in developing nations but only a few activists press for major increases in targeted foreign aid.

Soros wants his proposal to be more than a revival of traditional liberal calls for increased foreign aid. He opens his book with a list of the problems that vex traditional assistance: donor governments use it for political purposes (as in the West's egregious support of the Mobutu regime in the former Zaire) and recipient governments steal or squander it; other than government officials, local people seldom have control over, and investment in the success of, aid programs; and critics glibly dismiss such programs as failures because they do not realize that social investments are intrinsically riskier than for-profit enterprises, and must be judged by a more heterogeneous set of standards than simple dollar-for-dollar returns.

Following the model of his Open Society Institute, Soros proposes creating an international trust fund for development, overseen by a committee of independent, highly accomplished individuals. The committee would create a list of government and non-government programs, from which donor governments would choose in assigning their funds. Soros sees competence and autonomy as the keys to breaking the political constraints on aid and making a case for its effectiveness.

Soros also suggests a novel funding arrangement for the aid committee's trial run. He proposes that governments should finance his trust fund through the IMF's power to create "special drawing rights" -- basically, newly created currency apportioned among the central banks of nations much as the Federal Reserve places money in domestic banks. Congress has already approved the IMF's creation of $18 billion in special drawing rights to be shared among rich and poor counties, and Soros proposes that the rich countries' share should be the first deposit in the development trust, providing enough money to test the committee's effectiveness and to build political support on hoped-for development successes.

These proposals form the heart of Soros's book. On other issues he is illuminating but less expansive. Now is not the time to reform the World Bank, he says, because too many political critics are eager to cripple it. If his trust fund proposal works, reform of the bank along the same lines might be a later step. As for the IMF, he lays less blame as its door than does Stiglitz. The poor countries, he argues, are at an inevitable disadvantage in attracting investment because their economies are less stable than rich ones, so investors will demand higher returns or other guarantees to make up for the increased risk. IMF bailouts did benefit investors, but without the expectation of failure bailouts, investments to the developing world have fallen so much that developing economies have seen a net outflow of capital since 1998. Some sort of support is needed to encourage stable investment in developing countries. Soros proposes that the IMF should shift its focus from crisis management to crisis prevention by offering automatic lines of credit to countries with sound economic policies and well-regulated banking systems. That promise of hard currency in return for sound economic fundamentals might keep hiccups from becoming earthquakes and smooth investor anxiety.

Soros's work is structured by the idea of an open society -- not necessarily Western-style democracy, but a modestly robust form of liberalism that is respectful of personal liberty and tolerant of public dispute. He believes that markets alone cannot produce such a society, and in that he is surely right. He and Stiglitz agree on the importance of allowing "nonmarket values" to temper the "amoral" market. One might want to ask how fully they appreciate the murky underside of political motivation. From arch-nationalism in China to anti-Chinese riots in Indonesia and Hindu chauvinism in India, resentment, xenophobia, fundamentalism, and the sheer pleasure of violence are robust nonmarket values that find ample political expression.

Sometimes markets spur these passions, as was the case with the Indonesian riots that followed the economic crisis. At other times, as Montesquieu and his many successors have pointed out, tolerance and openness are market values, as is individual liberty. The famous softening of mores among commercial peoples was supposed to work against the hard edges of zealotry and nationalism. The dignity of the individual craftsman or merchant freed from feudal bonds, was as central to Adam Smith's thought as efficiency. Nor are these merely points in intellectual history. Some reformers in countries such as India endorse a liberalized economy not because they are market fundamentalists, but because they see markets as the only alternative to retrograde religious nationalism. They hope that the amoral churn of the market will tear down traditional social distinctions before bigots can make them the basis of triumphant political movements. That is not an optimal situation, but it may prove a least worst one.

The proposals that Soros and Stiglitz have made are compatible with these reservations, and, wisely implemented, they would give economic change a more humane face. Moreover, the time is auspicious for these ideas. When Paul O'Neill, Senator Jesse Helms, and the rock star Bono find common ground on foreign assistance and development, there may be enough community of sentiment to begin pressing a new program. If so, everyone involved will need what Isaiah Berlin used to call "the sense of reality" about the limits of economics, and the limits of politics.