1. ETHICS AND THE ECONOMICS OF GLOBALIZATION
Joseph E. Stiglitz
2004 Tanner Lectures
Oxford

2. OUTLINE IS THERE AN ETHICAL DIMENSION TO ECONOMIC BEHAVIOR?
THE RIGHTS PERSPECTIVE
ETHICAL DIMENSIONS OF GLOBALIZATION: PRINCIPLES
ETHICAL DIMENSIONS OF GLOBALIZATION: TRADE
ETHICAL DIMENSIONS OF GLOBALIZATON: FINANCE
ETHICAL DIMENSIONS OF GLOBALIZATION: ADVICE
CONCLUDING REMARKS

3. IS THERE AN ETHICAL DIMENSION TO ECONOMIC BEHAVIOR?
ADAM SMITH’S INVISIBLE HAND:
INDIVIDUAL’S, IN PURSUING SELF-INTEREST, PROMOTE GENERAL INTEREST
Arrow and Debreu showed sense in which (“Pareto efficiency”) and conditions under which Adam Smith was correct—Fundamental Theorem of Welfare Economics

4. ADAM SMITH’S INVISIBLE HAND
IMPLICATION: INDIVIDUAL’S ONLY NEED TO THINK ABOUT SELF-INTEREST
BUT ONLY LEADS TO EFFICIENCY: ETHICAL ISSUES REMAIN ABOUT DISTRIBUTION OF INCOME

5. MARKET FAILURE AND THE FAILURE OF ADAM SMITH’S INVISIBLE HAND
WHEN THERE ARE “MARKET FAILURES” THE PURSUIT OF SELF-INTEREST WILL NOT LEAD TO ECONOMIC EFFICIENCY
MARKET FAILURES ARE PERVASIVE

6. MARKET FAILURES ARE PERVASIVE
Externalities—environmental pollution
Lack of competition—exploiting the use of market power
Incomplete markets—poor countries bear risk, rather than risk being transferred to those most able to bear it
Information problems

7. MARKET FAILURES ARE PERVASIVE
WHEN INFORMATION IS IMPERFECT AND MARKETS INCOMPLETE—THAT IS ALWAYS—REASON THAT INVISIBLE HAND OFTEN APPEARS INVISIBLE IS THAT IT IS NOT THERE

8. WHEN INFORMATION IS IMPERFECT INVISIBLE HAND FAILS
Greenwald-Stiglitz theorem: market economy is essentially never constrained pareto efficient—taking into account costs of information
--trade liberalization may lead to Pareto inferior outcomes (Newbery Stiglitz)
--capital market liberalization increases risk and lowers welfare
American corporate CEO’s pursuit of greed (stock options, IPO’s, etc.) did not enhance economic efficiency; lead to bubble which burst, at great cost to American economy

9. WHEN INFORMATION IS IMPERFECT INVISIBLE HAND FAILS
PRINCIPLE AGENT PROBLEM
Agent has opportunity to act in ways which are not in interests of those for whom he works
Not motivated by “moral obligation”
Only by incentives
Economic problem is to find best incentive schemes

10. PRINCIPLE AGENT PROBLEM
BUT GENERAL WELFARE MAY BE ENHANCED IF INDIVIDUALS’ BEHAVIOR IS GUIDED BY NORMS AND VALUES, NOT JUST BY SELF-INTEREST
Norms can be “enforced” by social sanctions
But is this just a broader definition of acting in “self-interest”?
Still, goes well-beyond narrow Smithian conception
Particularly clear in case of externalities (littering)
And in case of agency: “fiduciary responsibility”

11. GLOBALIZATION MAY HAD ADVERSE EFFECTS ON EFFICIENCY
BEYOND MARKET FAILURES ASSOCIATED WITH INCOMPLETE MARKETS AND IMPERFECT INFORMATION
NON-MARKET INSTITUTIONS PLAY AN IMPORTANT ROLE
AND GLOBALIZATION MAY WEAKEN THESE NON-MARKET INSTITUTIONS
Families provide insurance and other non-market services
Market insurance weakens role of family
General equilibrium analysis (converse of Arnott-Stiglitz which showed how non-market institutions may weaken market institutions and lower social welfare)
Globalization may undermine other forms of social capital

