Making Globalization Work | Joseph Stiglitz | Talks at Google

So we obviously don't have enough books, we don't have enough chairs, we don't have enough resources. Perfect metaphor for talking about globalization from the google.org and Google foundation side. I'm particularly happy to welcome Joe Stiglitz here today because he's been writing about globalization and trying to carve a Goldilocks middle of the road approach between sweatshops that are enslaving and sweatshops that are liberating, which is, I think, a lot of what he's going to be talking about today. For those of you who don't know his background, it's like a litany of the top accomplishments in the field of economics. And I'm just going to read them to you so that you, after hearing them, are terrified to ask them a question. We'll start off with a small one. When he won the Nobel Prize for Economics in 2001 with Michael Spence and George Akerloff for contributions to understanding how asymmetries in information change the behavior of individuals. He is currently a university professor at Columbia University, but previously he was chair of President Clinton's Council on Economic Advisers. And while many people in Google sometimes think that this is actually President Clinton's cabinet in exile, here at Google, he has found many of his friends here in the last couple of days. A bit of an old, old home day for him. He was also senior Vice president and the chief economist of the World Bank. So he got all the major food groups, he got the World bank, he got Clinton and the Nobel Prize. More recently he has written, I think, sensitively, extensively and soberly about the problems of economic globalization. His book Globalization and Its Discontents, even the title, which I understand Hal Varian gave him, captures, I think the poignancy of the struggle to liberate hundreds of millions of people from the shackles of poverty and bring them up a notch without causing economic convulsion around the world. That book examined how major institutions of globalization operate. And it took a look and I think a tough minded and a fair minded look at the consequences of how they operate. He's on a book tour. His latest book is Making Globalization Work, which for us in google.org and the Google foundation are really part and parcel of what we're trying to understand as we struggle with methodologies of helping to mitigate the increasing gap between the rich and the poor and bring people out of poverty, especially in Africa, in India, in parts of Latin America. In this book he extends his investigation and proposes policies and structures which will allow countries to enjoy the benefits of globalization while mitigating and ameliorating their disadvantages. I can see from all the people who are here, you join me in welcoming Professor Stiglitz to Google.

Well, it's a real pleasure to be here and to see so many of you. And as Larry mentioned, it was also when you see so many old friends that I hadn't really realized been here. Hal Varian was in the first class I taught at MIT in 1966. And then there have been a lot of other people that I worked with in Washington. The subject of my talk is my book, Making Globalization Work. And the title conveys a lot of what the book is about. First, Making Globalization Work suggest that it's not working. And much of the book is about the ways in which it's not working and the reasons it's not working. But Making Globalization Work also conveys my sense of optimism that we could make it work or at least work a lot better than it has been. And much of the book is based on the basis of the diagnosis of the problems that I mentioned before. But their causes, what can be done? What are some of the reforms in the way we run globalization to make it work at least better than it's been for more people than it's been working before? Let me begin by trying to describe fairly briefly some of the ways in which I think globalization has not been working. And given the limited amount of time, I'll have to be fairly very brief about this. At the beginning of the discussions of globalization, modern discussions, the hope was that everybody would be made better off. The expression was sometimes a rising tide lifts all boats. But a more apt description of what often happens is that a riptide destroys a lot of smaller boats, and particularly if there aren't life vests. What has happened in recent decades is that while economic theory have predicted that, oh, and I'm supposed to turn on this, okay, well, economic. I don't know if it'll make any difference. While economic theory had predicted that the disparities between the richest and the poorest would be narrowed, in fact, those disparities have increased, and not only between the richest and poorest countries, but also within most countries around the world, the level of inequality has been increasing, and globalization has at least something to do with that. Closer at home, the disparity between Mexico and the United States is larger than today than it was. I was in the Glenn White House when we talked about nafta. One of the arguments for NAFTA was that it would do something about the six fold differences in income across that border, disparity in income, which gives rise to enormous immigration pressures, which have consistently been a problem. But as I say, a decade after the beginning of nafta, the those disparities had actually increased. And in some ways, if I have time and questions we can talk about NAFTA contributed to that. Thomas Friedman has written a very influential book called the World is Flat. And a simple point I want to make clear is the world is not flat. And in many ways the world is getting