Jere Van Dyk Interviews Joseph Stiglitz

Apr 3, 2006

"I firmly believe that aid and trade have to work together," says Dr. Stiglitz. "If we provide assistance to help people to take advantage of the new opportunities, we can get real growth, and they won’t need the handouts as much as in the past."

JERE VAN DYK: Welcome to the Carnegie Council.

Today we are fortunate to have a most distinguished guest with us. Dr. Joseph Stiglitz is a Nobel Prize-winning economist 2001, former Chief Economist for the World Bank, former Chair of President Clinton’s Council on Economic Advisors, and currently professor at Columbia University. He has just written a new book, entitled Fair Trade for All: How Trade Can Promote Development.

Dr. Stiglitz, you write in the preface to your book that one of your goals is to promote a fairer globalization and to help the welfare of the world's poor. Two billion people in the world live on less than $2.00 a day. You write about "fair trade." What is the difference between free trade and fair trade?

JOSEPH STIGLITZ: We don't really have a free trade regime. Free trade would mean that you took away all barriers to trade, all impediments to a level playing field.

For instance, the United States and the European Union subsidize agriculture. That means that almost half of the income of producers in these countries comes from government subsidies; they don't just rely on the market. Free trade would be to rely on the market alone. Some might argue that they spend more money farming Washington than they do farming the land.

The problem is that developing countries, too poor to give subsidies, have to compete with this highly subsidized Western agriculture. So even if they were twice as efficient, they would have a hard time competing. But they have all kinds of other problems that would make it more difficult for them to take advantage of a free-trade regime, even if such existed.

For example, you have to take your product to the port, put it on a ship to the United States where it can be sold. But if your roads don't exist, if your ports aren’t very good, it's hard to export. Developing countries have a very weak infrastructure. So we say that they have internal barriers to trade as well as the artificial barriers to trade of tariffs and other artificial government-imposed trade impediments.

Trade negotiations lower the artificial barriers, but in the past they have done nothing about the internal barriers. Europe opened up its markets unilaterally to the least-developed countries about three or four years ago. They recognized that in the past, trade agreements had been totally unfair to developing countries and they said: "We care about those who are less fortunate than us. We give aid. Well, rather than just giving a handout, let’s help them grow and let’s open up our markets." So they took away their tariffs on most goods.

But very little trade resulted. Part of the problem was the technical provisions, but it also had to do with supply-side constraints—that they had neither the goods to produce, nor the infrastructure to deliver any goods to market. The result was very little increase in real trade.

JERE VAN DYK: But how do you make globalization fairer? How do you help if they don’t have a proper road to deliver the goods from the farm to the port? Is that the problem for the North? How do you resolve this?

JOSEPH STIGLITZ: I describe fairer globalization in two steps. First, make it a level playing field. Eliminate the subsidies that make it difficult for developing countries to compete.

The United States, for instance, subsidizes cotton. About 25,000 very well-off farmers divide $3-to-$4 billion a year. Most of this goes to the very richest and biggest of those 25,000. As they get more subsidies, they produce more. The ordinary laws of supply and demand: you produce more, prices come down. They hurt 10 million sub-Saharan subsistence farmers who are just getting by, who are living on under $2.00 a day.

At one point, the U.S. Trade Representative said, "Well, let them go into something else. Stop complaining." But when you’re living on semi-arid land that can’t grow anything other than cotton, you have no choice.

America’s cotton farmers do have a choice. In fact, the subsidies lead them to use a lot of fertilizer and water that should be used for other purposes—it's actually very bad for the environment. So in the case of the United States, our taxpayers lose, our environment loses, and the people in the developing world who can't afford to lose also lose.

JERE VAN DYK: We live in a democracy, where Congress represents these particular states, and the president wants to win these states in an election. His job is to help his constituents rather than people from overseas. How do you resolve this?

JOSEPH STIGLITZ: It is a political issue, and one of the failings of our democracy. It’s a case where special interests have prevailed over the general interest. Twenty-five thousand farmers get $3-to-$4 billion. That’s not helping America as a whole. It is helping a few people. They bribe the government, spending perhaps a few million, maybe a few hundred million, and get back $3-to-$4 billion. Unfortunately, the problems of our democracy spill over and have consequences for other countries.

We live in a globalized world where we are supposed to be the leader of the free world, of the democracies; we're supposed to be setting a good example. If we cause such harm to others, if we show that our democracy is so flawed that a few people can inflict such pain on the whole rest of the world, that’s an abnegation of our responsibility which will have consequences.

JERE VAN DYK: When the United States negotiates with other countries, are the representatives really speaking for their countries or are they representing an elite which is in some cases not democratic, which is not really fair to the people?

JOSEPH STIGLITZ: One of the big changes in the world in the last 25 or 20 years has been the growth of democracies. There are vibrant democracies today in much of the developing world—Brazil, India.

I used to talk to our U.S. Trade Representative or representatives of Europe and say: "What you're doing is unfair to the developing countries. You talk about free trade, but you have an unfair trade."

They would respond: "We have no choice. Our hands are tied by our democracies."

I would say: "Other countries also have democracies What has happened more recently is that they are returning from these negotiations saying: Look, we can’t sign another unfair trade agreement. Our citizens understand what is going on because they know that their incomes are lowered because of your cotton subsidies, your wheat subsidies, your rice subsidies. If we come back from our trade negotiations with another agreement as unfair as the last agreement, we're out of office."

