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32 of 34 people found the following review helpful
5.0 out of 5 stars Expert advice on managing Globalization, January 11, 2007
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This review is from: Making Globalization Work (Hardcover)
There is a breed of economists who have what can only be described as a mystical reverence for the market. To them Adam Smith's `invisible hand' is not a merely a literary conceit but an actual force like electromagnetism or gravity. Following the advice of Milton Friedman these economists would privatize literally everything from primary education to road maintenance to social security. The government would act as a modest referee deciding property rights as well as defending borders. This is the mindset under which the IMF and World Bank operate. It's the "Washington Consensus", a one-size-fits-all solution to all economic problems and it's been active for decades using the indefatigable wisdom of the "free market" to solve all the world's ills.

The problem is that the "Washington Consensus" as instituted by the IMF and World Bank has had disastrous results in many countries around the world most notably Russia. As the chief economist of the World Bank from 1997 to 2000, Joseph E. Stiglitz is probably a pretty decent source to go to for on why so many countries AREN'T booming after instituting IMF imposed "structural adjustments". The author offers Argentina as an example of a country which received an A+ rating from the IMF for following the Washington Consensus only to face financial calamity a few short years later.

As the author puts it, one of the main problems is that, "the Washington Consensus prescription is based on a theory of the market economy that assumes perfect information, perfect competition, and perfect risk markets". Mr. Stiglitz writes, "policies have to be designed to be implemented by ordinary mortals". Economists seem to have become so enamored by the blackboard theories behind pure free market economics that they ignore the reality of its results. Even worse, when economies follow the IMF's prescription and fail they're blamed for not adhering CLOSE ENOUGH to the IMF/World Bank dictates.

The other main problem is that the Washington Consensus is being instituted in countries that simply do not have the institutions necessary for a free market economy including strong property rights, an established tax base and the means to enforce the rule of law. The shock treatment in Russia allowed money to flow freely in order to stimulate foreign investment but all it caused was the money to drain right out. The IMF/World Bank are very inflexible for instance they admonish countries for deficit spending, in order to stimulate the economy, even when a country has accrued a considerable amount of savings. At the same time the IMF/World Bank encourages low tax rates meaning that even modest economic stimulants can push a country into deficit spending. The scary thing is that even if a country doesn't currently have loans with the IMF/World Bank they can still fear bucking the Washington Consensus given that a poor report from the IMF/World Bank can potentially scare away foreign investments.

The author wisely points out that economic growth is only real if it is sustainable. American neo-conservatives love to crow about their pro-growth support but growth is pointless if you destroy the environment and rip up all the natural resources in a few decades. Using GDP as the de facto benchmark of a countries economic progress can be very misleading. As a case in point the author offers up oil production. The faster a country can rip oil out of the ground the higher its GDP will rise but in truth the country may well become LESS valuable as its resources are depleted. Compounded that with environmental damage, that isn't being factored into the equation, and a country can become poorer as its GDP rises. This is not just some abstract case but a situation that occurs frequently.

The author discusses a lot more topics including the often anti-democratic nature of the IMF/World Bank, issues of asymmetric globalization between developing and developed nations, the stifling nature of over patenting, subsidies versus tariffs. For an economics book I found it to be very readable and extremely enlightening. Mr. Stiglitz is clearly on the progressive side of the political spectrum which is evident by his concern for the inequity in globalization. Fortunately the IMF and World Bank seem to be adjusting somewhat to the reality that strict adherence to the Washington Consensus isn't the end all be all solution. Hopefully this is a sign that the times are a changin'. Hopefully.
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Showing 1-3 of 3 posts in this discussion
Initial post: Sep 3, 2008 1:56:33 AM PDT
Kyle says:
Followers of Milton Friedman would not privatize everything. Do not confuse the radical Ron Paul-types who want NO government and everything privatized with free-market economists. What free-market economists believe in is, IN GENERAL, the government should be limited and the market mostly free and most things privately-owned. In general, government should keep a hands-off policy and keep taxes low. However, there is obviously a limit to this, and the government plays a very important role in certain areas. For example, the Securities and Exchange Commission. I am not for government regulatory agencies at all when un-needed, but I understand that without the SEC, our financial markets would be in who-knows how much chaos. I understand the role of the Federal Reserve. I understand that things such as police, firefighting, etc...need to be publicly provided as when privatized they do not function correctly. And free-market economists understand that the environment needs protection too. But what the legislators need to take into account is to make sure they do not restrict people's freedoms or destroy industries through being over-zealous in protecting the environment.

No sensible free-market economist would just switch Social Security to being privatized. I do not believe SS should have ever been created in the first place, but it is here now, so it's to stay for the time being. Purely privatizing it would be silly, as the average citizen does not know how to play the stock market at all or invest; many professionals even make huge blunders in this.

But no one can deny that SS faces some big problems either. What free-market economists seek is to combine the benefits of privatization with the security of government for SS, so that SS could make a lot more money, but still remain secure for market crises and so forth.

Belief in the free-market and invisible hand are fine, as these have been proven to work, for the most part. But there are exceptions, for things such as the financial markets in particular, where the government plays a role when required. Things such as wealth redistribution, extensive government intervention and high-level government spending, price controls, protectionism, tariffs, subsidies, etc...in general, are wrong and bad for the economy. Inequality is necessary for the functioning of a free-market economy. There is nothing wrong with a lot of wealthy people being minted or a large level of inequality, as long as the standard of living for the middle-class is continuing to increase. This just means much wealth is being created and there is a lot of prosperity. No one is entitled to the wealth created by the wealthy folk. No where does it say we are all supposed to come out equal in the end. There is a problem when the middle-class is eroding or their growth in standard of living has slowed, or stopped, while many wealthy continue to form. Blaming the wealthy for this is not necessarily correct, but it means there is a problem in the economy that must be fixed.

In reply to an earlier post on Nov 14, 2008 7:55:06 PM PST
Last edited by the author on Nov 14, 2008 8:20:55 PM PST
Kyle,
We understand what "Free Market" is as it is defined and your post is nothing but babble of this definition. Sure it works - but it does not or ever will take into account the environment of which is currently taking a beating. I imagine you might not be so aware because perhaps you are tucked away in your little apartment somewhere srrounded by the comfort of humming electrical devices. The problem with the "Free Market System" is that human greed wins out. The system will not correct and regulate itself before it becomes too late. For some reason - all you people so caught up in free market ideals have very little respect or understanding of how connected we are to this earth. If this earth goes down - we all go down with it. The real sad thing about about the "Free Market System" is the absolute abuse and greed that carries on without responsibility.
Here is the perfect example provided by your own post, "But what the legislators need to take into account is to make sure they do not restrict people's freedoms or destroy industries through being over-zealous in protecting the environment." HA HA It's a very rare moment if any that we as a nation were "Over-Zealous" in protecting environment. Obviously you must be a man who does not believe that by adding more and more CO2 into the current earth's system brings about any harmful destruction through climate change. Don't you understand what you are saying? Basically, save industry and economies over nature... nature being the only one of those three that is necessary for humans to exist. And describe what you mean by "Freedoms" Kyle! Freedoms are different from person to person - culture to culture when you bring it down to the details. Your support for industry happens to take away and intrude on some of my freedoms because I prefer more room, more trees and less people. Go get a reality check before you start vomiting your free market magic all over the place.

In reply to an earlier post on Jan 30, 2009 7:39:49 AM PST
And Clinton Kollar wins a decisive knockout victory in the debate, well done, lucky for you, your side of the argument is much easier to make.
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