Ecuador on the Global Stage: The challenges of globalization

for developing countries Joseph E. Stiglitz

Quito

July, 2006

Two challenges

• Shaping globalization– Working in concert with other developing countries– To make sure that the “rules of the game” more

effectively reflect their interests, rather than the interests of the advanced industrial countries

• Living with globalization– Learning how to cope with the rules as they are

• To maximize stable growth, promote equity, strengthen democracy, protect the environment

– Even if they are unfair– Even if they expose developing countries to

enormous risks

Shaping globalization

A PRO-POOR, PRO-DEVELOPMENT, PRO-DEMOCRACY AGENDA FOR GLOBALIZATION

Increasing resourcesEnhancing opportunitiesHelping developing countries seize opportunities,

use resources, to promote democratic, sustainable, and equitable growth

• Trade• Intellectual property rights• Investment and capital• Natural resources

Trade

• Trade agenda is tilted against the developing countries– Advanced industrial country tariffs against developing

countries four time higher than against other developed countries

– Uruguay Round made matters worse• Poorest countries actually worse off

– Development Round was supposed to rectify problems

• But what is emerging (if anything) does not deserve being called a Development Round

Bilateral trade agreements

• Are even worse• With balance of bargaining even more one

sided• So called free trade agreements are

neither free nor fair– America keeps in agricultural subsidies– America keeps its non-tariff barriers

• And large intrusions into other areas (investment, environment, taxation, intellectual property)

Bilateral agreements

• Often based on a dream– Though sometimes on fear

• That by signing agreement there will be new levels of investment and growth

• Mexico shows otherwise– Growth lower than in earlier decades, disparity between Mexico

and U.S. increased; jobs created early on lost by end of decade• Foreign banks may have contributed to low credit• Reduced tariff revenues—less money for needed investments• Attention diverted from other major elements of growth agenda

– Poorest (corn farmers) made poorer as a result of huge U.S. corn subsidies; a decade of real wage stagnation

– Intrusions in environmental regulations

Trade can be a powerful force for growth

• Success of East Asia based on export led growth– Access to international markets– Advanced technology

• Made sure that job creation matched job destruction– Comprehensive strategies for growth– Access to credit– Education, technology

But for too many developing countries this has not been the

case• On average, trade liberalization has not been associated

with growth (UNDP)– Though because of success of East Asia, there is a positive

association between growth and trade

• Internal barriers to trade and supply side constraints limit ability to take advantage of new opportunities– Rationale for aid for trade agenda

• And trade liberalization has been associated with growing inequality– Though China’s and East Asia’s pro-poor agenda meant that

there was poverty reduction– Link for advanced industrial countries long predicted by

economic theory

Lessons

• Be cautious about signing trade agreements– May be least bad alternative

• Look especially carefully at non-trade provisions: investment and intellectual property

• The world needs a true development round

Intellectual Property

• IP provisions of Uruguay Round were unbalanced– Represented interests of U.S. entertainment and

pharmaceutical industries– Even the President’s Council of Economic Advisers

and Office of Science of Technology Policy opposed• Bad for American science• Bad for World science• Bad for innovation• Enhancing dangers of monopoly• Bad for developing countries

Failed to protect interests of developing countries

• Access to advanced knowledge necessary for development• Put drug company profits above the right to life itself

– Little of money going for research• More money to advertising than research

– More money to life style drugs than to life saving drugs– Even less going for research for diseases relevant to developing

countries • Failure to protect traditional knowledge

– Leading to bio-piracy– Lack of incentives for biodiversity

• Developing countries are providing global environmental services (biodiversity and carbon sequestration) for which they are not being compensated– Value exceeds all of foreign aid they receive

• Intellectual property should never have been included in trade agreement

• Need for TRIPs minus

• But in bilateral trade agreements, US has been pushing TRIPs plus– Less access to generic drugs even than in US

