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Joe Stiglitz is one of the most renowned economists in America. He's presently a professor at Columbia University in New York, and chair of the university's Committee on Global Thought. He received his PhD from MIT in 1967, became a full professor at Yale in 1970, and in 1979 was awarded the John Bates Cluck Award, given annually by the American Economic Association for Economists under forty who have made a significant contribution to the field. He has taught at Princeton, Stanford, MIT, and was a Drummond professor and a fellow of All-Soul's College in Oxford. Stiglitz has helped create a new branch of economics: the economics of information, exploring the consequences of information asymmetries and pioneering such pivotal concepts as adverse selection and moral hazard, which have now become standard tools, not just for theorists, but also for policy analysts. He has made major contributions to macroeconomics and monetary theory, to the development of economics and trade theory, to public and corporate finance, to the theories of industrial organization and rural organization, and to the theories of welfare economics and of income and wealth distribution. In the 1980s he helped revive interest in the economics of RND as well. Professor Stiglitz was a member of the Council of Economic Advisors from 1993 to 1995, during the Clinton administration, and served as the Council's chairman from 1995 to 1997. He then became the Chief Economist, and Senior Vice President of the Ward Bank from 1997 to 2000. In 2001 he was awarded the Nobel Prize in economics for his analyses of markets with asymmetric information. In addition to his groundbreaking theoretical work and the pragmatic policy work he's been involved in, Professor Stiglitz is well-known for his provocative views on the global economy. Many of you may recall that we had the pleasure of having Professor Stiglitz be our guest at the council about two years ago, when his last book came out. Well, Joe Stiglitz's most recent book, Making Globalization Work, is part of his effort to create a more successful and equitable world. The book draws both from his academic expertise and the time that he spent on the ground in dozens of countries around the world. So please join me in welcoming Professor Joe Stiglitz. Well thank you very much for that introduction. The title of the book actually says a great deal about what the book is about, making globalization work suggests first that it's not working. And that actually is a very important part of what I have to talk about, the various ways in which it's not working, and the reasons that it's not working. But unlike my earlier book, where I did an awful lot of complaining, I still do a lot of complaining, what I try to do in this book is to suggest what might be done about it. So the other part of making globalization work is a sense of optimism, that there are some new forums, some small some big, some that we could do right away and some that would take a long time, that could make globalization work, or at least work a lot better than it has been for a lot more people. Let me begin by describing some of the ways in which globalization has not been living up to at least what was hoped at the beginning of the current era of globalization. When it was hoped that everyone would be better off. At that time, the advocates of globalization were actually quite surprised when in December of 1999, the riots broke out in Seattle, in what was supposed to be getting a new round, a lot of people that had been called the Clinton Round. And now of course, we only remember the Seattle Riots. The, some economists thought, that the problem was really a problem for psychiatry, not for economics. Why was it that people were better off, but not happier? Why was it they didn't know that they were better off? But as economists looked at this more carefully, they realized the reason that they were unhappy was that they should be unhappy. They were actually becoming worse off. In fact, after the last round of trade negotiations, the Uruguay round that was completed in 1994, the poorest countries of the world were actually worse off. Everybody had expected in the United States, the EU, to get the lion's share of the game. But they hadn't expected it to be so unfair that the poorest were actually worse off. There was the hope that globalization would reduce the disparity between the richest and the poorest, and some of you may have seen the recent book by Thomas Freedman, called The World is Flat. Who not only suggests, the title suggests not only that it was making it more equal that we've already had a flat landscape. Well, he's right that there's been very large changes in the global landscape, but in case any of you don't know, the world is not flat. And in fact, in some ways, the world has become less flat. I mentioned before the disparity between the poorest and the richest countries has increased, what is true is that China, India, two countries with 2.4 billion people, have done enormously well, historical change of historic proportions. China's been growing at 9.7% for 30 years, India growing at 5, 6% for a quarter century, and last year, this year growing at 6, 7, 8%. They've figured out how to manage globalization. In the case of China, they've even managed it so that several hundred people were moved out of poverty. Seven hundred million, I'm sorry. Seven hundred million. I'm sorry, thank you. Seven hundred million. Seven hundred million, thank you. Many people were moved out of poverty. So the. but elsewhere, as I said, things have not worked out so well. I was on the Council of Economic Advisors when NAFTA was being discussed and it was adopted, and one of the reasons that there was a certain amount of enthusiasm for it was that it was hoped that this would reduce the disparity