12. BEYOND EFFICIENCY TO SOCIAL JUSTICE
Rawls—behind veil of ignorance (though not necessarily max-min)
ethical aspects of the exploitation of market power
motivated concerns about usury
Particularly important when considering intergeneration equity—environment

13. SOCIAL JUSTICE FOCUSES NOT JUST ON OUTCOMES, BUT ON
PROCESSES
OPPORTUNITY

14. PROCESSES Difficulty of ascertaining and ensuring fairness of outcomes
May be easier to ascertain fairness of process
Includes participation, voice in decision
Helps mitigate agency problems

15. OPPORTUNITY
Way of reconciling concerns about incentives, individual responsibility

16. CAPITALISM/MARKET ECONOMY “WORKS” BECAUSE UNFETTERED CAPITALISM IS TEMPEREDBy
Awareness of market failures
“Social contract” ensures modicum of social justice

17. II. THE RIGHTS PERSPECTIVE
INCREASING EMPHASIS ON RIGHTS
Include economic rights
Not just property rights
Debate about whether rights are just, or at least largely, instrumental: property rights important because they enhance economic efficiency

18. HOW DOES ONE RECONCILE “RIGHTS” PERSPECTIVE WITH TRADITONAL ECONOMICS PERSPECTIVE?
Is there a lexicographic ordering?
With rights given “priority”?
What is nature of “economic rights”—right to medicine, education, housing?
Standard economics emphasizes trade-offs, no absolutes
Can’t be “absolute rights” (at least with respect to economic rights): Poor countries cannot afford standards that would be viewed as below “minimal” is advanced developed country

19. IN PRACTICE, ECONOMIC RIGHTS ARE OFTEN TREATED AS PRIOR TO OTHER RIGHTS
Intellectual property rights “trumps” right of access to life-saving medicines
But public policy inconsistent: Anthrax and Ciprio
Emphasis on certain economic rights (property rights, rights of free capital mobility) over other rights and values (right to medicine, environmental rights, labor rights) part of objection to globalization

20. III. ETHICAL DIMENSIONS OF GLOBALIZATION: PRINCIPLES
Will take a look at “practical ethics”
Based on principles of social justice
Economic institutions, rules, practices which disadvantage the poor will be viewed as unethical
Ethical behavior requires “progressivity”: the poor should benefit disproportionately
As well as other ethical principles
Hypocritical behavior viewed as unethical
Advisers who are not “fully honest” viewed as unethical

21. GLOBALIZATION OF POLITICS, SENSE OF SOCIAL JUSTICE NOT KEPT PACE WITH ECONOMIC GLOBALIZATION
Adam Smith’s invisible hand only applied to market behavior
Globalization debate involves political behavior
Choice of institutions, policies, rules to govern globalization
Neither politics nor “morals” temper unfettered capitalism—recognition of market failures and social contract
Failure of democracy at international level, lack of voice of poor, makes emphasis on “morals” all the more important
But there is a moral failure as well as a political failure

22. But there is a moral failure as well as a political failure
Think differently about poor abroad, at home
Job destruction at home bad, even if more job creation abroad, among people who are poorer
Not consistent with any “anonymous” equalitarian social welfare function
Hard to Reconcile with, say, Rawlsian principles of social justice
Ideals of social justice, social solidarity stop at the border

23. RELATIONS BETWEEN COUNTRIES DICTATED BY PRINCIPLES OF ECONOMIC POWER, NOT ETHICAL PRINCIPLES
Trade ministers instructed to get best deal for special interests in their country, not to get “fair” agreement

