Teaching Notes · Economic Development and Growth

Globalization and Emerging Markets: A Class Discussion on Stiglitz

Globalization is usually presented to students as an unambiguous good: open the economy, let capital and goods move freely, and growth should follow as resources flow to wherever they are used most efficiently. One of the more useful class discussions in this course takes that presentation apart, using the Nobel laureate Joseph Stiglitz's critique of how globalization actually played out for many emerging markets rather than how simple theory predicted it would.

Why the neoclassical story was incomplete

The neoclassical theory of growth that underpinned much of the push toward global financial liberalization largely ignored risk and the role of financial institutions, assuming instead that capital would simply flow from where it was abundant to where it was scarce, with no meaningful information problems standing in the way. Stiglitz's argument is that the real gap in outcomes between developed and developing countries was never mainly about the raw quantity of capital or resources available. It was about the willingness and ability to take on risk, the presence of capital markets actually willing to fund new and unproven enterprises, a technically trained labor force, and close working relationships between universities, research centers, and the business community. The United States, in this reading, did not out develop other economies simply by having more capital; it built an entire institutional ecosystem, venture capital funds willing to back new enterprises, leading research universities, and the ability to attract top scientific talent from around the world, that made its risk taking pay off.

Stiglitz's broader argument is that the standard policy advice exported to developing countries, often associated with the Washington Consensus, actually made it harder for them to take advantage of this same new economy, in part by raising the risk firms in those countries faced and in part by discouraging industrial policies aimed at closing the technology gap, since developing countries were instead advised to concentrate narrowly on primary education rather than more ambitious technology and industrial strategy.

East Asia as a partial counterexample

Stiglitz points to the East Asian economies as an instructive counterexample, not because they rejected globalization but because of how they managed it. Rather than adopting liberalization wholesale and all at once, these economies pursued pragmatic policies, deliberately regulating the pace and sequencing of globalization rather than following neoliberal doctrine uncritically, which let them capture many of its benefits, especially the opportunity to close the technology gap with more advanced economies, while limiting their exposure to its downside risks. Stiglitz also raises a sharper political point about how reform decisions actually get made: countries that need outside financial assistance often find themselves effectively obliged to accept the conditions attached to it, which complicates the common claim that liberalization measures are simply chosen freely by sovereign governments acting in their own interest.

The adverse effects Stiglitz identifies in developing economies

A substantial part of this discussion works through the specific channels by which poorly sequenced globalization can hurt, rather than help, a developing economy.

• Job creation. Trade liberalization is frequently paired with monetary tightening and higher interest rates meant to stabilize the currency, which makes new investment less attractive precisely when the economy most needs it, without necessarily being matched by measures that strengthen the financial system's ability to lend to new enterprises.
• Risk. Capital market liberalization is not the only channel through which globalization raises risk; trade liberalization itself can increase risk by exposing an economy to volatile global commodity prices.
• Capital flows without growth. Short term capital that can move in and out of a country overnight is not well suited to building new jobs and enterprises, and the risk such liberalization introduces raises the effective cost of capital, since reserves set aside to cushion against sudden outflows represent funds diverted away from more productive investment.
• Capital flight. Rapid liberalization, sometimes undertaken under pressure from international institutions, has in some cases been followed by sudden capital outflows, which sharply depreciate the exchange rate and hurt anyone holding foreign currency denominated debt.
• Loss of independent monetary policy. Capital market liberalization constrains a country's ability to run its own monetary or exchange rate policy independently of global capital flows, narrowing the range of domestic stabilization tools available during a downturn.
• Weaker domestic financial institutions. A banking system squeezed out by foreign competition may be less able to extend credit to small and medium enterprises, contributing to unemployment, and may also be less responsive to the kind of informal guidance domestic regulators have traditionally used to steer lending.
• Political strain. Reforms imposed from outside, under conditions set by an international institution, often lack the domestic political legitimacy needed to be sustainable, undermining long term policy credibility.
• Social capital. The disruption globalization can bring, particularly where it collides with traditional cultural norms, can undermine the social cohesion and trust that, as the companion piece on culture and institutions in this series discusses, is itself an economic asset.

Reading the critique fairly

It is worth being clear about what this argument is, and is not, claiming. Stiglitz is not arguing that trade and financial openness are inherently harmful to development; East Asia's own experience, in his telling, shows that globalization can be managed in a way that captures real benefits. The argument is narrower and more specific: that the sequencing, pace, and external pressure behind globalization, not globalization as such, determined whether a given developing economy ended up better or worse off, and that the standard advice offered to developing countries in the 1990s often got that sequencing wrong. It is a genuinely contested position within economics, and students encountering it for the first time are encouraged to weigh it against the neoclassical case for liberalization covered elsewhere in this course, rather than treating either side as the final word.

Sources: Notes on J. E. Stiglitz, “Globalization and Growth in Emerging Markets and the New Economy,” Journal of Policy Modeling (2003); and the broader discussion of the East Asian financial crisis and the Washington Consensus in J. E. Stiglitz, Globalization and Its Discontents (2002).