between Mexico and the United States. There's a sixfold disparity in income across this border. None of us took seriously the Ross Perot's worries about the giant sucking sounds, perhaps maybe Lou Dobbs, who you'll hear about next week, but and Ross Perot was proven wrong, unemployment was 6% of the time, that at the time NAFTA was signed, and it got down to 3.8%. So we lost some jobs, but we created a lot more jobs. The real hope was that NAFTA, by reducing the disparity between the United States. the disparity in incomes between United States and Mexico, would reduce the migration pressure, and addressing one of the real problems facing the United States. Well, NAFTA didn't do that. In the first decade of NAFTA, the disparity of incomes between the United States and Mexico actually increased. Of course, there are a number of reasons that I talk about in the book why this is so. It's partly, NAFTA is not a free trade agreement, that's just part of the title. It's become fashionable to call these things free trade agreements. If it were a free trade agreement, it would only be a few pages. We would say we eliminate our tariffs, we eliminate our non-tariffs, and we eliminate our subsidies, and they would eliminate theirs, and another page for Canada, and a three page agreement. But any of you who have looked at these agreements know that they go on for thousands and thousands of pages. What they really are is an excuse for every vested interest to try to make sure that other countries open up the markets to their goods, but they don't reciprocate. So they are designed, as far as they can, to be asymmetric trade agreements, and that's what they've been. There are other ways in which globalization has not born the fruits that was hoped. In spite of the fact that economists think that we've learned something in the last quarter century, I mean what else have we been paid for, and we, institutions have gotten better, supposedly, we've been giving advice freely, or un-freely, around the world, the fact is that growth in those, not in China and East Asia, but in the countries that paid attention to us, in Latin America, has been dismal. Growth in Latin America in the 90s was just over half of what it was in the 50s, 60s, and 70s, before we taught it what to do. Brazil, we sometimes forget. Had 75 years of growth at 5.7%, before 1980. Wasn't quite as rapid as East Asia, but it';s still very impressive. And then we explained it how to manage its economy, and today they feel lucky if they can get growth of 2 or 3%. In the lowering of their expectations is one of the saddest things that I feel as I visit these countries. Not only did we think that a basis of this better knowledge and better institutions would there be more rapid growth, we also thought there would be more stable growth. And yet there have been 100 crises around the world, mostly in emerging markets in the last 30 years. It's more unusual for a country not to have had a crisis than to have a crisis. Another manifestation of things not working the way they were supposed to. Partly accountable for why growth has not been done in the way it, formed in the way it should have. Is that money has been flowing from the poor countries to the rich. One would have thought, because like water should flow downhill, money should flow from the rich to the poor, but it's going in the other way. And in spite of the fact that financial markets pride themselves on being able to shift risk, slice and dice risk, risk should be transferred from those less able to bear it to those more able to bear it. And the rich are more able to bear it. In fact, the poor, the poor countries, bear disproportionately a high amount of the risk. When they borrow, they borrow short term in hard currencies. And that means when exchange rates change, interest rates change, they bear the brunt of that. And this too has enormous cost around the world. I was visiting Moldova, one of the former Soviet Union, hard to remember but at the time we has said that capitalism was a much more efficient system than communism, and we thought therefore that when they went from communism to capitalism, their economy would grow. What happened was that poverty grew, GDP fell by 70%. And when I visited Moldova, 75% of their income was being spent servicing the foreign debt. And that meant that they had no money for roads, for schools, for an economist it was interesting because we could see the process of de-development. They were going back to using horses and buggies. And the consequences of course could be devastating. While we were there, one of the daughters of one of the, of a friend of a member of our team was hospitalized, was put on oxygen, and the whole country ran out of oxygen in the middle of the night. And she died. And what we take as. take for granted for them was an unaffordable luxury. And what was the reason for this? It was very simple. Why had their debt grown? It was nothing that they had done, particularly, what had happened had their debt grown? It was nothing that they had done, particularly, what had happened was, they had borrowed in hard currencies, their currency itself was linked to the ruble, when the Russia had a crisis in 1998, the ruble fell by sixfold, and the value of their debt in their currency increased sixfold, and what was a manageable debt became an unmanageable level of debt. The problem of debt is a problem that plagues country after country. If it were only one country that were facing a problem of debt, we'd say, a pofolk of government. We all know how mismanagement can turn a country with a 2% surplus into a 4% deficit in a space of just 3 years. But it's not just one or two countries. It's country after country. And when you see it being country after country, you have to conclude, it's a systemic problem. So it was good news in the summer of 95, when the leaders of the GA