24. “RULES OF GAME” ARE SET BY COUNTRIES, NOT BY MARKET FORCES:
CANNOT IGNORE ETHICAL DIMENSION, EVEN IF THERE WERE NO MARKET FAILURES
Lack of social justice even in processes by which rules are set
Market failures are pervasive
Poor countries forced to bear risk of exchange rate and interest rate fluctuations
And ethical globalization ought to deal with the consequences of these market failures on the poor

25. PRINCIPLES OF ETHICAL GLOBALIZATION
Fair procedures for determining the rules of the game
Fair outcomes
Rules, institutions, outcomes which disadvantage poor (poor countries, poor people within country) should be viewed as unethical

26. PRINCIPLES OF ETHICAL GLOBALIZATION
CENTRAL THESIS: CURRENT RULES, INSTITUTIONS, PRACTICES DISADVANTAGE THE POOR

27. IV. ETHICAL DIMENSIONS OF GLOBALIZATION: TRADE
PROCEDURES DISADVANTAGE POOR COUNTRIES
“Green room” bargaining behind closed doors
Arm twisting, threats, etc.
REFLECTED IN PAST OUTCOMES

28. REFLECTED IN PAST OUTCOMES
Average tariffs by developed countries against developing country products higher than against developed country products
Even with “preferences”
Uruguay round: poorest region of world, Sub-saharan Africa actually worse off
Developed countries allowed to continue agricultural subsides, restrictions, harming poor agricultural producers, but developing countries were circumscribed in their development strategies

29. MORE FUNDAMENTAL ISSUES RAISED BY TRIPS (INTELLECTUAL PROPERTY REGIME)
Effectively transfer of income from developing countries to developed
Research public good—should be paid for by rich
Denied access to life saving drugs to poorest people in world
Lead to bio-piracy
Contrast: Western governments strive to ensure access to health care
Contrast: During Anthrax scare, U.S. uses compulsory licensing

30. BROADER ISSUES RAISED BY TRADE AGENDA
Agenda itself shows ethical lapse
Defined by what is in interests of advanced industrial countries, regardless of impact on poor
Labor market liberalization would contribute more to global economic efficiency
Yet capital market liberalization remains at center of agenda
Even though there are questions whether capital market liberalization even contributes to economic growth
And there is strong evidence that it contributes to instability and poverty

31. BROADER ISSUES RAISED BY TRADE AGENDA
Dumping duties argued for on basis of “fair competition”
Yet double standard: fair competition among domestic firms and foreign firms
Should be single standard

32. V. ETHICAL DIMENSIONS OF GLOBALIZATON: FINANCE
OTIOSE DEBTS
BANKRUPTCY (STANDSTILLS)
GLOBAL RESERVE SYSTEM

33. OTIOSE DEBTS
Western governments and financial institutions helped sustain repressive dictators (Megistu in Ethiopia, Mobutu in Congo)
But today country’s face burden of paying back debts incurred
Even when money went, effectively, to suppress fight for democracy and human rights
Lenders should be put on notice—positive incentive effects
Many difficult cases: Russia in 1997/1998

34. BANKRUPTCY (STANDSTILLS)
Excessive payments abroad
Lender is as much at fault at debtor
Especially when lender is supposed to have more expertise—failed development project
Many problems due to market failure—developing countries are forced to bear brunt of exchange rate and interest rate risk
With enormous adverse consequences
Latin American lost decade
Moldova
International institutions and developed countries had a moral obligation to help markets work better

35. BANKRUPTCY (STANDSTILLS)
Principle of “fresh start” well established
More “humane” that debtor prisoners, military interventions of earlier period
But IMF has often left countries more indebted through bail-outs
IMF finally recognized importance of sovereign debt restructuring mechanism

36. IMF finally recognized importance of sovereign debt restructuring mechanism
But failed to recognize that creditor institution (IMF) could not play impartial role
And failed to recognize important difference between public and private restructurings (chapter 9 vs. chapter 11 of U.S. Bankruptcy code)
With importance of implicit creditors (pensioners, education. Etc)