less flat. The good news is that 2.4 billion people living in China and India have been growing very rapidly for a quarter century. Incomes in India have been growing at 5,6%. This year it's expected to grow at 7 to 8%. Case of China, growth has been just under 10% for 30 years. And they've managed globalization reasonably well, so that several hundred million people have moved out of poverty. But elsewhere in the world, globalization has not been managed as well. And there are these problems of increasing disparity. In some ways, the forces that Friedman talks about as having made the world flat have actually contributed to, to making it less flat. And he emphasizes in his book the importance of technology, of which Google is at the center. And what is so clear is that if you don't have access to that technology and if you don't have the education to make use of that technology, you will fall farther and farther behind. And one of the problems is that countries like Africans, like Africa, they do not have access to those resources, to that knowledge, that education. And that is one of the reasons that the gap has been increasing. But there are other reasons. The international community makes rules, rules of trade. And those rules are made mostly by the advanced industrial countries and particularly by special interest in those countries for their own interest. The result of this is that the last trade agreement, The Uruguay Round, 1994, actually made the poorest countries worse off. It wasn't just that the United States and the EU got the lion's share of the gain. The poorest countries were actually poorer than they had been before that agreement. There are other funny things, funny other ways in which globalization has not worked out in the same way that many people had hoped. The growth was supposed to be faster. In fact, growth on average has been slower in Latin America and Africa. It was supposed to be more stable. There have been 100 crises in the last 30 years. Money is supposed to flow from rich countries to poor countries. In recent years, money has been flowing from poor countries to rich countries. On the other hand, Talk about financial markets being able to slice and dice risk, move risk from those less able to those more able to bear risk. And yet a disproportion of the risk still is born by those in the developing countries when they borrow money. They borrow money in short term loans in hard currencies, which means that they have to bear the brunt of interest rate and exchange rate fluctuations. And this can have enormous consequences. I was in a few years ago, I was in Moldova, one of the former Soviet Union republics. Have to remember that at the time we had said that communism was an inefficient system. Market economy was efficient. Moving from communism to market was supposed to increase their incomes. In the case of Moldova, it had led to a 70% decrease in their income and poverty was soaring. But when we went there, 75% of the budget of the government was being spent on servicing the foreign debt. And the reason was very simple. They had borrowed in her currency when their own currency was linked to the ruble, when the Russian ruble, when Russia had the crisis, the ruble fell sixfold and the value in terms of their own currency of their debt increased sixfold. For an economist it was interesting. We could see the process of de development. You could see people going back to using horses and buggies. It was just, you know, a totally depressing scene. The whole country ran out of oxygen in the hospitals and people on oxygen died the night while we were there. And what we take as a necessity take for granted, they take as an unaffordable luxury. If there were only one country having a crisis, only one country not being able to pay back its debt, you could claim the problem was a profligate government. You could talk about corruption. We all know how a country can go from a situation where you have a 2% of GDP surplus to 3% deficit in a span of just a few years, with not so good economic management. But the problem is in the developing world, it's country after country. And as a social scientist, when you see a pattern like that, when you see country after country, you have to say it's a systemic problem. And therefore you have to look for systemic cures. It was very good news that at Gleneagles a year ago summer, the G8 leaders decided to give for the third time debt forgiveness to the poorest countries. But they didn't even discuss the problem of why are so many countries having debt beyond their ability to repay. And if they don't discuss that, if they don't solve that problem, debt forgiveness is just a temporary issue. And there'll be a debt problem another five years along the way. Well, these are some of very quick picture of the ways in which globalization has not worked out in the way that it's hoped. What are the reasons? Well, in the book I look at globalization not only from the broad view, but look at it in all its manifestations. In my earlier book I focused mostly on the World bank, the imf, the global financial institutions. But globalization touches every aspect of society. Trade, intellectual property, environment, natural resources, multinational corporations, as well as financial markets. And I try to look at each of these, the nature of the problems in each of the areas and what can be done. But there are a couple overarching aspects that I just want to mention very quickly. The first of these, the underlying problem is that economic globalization has outpaced political globalization. Economic globalization means that we've become economically more integrated, more interdependent. That