got together for the third time, said that there's going to be more extensive debt relief. But they didn't ask the fundamental question, why were so many countries facing debts beyond their ability to pay. And unless they address that question, the problem will arise again. They'll get debt forgiveness, but more countries will wind up in debt, and the problem will be with us, and unfortunately these questions were not even on the table. What I would have hoped to give you a glimpse of just a few of the problems, and to convince you that there was a reason to write the book, that globalization isn't working quite the way that it was supposed to. So I want to turn now to spend a few minutes on overall perspective of why things haven't worked as well as they should have. And do it very quickly. The first is that economic globalization has outpaced political globalization. Economic globalization is the closer integration of the countries of the world, as we become more integrated we become more dependent, what happens to one part of the system affects others, that means we need more collective action, but we don't have the democratic political institutions or the mindsets that allow us to act cooperatively at a global level. The result of this you can see dramatically in so many different ways. Domestically, when we talk about an issue of economic policy, we always ask what's efficient, but also what is fair, and we look at the effects of various groups. Our trading, US trade representative, when we send him off to Geneva, we don't say, come back with a fair trade agreement. If he did that, he would be fired. We say, come back with the best agreement for America, and what we really mean is come back for the best agreement for those who are giving large campaign contributions. And you can see the disparity and the outcomes. Clinton administration, one of the big issues, the beginning administration, was the access to health care, and one of the problems was high drug prices. And the administration rightly criticized the drug companies. But when it came internationally, we were in effect in bed with the drug companies. At the trade agreement that I referred to earlier, the Uruguay round, we, part of that was a provision called TRIPS, trade related intellectual property, and it was not trade related, they just put it there so they could put it inside the agreement. There already was a world intellectual property organization, so they had to have a reason to put it into a trade agreement, so they put those words T-R in front. But no one was really fooled. The real objective of this was to make generic medicines less accessible to the poor. And this is a very important issue, because generic medicines are 5, 10% of the price of brand name medicines. So a year's treatment of AIDS medicine, generic medicines will cost under $300, for brand name, $10,000. If your income is 300 or even 3,000 dollars a year, you can't afford 10,000. So when they signed the agreement, they were signing the death warrants for thousands of people in sub- Saharan Africa who would no longer be able to afford the generic medicines that would be available, and we made generic medicines no longer available to them. Making matters worse, the end of the Cold War. In most ways the Cold War was a good thing. But the Cold War meant that we had to compete for the affections, for the interest, for the loyalty, of the Third World. So we would give money to Mobutu, knowing that that money was going to wind up in a Swiss bank account. The fact that it wasn't helping development was not the issue, we wanted to make sure that those country's rich natural resources weren't at the disposal of the Soviet Union. We had the position that the enemy of our enemy was our friend. And so we cuddled up with Pinochet in Chile. The end of the Cold War meant that we had an opportunity to re-define our international relations, international economic relations. We could either do it on the basis of a set of principles, reflecting American values, or we could let our economic interests, special interests prevail. And unfortunately to a too-large extent, we chose the second course. And that's why, as I mentioned before, just a few years after the end of the Cold War, we were pushing the kind of trade agreement, that word got around, that actually the poorest countries in Africa were worse off. And the final reason why things have not worked out as well is that we've been a little Pollyanna-ish. We actually believe some of the rhetoric that the advocates of globalization put out, that everybody would be better off. And actually, economic theory had always made it clear that that wasn't the case. What it said is that there would be winners and that there would be losers, that the winners could compensate the losers, but never did we say that they would compensate the losers. And in fact they haven't. And making matters worse is too often we've used globalization as an excuse for taking away the social protections that government in the past has provided. To explain why economic theory actually predicted in a way that the poorest in the advance industrial countries would be worse off, it's very easy to just think for a moment, what a world of globalization, perfect globalization would look like. In the kind of world in which markets were perfect. The assumption of a perfect integration, perfect markets, would mean unskilled workers all over the world would get the same wage. And that would mean that unskilled workers in the United States would have the same wage as unskilled workers in India and China. And that would mean that they would be lower than they are today. Now, my own teacher, Paul Samuelson, showed that you didn't need full integration to get these kinds of results of downward pressures on unskilled workers. It would happen even if you had partial liberalization. These