37. GLOBAL RESERVE SYSTEM
Allows richest country in world to live well beyond its mean
Borrowing almost $2 billion a day
And entailing large transfers from developing countries to U.S.
And contributing to global instability
The costs of which are largely borne to poor

38. VI. ETHICAL DIMENSIONS OF GLOBALIZATION: ADVICE
SHOULD BE “IMPARTIAL” “SCIENTIFIC” “HONEST”
PROVIDING ASSESSMENT OF RISKS
AND IDENTIFYING LIMITATIONS OF KNOWLEDGE
YET MUCH OF ADVICE PROVIDED BY IFI’S HAS
NOT INDICATED UNDERLYING ASSUMPTIONS,
NOT IDENTIFIED LIMITATIONS OF KNOWLEDGE,
NOT DESCRIBED RISKS ASSOCIATED WITH ALTERNATIVE POLICIES,
NOT DESCRIBED POTENTIAL ADVERSE EFFECTS ON POOR,
NOT EMPHASIZED DISTRIBUTIONAL CONSEQUENCES

39. MORAL DIMENSIONS OF ADVICE
PROBLEM IS NOT JUST THAT THE PREDICTIOINS HAVE BEEN WRONG
BY FAILING TO CALL ATTENTION TO DISTRIBUTIVE CONSEQUENCES HAVE EFFECTIVELY CONTRIBUTED TO WORSENING OF WELL-BEING OF POOR

40. MORAL DIMENSIONS OF ADVICE
ABUSE OF POLITICAL POWER:
THE POLITICAL POWER OF THE IMF (OTHER DONORS WILL NOT PROVIDE AID IF IMF WITHHOLDS; CRITICISM BY IMF MAY HAD ADVERSE EFFECTS ON ACCESS TO PRIVATE CAPITAL) MAKES “MORAL SHORTFALL” OF IMF EVEN MORE SERIOUS

41. CONCLUDING COMMENTS
GLOBALIZATION HAS NOT LIFE UP TO ITS POSITIVE POTENTIAL
GLOBALIZATION MAY HAVE EVEN HAD ADVERSE EFFECTS ON MANY POOR COUNTRIES, AND, MORE BROADLY, ON THE POOR WITHIN DEVELOPING COUNTRIES

42. WHY THE FAILURES?
KEY EXPLANATION: DOMINANCE OF DOCTRINES OF “MARKET FUNDAMENTALISM”
A BELIEF IN AN ALMOST UNFETTERED CAPITALISM
UNTEMPERED BY THE FORCES WHICH MAKE CAPITALISM WITHIN COUNTRIES WORK

43. UNTEMPERED MARKET FUNDAMENTALISM
A FAILURE TO RECOGNIZE
THE PERVASIVENESS OF MARKET FAILURES
THAT EVEN WHEN MARKETS ARE EFFICIENT, THEY DO NOT ENSURE SOCIAL JUSTICE

44. UNTEMPERED MARKET FUNDAMENTALISM
THERE IS AN IMPORTANT ROLE OF GOVERNMENT
THERE IS A ROLE FOR “MORALS” AND ETHICS IN ECONOMIC LIFE WITHIN COUNTRIES
BUT THERE IS EVEN A GREATER NEED FOR MORALS AND ETHICS TO GOVERN MARKET RELATIONS THAT GO ACROSS BORDERS

45. NEED FOR MORALS AND ETHICS TO GOVERN MARKET RELATIONS THAT GO ACROSS BORDERS
BUT IN FACT, ETHICAL FAILINGS ARE EVEN GREATER
UNLESS WE RECOGNIZE THESE FAILINGS, THE DISCONTENT WITH GLOBALIZATION WILL PERSIST
GLOBALIZAITON WILL CONTINUE TO FAIL TO LIVE UP TO ITS POTENTIAL
AND WILL CONTINUE TO HAVE THE ADVERSE EFFECTS THAT HAVE BEEN SO WIDELY CRITICIZED