means what happens in one part of our global economic system has effects in other parts of the system. That means there's more need for collective action to doing things together. But unfortunately we don't have either the political institutions or the mindsets to do this effectively democratically. And you can see that in a whole variety of One of them is that when we're talking about economic policies inside the United States, we always talk about what is efficient, but also what is fair, what is the effect on various groups. But it comes internationally. We don't tell our trade representative, the ustr, when he goes to Geneva to negotiate agreement. We don't say come back with a fair agreement. If he did that, he would be fired. We say come back with the best agreement for the United States. But we really mean come back for the best agreement for our campaign contributors. And that's what they do. And you can see that in some specific context. For instance, the beginning of the Clinton administration, a big issue was access to health. And one of the problems was the high drug prices. And there was a lot of acrimony about, you know, between the Clinton administration and the drug companies about drug prices. But internationally we were to a large extent in bed with the drug companies. The provision of the Uruguay Round trips called trade related intellectual property had nothing to do with trade. It was only said trade related because so they can put it inside an international agreement. There was already the World Intellectual Property Organization and they had to have some justification of why this was being dealt with in the context of trade. The whole purpose, one of the main purposes of trips was to make access to life saving medicines, to generic drugs less available. And the reason this is important is that brand name medicines often sell for 10, 20 times the price of generic medicines. In the case of, say, AIDS medicines, a year's treatment, generic medicines can be under $300. The brand name cost in the United States is $10,000. And if your income is 300 or even $3,000, you're not going to be able to afford a $10,000 treatment. So that was the intent and that was the effect. It meant when the trade ministers were signing the agreement in Marrakesh, they were in effect signing the death warrants on thousands of people in Sub Saharan Africa, India and other developing countries. Interestingly, both the Council of Economic Advisers and at least many people in the Office of Science and Technology Policy thought that this was bad not only for the developing countries, but was bad for American, the American economy and for American science and global science. It was not a good structure to intellectual property. And I'll come back and talk about that a little bit later. The second reason exacerbating these problems is the end of the Cold War. In most ways, the end of the Cold War was a great thing. But during the Cold War, we had to fight to win the hearts and minds of those in the developing world, in the Third World. And that meant that we would give aid assistance to people like Mobutu in Congo, knowing that that money was going to go into a Swiss bank account, not help the development. But it did what it was intended to. Mobutu stayed on our side, at least, didn't go over to the Russia side. We had the view that the enemy of our enemy was our friend. So Pinochet we could cuzzle up to. With the end of the Cold War, we have the opportunity to try to reshape globalization or international economic, international economic order to reflect our principles and our values, or we have the opportunity to try to reshape it to reflect our own economic interest or the interest of our multinationals. And to a very large extent, we chose the second course. And that was why, just shortly after the end of the Cold War, we had the Uruguay Round Agreement that I mentioned before left the poorest countries worse off. And the final reason that globalization has not done as well as it should have is that we've had a little bit of a Pollyannish attitude view was that everybody would be better off. The view that I mentioned before, but in fact, what the economic theory had always said was that countries would be better off, there would be winners, and the winners could compensate the losers. But it never said that they would Compensate the losers. In fact, it predicted that there would be some very big losers. And the way to see this is to envisage for a moment what a world of complete globalization with perfectly working markets would look like. Now, we don't have anything near that, so you don't have to worry. But just imagine what the world that those who advocate full globalization would like to see. Well, it would mean that unskilled wages everywhere in the world would be the same. Unskilled workers in the United States would get the same wages as unskilled workers in India and China. And that means there's an enormous downward pressure on their wages. Now, globalization is not the only force that is exerting downward pressure at the bottom, but it is one of the forces, and it's one of the forces that a lot of people think that they can do something about. The magnitude of these effects are really quite striking. And they're not just short run. Real wages at the bottom in the United States today are about 30% below what they were 30 years ago. And the last six years, even in the middle has seen the income, real incomes decline. Basic point I want to stress, and really the point that Larry was making is that unless we can make globalization more equitable, unless the fruits of globalization are more widely shared, unless there are more winners