are obviously effects that were never advertised by the advocates of globalization. When he wrote his work, some 60 years ago, like any work, any theory, there are assumptions. And one of the assumptions underlying his analysis was that there was the same information, the same knowledge, everywhere in the world. And that was a pretty bad assumption 60 years ago. But it's a much better assumption today. One of the benefits of globalization has been the sharing of knowledge all over the world, and that means the prediction of the theory is much better today than it was 60 years ago. And clearly I think that globalization has exerted a downward pressure. It's only one of several forces: technology, weakening of labor unions, other forces, social forces, have also had the effect. But the effects are clearly palpable. Real wages at the bottom have not only stagnated but today at the very bottom they're 30% below what they were 30 years ago. In recent years, even the middle has been suffering, meaning family income in the United States is lower than it was six years ago. As I said, globalization is only one of the forces, but it's the one force that people can do something about. Or at least they feel they can do something about. Now, some people have always had the attitude that globalization is sort of like medicine, like cod liver oil, you have to swallow it even if I don't like it. But the fact is that that's not true, it's not inevitable. And globalization is measured, for instance, by the ratio of trade to GDP, or capital flows to GDP, was stronger before World War I than it was during the end of war period. There was a backlash against globalization, and one of my concerns is that because globalization has been managed in such a bad way, with so many losers, more losers than winners in some places, that it is not unlikely that there will be a backlash. In that case, the potential benefits of globalization will not be realized. Now, most of the book is spent by looking at the problems of globalization as they are manifested in a while variety of ways. So rather than talking about these in a very abstract way, I try to look at this in very specific contexts, trade, intellectual property, the environment, natural resources, multinational corporations, global financial markets, debt. Because it's in each of these areas that you really see how things go, and you see the ways in which they go wrong, and those are the areas where you can make specific proposals, specific reforms that will make things work better. In the time that I have, I obviously can't go through all of those, so let me talk maybe with one or two until the time runs out. I mean, the time before the question period. And let me begin by intellectual property, and the reason I begin with intellectual property is that sometimes people say, well what does this have to do with globalization? Well, it's part of globalization because we made it part of globalization. We said that every country in the world had to have the American style of intellectual property regime. Didn't really have to, but as part of the WTO agreement, Uruguay round, we forced that on everybody, and that's an aspect of globalization, forcing standards, sometimes that are inappropriate, for countries at various stages of development. The intellectual property regime that's appropriate for the United States is not the one that's appropriate for a developing country, and the one that we forced, foisted on the developing countries is not even probably the best one for the United States. As an academic, as a producer of intellectual property, I obviously have some sympathy to the notion of intellectual property. If it's designed right. But I ought to share with you a minute some of my ambivalences about intellectual property. A number of years ago, in the 80s, I got a letter from a Chinese publisher that wanted me to write a preface for the pirated edition of one of my textbooks. And actually, I was actually very pleased, because you know I figured if 1/10th or 1/100th of a percent of the people in China read my book, I would have more influence than I did at home, and when you write these books, money is only one small part of why you do this, and so I was actually very enthusiastic. But I thought, before doing it I ought to ask my publisher. And he did go ballistic. So it shows the tension. now intellectual property is different from ordinary property. Ordinary property is designed to increase sufficiency. You need property rights if you're going to have incentives to take care of your property. But intellectual property is fundamentally associated with an inefficiency. Because knowledge is a public good. The marginal cost, the way economists put it, is marginal cost, of somebody else using knowledge, is zero. When I tell you what I know, you know it and I still know it. It's not like a chair, if I'm sitting on it, only one of us can comfortably sit on it at the same time. Thomas Jefferson put it much more poetically, when he said that knowledge is like a candle, that when the candle lights another candle, it doesn't diminish from the light of the first candle. But actually intellectual property is even worse than that because intellectual property creates a monopoly. A monopoly is one of the worst inefficiencies in a market economy. So the question is, why do we allow there to be this inefficiency, this monopoly? And the answer is, that because we think it will induce innovation. But if we don't design intellectual property rights, it will have just the opposite effect. And there are a number of provisions that when we design intellectual property, the length, the patent for instance, the length of the copyright, what kinds of things can be patented or copyrighted, and when we don't get it right, we get all the costs and we get none of the benefits. And in fact, there are many instances