Investment Agreements

• Problems just becoming understood• Giving rights to foreign investors than are even

greater than those provided to domestic investors

• Restricting legitimate legislation, e.g. protection of environment– Chapter 11 of NAFTA– Regulatory takings measure was actually strongly

opposed by Clinton Administration• Disputes sent to questionable judicial

proceedings – Without standard protections of the rule of law

Natural Resources/Resource Curse

• Countries with an abundance of natural resources have done more poorly than those without resources– Paradox of plenty– There are some exceptions—need not be the case

• Explanations– Instability of resource prices

• Learning to manage instability• International Lending exacerbates problem• IMF was supposed to engage in offsetting, countercyclical lending

– Too often done just the opposite– And policy stances have worsened the problem

• Need to restrict capital inflows in booms

Resource Curse

• Dutch disease– Currency appreciation– Oil/gas drives out other industries– But oil and gas have few jobs– Rich countries with poor people– Need stabilization funds, active exchange rate

policies

Resource Curse

• Political– Energy sent on rent seeking rather than wealth

creation– Wealth captured by elites

• Could have more egalitarian societies• But actually, resource rich countries market by greater

inequality

– Perpetuates themselves in power• Negative relation between democracy and oil/wealth• Sometimes by force of arms, sometimes by control of media

and other “more democratic” means

• Marked by high levels of corruption– Even in advanced industrial countries, oil and mineral

companies fight to maintain give-away• Sometimes outright corruption, sometimes campaign

contributions– If they can get away with it, profits are maximized by paying a

bribe rather than paying full market price for their resources

• Resisted initiatives for transparency• Fought development of better auction procedures• Fought environmental safeguards

– And used limited liability for avoiding paying the full consequences of their damage

• Cheated on contracts (Alaska, Alabama)

Consequences

• Resource rich countries get less for their resources than they should

• Too little of what they get goes for development

• Too little of what they get goes to the poor

• While democracy is undermined

• And the environment is degraded

There is no easy answer…

• But international community could do more by restricting corruption, bank secrecy, arms sales

• Forcing more transparency – It would be easy: tax deductions only for those who

report completely• Setting benchmarks for compensation for

resources• Recognizing that by transfering technology,

agency costs can be reduced– State oil and natural resource companies most

effective in realizing for their country the value of their resources

II. Coping With Globalization

• Coping with trade liberalization– Including Intellectual property

• Coping with financial market instability

• Encouraging investment

• Coping with resource exploitation

Coping with Trade liberalization

• Be careful in signing trade agreements

• Use (but do not abuse) fully the flexibilities/protection– Safeguards– Compulsory licenses– Regulations to ensure credit available at

affordable terms

Coping with Trade liberalization

• Make sure that one can take advantage of new opportunities– Investments in infrastructure– Credit availability

Coping with financial market instability

• Do not borrow more than absolutely necessary

• Borrow as much as one can in domestic currency

• Restrict capital inflows• Use wide range of instruments—including

taxation of capital gains (including on exchange rate changes)

• Hold diversified reserves

Foreign investment

• Can bring not only capital, but access to foreign technology, markets, training

• But also can despoil environment, seek special protectionist and tax favors– Foreigners should be treated no more favorably than

domestic enterprises– And just as foreigners worry about their investments

being appropriated without copensation, countries should worry about their assets (natural resources) being appropriated without compensation

• Principle of symmetry

Natural Resources

• If foreign companies are to be involved, well-designed auction (competitive bidding)

• Transparency and benchmarking• Try to acquire technology/avoid extra layer of

agency costs– Malaysian example

• Strong environmental and health protections– Avoid short sighted perspectives– Impact on GDP not correct perspective– Impact on Green NNP

Making Globalization Work

• Major theme of forthcoming book Making Globalization Work is that globalization, as it has been managed and shape, has not lived up to its potential in helping developing countries—and in some cases has actually weakened them.– Wide reform agenda– Will be resisted by corporate and other special

interests which benefit from status quo, both in developed and developing countries

– But vast majority in both North and South could benefit

• We can reshape globalization to make it fairer, to make it reflect interests of all citizens, poor as well as rich, in the developing and developed world; in ways which benefit both the current and future generations, and which both protect the environment and strengthen democracy