and fewer losers, there can be a backlash against globalization. Now, some people think of globalization as something like medicine, cod liver oil, that you just have to swallow and accept and it's inevitable. But that's not true. Globalization as measured for instance by the ratio of trade to GDP or capital flows to GDP was stronger before World War I than it was the interwar period. So there can be a backlash. And we've seen already inklings of some of that kind of backlash. And that's why this issue is extraordinarily important, important for those who are advocating globalization and that the interest in making globalization work is really, I think, in everybody's, in everybody's interest. Well, as I said, much of the book is trying to describe in more particular ways how we can make globalization work in each of the areas that I mentioned. And given the limited amount of time, and I want to save most of the time for questions, let me just talk about two areas that I think probably of interest to people here. One is intellectual property. And obviously in Silicon Valley, people think intellectual property is very important. And it is. And as an academic, I also feel it's very important. I'll tell you a little story though, that shows a little bit of the ambivalence that most academics have towards intellectual property. I was about 20 years ago, I got a letter from a Chinese publisher wanting me to write a preface for a pirated edition of one of my textbooks. And I was actually quite enthusiastic because I figured if 100th of 1% of the people in China read my book, it's a bigger audience than I'll get anywhere else in the world. So, you know, and you write these books mainly, you do your work mainly not motivated by pecuniary returns. The main motivation is ideas affecting the world, trying to solve some economic problems. That is the motivating factor. It's not money. So disseminating ideas was to me, an unambiguous positive. But I thought before I wrote this preface, I ought to check with my publisher, and he went ballistic. Well, intellectual property is different from other kinds of property in that it creates an inefficiency. Ordinary property we think of as important. Property rights are important. Everybody talks about property rights as a necessary part of, of the efficient market economy. But intellectual property rights creates an inefficiency. Why? Well, because knowledge, as economists call it, is a public good. To use a technical way of saying the marginal cost of using knowledge of somebody else knowing the knowledge is zero if it's unlike ordinary goods, like a chair. If one person is sitting in the chair, another person can't sit in the chair without high discomfort. But in the case of knowledge, after I've told you what I know, you now know it. But I still know it, right? I haven't lost it. Well, Thomas Jefferson put it actually much more poetically. If you go to the Jefferson Memorial, you can see this where it says, knowledge is like a candle. When a candle likes another candle, it doesn't diminish from the light. The first candle. Well, intellectual property not only restricts the use of knowledge, it actually gives a monopoly power. And we know that monopoly is very inefficient. So the question is, why do we do this thing, create this intellectual property that has such inefficiencies? Well, the answer is to motivate innovation. And that is it plays a very important role in motivating incentivizing innovation. It's not the only incentive. As I say, a lot of the basic research is done not with that as part of part of the incentive. There are other incentives that are just as important. But if you don't get intellectual property rights correct, you can have all the disadvantages without the advantages. And what I mean by correct? Well, intellectual property has a lot of dimensions to it. It's the length of the patent or the copyright, the breadth, the conditions under which you can get it, a whole set of terms which affect, which relate to that describe the intellectual property regime. And if you don't get the balance right, you get the disadvantages of without the advantages. And historically, we've known about that for a long time. It's not been talked a lot about. But in the 20th century, the two most important inventions, innovations arguably were the automobile and the car. And both of those were almost dymied by intellectual property. In one case, the Wright brothers got a patent on the airplane after Kitty Hawk, but so did somebody else called Curtis, and they developed what is called a patent ticket. Anybody wanting to develop an airline airplane had to pay both of them and no one could pay both of them. And so nothing happened until World War I came along. And the U.S. government said it's too important to have an airplane to allow the patent lawyers to stymie the development. And the result of this was they seized the patents and decided who was going to get what and who was going to pay how much, and we got the airplane. More recently, the story, all of you probably know the story of BlackBerry where it had to pay $600 million ransom to continue to operate to a patent lawyer who had bought a patent from somebody else for a patent that had already been declared invalid in two other and probably will not be sustained in the United States. And yet the way our intellectual property regime works says that if you have that patent, nobody can trespass it. Well, these are examples of the ways in which, if it's not correctly designed, it can have very adverse effects in the area of health. You can see it even more dramatically because what's at issue is not just a question of money, it's a question