where intellectual property can stymie innovation. The two most important innovations in the 20th century were probably the automobile and the airplane. And both of those were almost stymied by intellectual property. In the case of the automobile, the George Selden got a patent for a four wheel vehicle, his intent was not to make a car, his intent was to make a cartel. And he succeeded in doing that, the other automobile companies thought it was a great thing, well who doesn't like high prices. There's only one person who had a different view, and that was Henry Ford. His view was a low priced vehicle distributed, a people's car, and he had the determination and the resources to fight the patent, and he eventually prevailed, but had he not, the car, the development of the car would have been delayed for years, decades. Given the problems of global warming, that might have been a good thing. But they didn't know about it at that time. The same thing is true in the case of the airplane. We all know about the Wright Brothers, 1903, but also Curtis got patents, and then you have what is called a patent thicket. Two people have the patents, nobody knows who to pay off, and nobody wants to develop the airplane because everybody's demanding. Anybody if you work in software know about this problem today. Thousands of patents, if you've read all the patent applications, you wouldn't have any time to do research. The likelihood when you write your software program that you're trespassing somebody else's patent is very high. Blackberry found that out, but in that case, it was actually interesting, because it was a patent that was already declared invalid in two countries. And yet Blackberry had to pay $600 million in ransom to continue operating. So what happened was, World War I, it was too important to have the airplane to allow the patent lawyers to stop all this, and US government basically seized the patents. And said, we'll determine who gets, who has to pay how much and who gets how much. Well, these are examples, there are a lot more, of intellectual property actually stymieing innovation. In the case of the developing countries, the problem is that they're paying this high price for drugs, but they're not getting any of the benefits. So what's happening is that drug companies are spending more on advertising and marketing than they are on research, more on research, on lifestyle drugs, like hair, than they are on life saving drugs, and almost all the research on life saving is for the diseases that affect industrial countries. Almost none on diseases like malaria. Now, of course, it takes resources to make innovation. It needs incentive system. So no one is saying that you don't need some incentive system. The question is, is are currently designed patent systems the right one? And the question I think is unambiguous, the answer I think is unambiguously, no. And I give an alternative system called the medical price fund, where you give a prize, and you say, if you come up with a vaccine or a cure for malaria or a drug that affects hundreds of millions of people, and has a huge cost, then you get a big prize, if it's for a small disease or for a disease that there already is a cure, you just make it a little bit better, or fewer side effects, you get a smaller prize. So you have an incentive system but then you use the market, competitive markets, not monopoly markets, competitive markets, to distribute the drug widely at low prices, rather than the monopoly system which is based on low distribution at high prices. And this is just a much more efficient system than our current system. Well, this illustrates how we can redesign incentives, markets, to make them work better, and how markets often don't work the way that they should. In each of the other areas that I mentioned I talk about specific reforms, where we can actually make our economic system, our globalization, work better. Let me conclude by sharing with you why I have some degree of optimism. Globalization is actually in a very fluid state. There are lots of changes going on. Think about the issue of global warming. It's moving on much faster than anybody anticipated. I was on the scientific panel that reviewed the evidence in 1995, it was compelling then, but I don't think any of us really thought it would proceed as fast as it has. The melting of the Arctic ice caps within 70 years. Let me just digress for a moment and share a little story, which I was in Davos, meeting a lot of the business leaders of the world got together, and at a meeting which a lot of the oil companies were, and one of these oil executives said, you know you guys are being too pessimistic about global warming. You're only looking at the negative side, you're not looking at the positive side. Because of the melting of the ice caps, we'll be able to get oil much more cheaply underneath the Arctic Sea. And the only problem is, because the United States hasn't signed the Law of the Sea, there may be a little conflict. Of who gets this oil. But we'll have this oil much more cheaply than we otherwise would have. Well, these are examples of the fluid nature in which globalization is in. The WTO has ruled that American cotton subsidies are illegal. There are lots of other changes that are going on very rapidly. The question isn't whether globalization will change, the question is whether we will make a patchwork in the system as one crisis happens after another, kicking the ball a little bit long into the next crisis, or whether we try to intelligently think about these problems, make the reforms before the crisis, do it in a more careful, thoughtful way, and this book is written in the hope that we will take the latter course. And if we do that, then I do think we can make globalization work, or at least work a lot better for more people than it has been working in the past. Thank you.