of life. There was a race, a very major important project, the Human Genome Project, to decode the human genome. It was an orderly process and clearly on target. But a few private companies decided that if they could go a little bit faster, pick out a few hopefully valuable genes, they could get a patent on the gene. What is the social value? Well, they decoded it maybe a day or week, a month earlier than the human genome project, but the social value of that was almost nil. The social cost is enormous. One of them, for instance, got a patent on the gene that's related to breast cancer. Another company wanted to provide a free test for breast cancer. But this company that hugs the genes said, no, no way. We have to get several thousand dollars to. You have to pay us if you want to find out whether you are susceptible to breast cancer. And the result of that is large numbers of people will die unnecessarily. Case of Canada, they've decided not to recognize this patent. So there is an element of discretion here. But the way the American system has been going has been to restrict the usage. Well, in the context of developing countries I mentioned before, the whole intent was to reduce access to generic medicines. The whole intent of the TRIPS agreement, and it's done that. What have they gotten out of it? Well, the pharmaceutical companies have not used that money to spend that money on research for the diseases of the developing countries. They spend more money on marketing and advertising than they do on research, more money on research on lifestyle drugs like hair than they do on life saving drugs. And almost all the money on life saving drugs is spent for those diseases. For the advanced industrial countries, it is all understandable. It is market economics where the returns are. But that does not mean that it is socially efficient or socially desirable. And there's an alternative system that I describe in the book, which is the prize system, where you give a medical prize, where you give a prize for those who discover a vaccine, a cure to an important disease like malaria, and a small prize to somebody who discovers another drug for which there already is a cure, that would provide the resources, the incentive to develop, to do the research that you need. The American taxpayers are paying for this anyway through Medicare, Medicaid, through a whole. The question is, are they paying for it in an efficient way? And the answer clearly in the current system is no. What you would do once you have.

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Innovations then is use the competitive marketplace to distribute these drugs, vaccines, widely. So you use competition to drive down the price and increase the quantity, as opposed to the current system, which is based on a monopoly system, which is raising the price and restricting the quantity. And obviously, if you have knowledge, you want that knowledge to be used and disseminated as widely as possible. And as I said, in this particular case, the cost of not doing that is enormous. So that's an example, and it's an important example because it illustrates the general principle. You need resources to do anything, you need resources to innovate. Incentives matter. But too often, without thinking about things, we've wound up with systems where the incentives are not working in the right direction and that there are ways of redesigning the incentive structures to try to use the resources that we have in a better way to direct them to have increased both economic efficiency and overall equity. Let me spend a moment talking about the environment I spent a lot of time a chapter in the book called Saving the Planet. The reason I talk about the issue of global warming is twofold. It exemplifies the failures of globalization, the global governing system. But also, even if we solve the problems of economic globalization, if we don't solve our environmental problems, it won't do us any good. So these are really first order issues. I was on the IPCC Intergovernmental Panel of Climate Change that reviewed the evidence in 1995. And then it was, even then it was overwhelming. But since then, what has happened is made it even stronger. One of the things, you know, for instance, we knew that the Arctic ice cap was melting, but we didn't anticipate to melt anywhere near as fast as has been occurring. I should tell just a brief little story. I was at Davos last year, one of the sessions on global warming. A large number of oil companies were there and one of the oil executives said, you know, you guys are just much too pessimistic. You're only looking on the gloomy side of things. You know, there's a bright side to everything. The melting of the Arctic ice cap means that we are going to be able to get the oil underneath the Arctic sea at a much lower cost. So there's only one little problem. The United States has not signed the law of the sea. So there may be a little war about who gets this oil. It is unbelievable. But these are actually things that do happen. This is a particular concern for developing countries because they are among those that are going to be much most affected. The most vulnerable, Bangladesh, you know, one of the poorest countries. A third of the country will be underwater. I had a meeting with a number of the Pacific island leaders. The Pacific islands, they were in New York for the UN meeting. Most of them see their days as numbered. They will be underwater. They just won't exist anymore. So for them, this is a matter of life and death. No war could do what we are doing to them as a result of global warming. Now, for an economist, the problem of global warming is a very simple one. It's a question of externalities. We are imposing costs on others that the greenhouse gases, the emissions of greenhouse gases lead to the warming of the atmosphere. Something that actually was predicted in a sense. One of the things that very interesting as you start getting into this is realize that there are some physicists that made a back of the envelope calculations 100 years ago, didn't know that there was going on, but they asked the question, what would happen if concentrations of Greenhouse gases increased and their predictions were remarkably accurate even before the big computers. The, the, As I said, the global warming is going to affecting the most vulnerable the most. But we aren't doing anything about it. The way economists think about it is as an externality. Whenever there's an externality, you make people pay for the cost that they're imposing. And that means a tax, some kind of a charge, a carbon tax. And that was one of the things that the Clinton administration proposed in the beginning. Now Kyoto was a major success. In some ways the world got together very disparate groups and reached an agreement. But in other ways it was a big disappointment. It only covers about a quarter, a third of all the sources of greenhouse gas emissions. United States was not, didn't join the developing countries that within 30 years will be accounting for about 50% of the emissions aren't in. And deforestation, which accounts for about 20% of the emissions, also is not a part of Kyoto. And so as I say, much more was left out than was brought in. The Kyoto approach has reached an impasse. The problem is a very simple one that it's impossible to get an agreement about target reductions between the United States on the one hand and the developing countries and the other. The developing countries say why should we have less of an emissions permit, emissions target per capita than you do. But if every country got the same as the United States, the amount of emissions would be enormous. The world, it would not be tolerable. More, put it another way, it would put no constraints on the developing countries for another century. So we are at this impasse where a target approach simply is not going to work. And this alternative approach of a global tax, carbon tax, I believe is an alternative. The interesting thing is there is a beginning now of a movement in this direction. The head of the Conservative Party in the UK has said it makes so much more sense to tax bad things like pollution than good things like work and savings. And so why don't we shift the burden of taxation away from working savings towards taxing pollution. And if you do that, incentives matter and people will then pollute less and that we can do something about this basis. Now the fact that even the Conservative now in England is moving this way, I think is providing a basis of an alternative potential approach to this. In the book I talk about how what we can do about deforestation, that was a really minor mistake with major consequences. We said that countries could get credit for planting forests but not for not cutting down their forest. That means a country like Papua New guinea is Better off cutting down its forest than replanting it, than keeping it. Now you think about that. It sounds pretty stupid. And it's amazing how long it takes to move this idea through the political process. And we worked with a group of us in Colombia have been working with, formed a coalition called the Rainforest Coalition, which has actually succeeded now in getting this issue on the next agenda, the post Kyoto agenda, for where we go from here. Well, let me just conclude with sharing, with a sense of optimism, a mild sense of optimism. A lot of people ask me, you know, why do I think, you know, I've described all the problems, the roles of special interests, how they shape globalization. Do I really think giving a sermon or writing a book is going to make any difference? Aren't these forces too strong? Won't they just keep going on the way that they've been? I think the answer is that globalization is in a very fluid state. Lots of things are changing. I talked about global warming. The evidences of that are much more rapid than anybody had anticipated. Talk about trade agreements. When the protests broke out in Seattle in 1999, the idea the problems were not very much in the air. Today, everybody understands them. The WTO created a rule of law, was an imperfect one, but still a rule of law. And they've ruled that the United States cotton subsidies are illegal. So we continue to subsidize them. 25,000 rich American farmers share 3 to 4 billion dollars a year, causing incomes of some 10 million people in sub Saharan Africa to go down. But eventually those will go. These are just a number of examples of things, the ways in which globalization is changing. The real issue in my mind is the following. Are we going to try to patch globalization, as it were, have a crisis? We'll deal with the problem, find some temporary solution, as the expression goes, kick the ball down the road a little bit till the next crisis comes along. Or can we make globalization work better by trying to think thoughtfully about the problems? Think thoughtfully of realizing that there are winners and losers, that we can redesign globalization to make sure that there are a lot more winners. And this book was written in the note with the hope that in the belief that there are a lot of these reforms that we can undertake that will succeed in making globalization work, work for a lot more people, so that the potential that the advocates of Globalization talked about 25 years ago will really be realized. Thank you.