We are seeing a clash of democracies here. In one case, it's a democracy representing the vast majority of the people in the developing countries, which we should be proud of. Unfortunately, our democracy is flawed. In our democracy, all we can say is, "Well, it's 25,000 cotton farmers who bribe their government to give their large corporate farms $3-to-$4 billion in subsidies."

JERE VAN DYK: You once said that Europeans subsidize cows to the tune of $2.00 a day.

JOSEPH STIGLITZ: It's such a resonant number because that’s the way the World Bank measures poverty, less than $2.00 a day. It’s better to be a cow in Europe than to be a person in most of the developing world.

JERE VAN DYK: The trouble is, though, when you live here you're not aware of the poverty, you're not aware of how people suffer, elsewhere in the world. How do you tell people, particularly a French farmer for example, or an American agricultural worker, that we must do away with this subsidy, when people believe that the farm is integral to American culture? In France, they believe that the farm is the true France. How do you compensate these people if you do away with the subsidy, and how do you respond to the philosophical issues here?

JOSEPH STIGLITZ: An important point to recognize is that most of the money goes to large corporate farms. The small family farm is almost a thing of the past already.

In fact, our agricultural subsidies make life harder for the family farmer. When we give large subsidies, the big corporate farms compete for the land, the basic resource necessary to receive government subsidies. The price of land goes up. The poor family farmer can no longer afford the price of the land. When the land is so expensive, to make it economically viable you have to use a lot of fertilizer, which is bad for the environment; you have to use very expensive herbicides, special seeds. So you make farming extremely expensive, only affordable to the big corporate farmers, and the small farmers are driven out of business.

When I was at the Council of Economic Advisors, I proposed a simple solution to the problem: let's just cap subsidies. No farmer should get more than $100,000. The farmers rejected it, because most of the money was going to the large corporate farmers. A hundred thousand dollars does not even begin to talk about how much they're getting.

I can understand worrying about the small farmer, but the simplest interim solution would be that no farmer with an income over $100,000 should get a subsidy and no farmer should get more than $100,000. If we did that, we would go a long way to helping developing countries.

JERE VAN DYK: What are your thoughts on foreign aid or assistance? Do you believe that we should teach a man how to fish or give him fish?

JOSEPH STIGLITZ: We clearly should be teaching people how to fish. Trade is like a hand-up rather than a handout.

But you need more than opportunity. Opening up trade says, "You can sell goods in our country." But if you don't have the capital to start a new business, if you can't afford to buy the raw materials, you can’t take advantage of those opportunities. If you don't have the ports, if you don’t have the roads to take your goods to the market, you can’t take advantage of it.

I firmly believe that aid and trade have to work together. If we provide assistance to help people to take advantage of the new opportunities, we can get real growth, and they won’t need the handouts as much as in the past.

JERE VAN DYK: Many people feel that some of these countries are dictatorships and not democracies. How do you respond to that?

JOSEPH STIGLITZ: Clearly, there are some governments that are corrupt. We have some corrupt governments in the West as well.

But the situation has improved in developing countries in the last two decades. One of the strengths of democracy is that it provides a check against corruption. If people are not delivering on their promises, if money is going from the people to these corrupt elite, they will be voted out of office where you have truly effective democracies.

One of the real examples of success is India. We haven’t been focusing on India because China has been getting a lot of attention, but for a quarter-century now India has been growing at 5-6 percent a year, and is expected to grow at 8 percent in 2006. That has lifted many people out of poverty. They have invested heavily in education. Now the big issue is that they are involved in outsourcing. Because of their highly trained people, they are able to do computer services, programming, at much lower prices in the global economy.

JERE VAN DYK: We have so many Indians with tremendous computer skills who have come to the United States. How is migration affecting trade and how is that affecting the global economy today?

JOSEPH STIGLITZ: First, migration is terribly important. The value of remittances now is about three times that of all of the foreign assistance and greater than foreign direct investment in many countries. So it is a major impetus to economic growth.

This illustrates the asymmetries in the global trade regime. In the last 15 years, there has been a lot of effort to open up global markets to the free flow of capital. But if you ask the question, "What is of more importance to global efficiency, raising living standards all over the world, movement of capital or movement of labor?" there is no comparison. Movements of labor have the potential of increasing global efficiency far more than movements of capital. An even partial opening up of movements of labor can have an enormous effect in increasing global income.

The big asymmetry is that in the case of labor it tends to be the developing countries that benefit. In the case of capital, it’s the advanced industrial countries that benefit. The special interests within the advanced industrial countries have been controlling the rules of the game and so they focus on increasing flexibility and liberalization of capital. But there is no interest in increasing flexibility and liberalization of labor.

Wages and incomes in the United States are a multiple of wages and income in Mexico. If a worker in Mexico is making $5,000 a year and he moves to the United States and he makes even $15,000 a year, his income has tripled. And if wages reflect productivities, that means global productivity has increased by $10,000. America is better off because we get services. Mexico is better off because they get some of the remittances.

But there is a problem: as more unskilled workers come into the United States, it creates more competition for our workers, and that drives down the wages. So while it helps Mexico and its poorer workers, it does have an adverse effect on U.S. workers, particularly unskilled workers.

The problem is that we are not doing what should be done to deal with it: better educating our citizens. We should have a more progressive income tax system, putting more of the burden of taxation on those who are benefiting so much from globalization, the people who are wealthy. But what have we been doing in the last five years? We have lowered the tax mostly on the upper income, leaving the burden on the bottom almost unchanged. So we've exacerbated the problem.

JERE VAN DYK: There are those who feel that by lowering the taxes for those in the upper income strata, we are helping to generate income throughout the entire economy because they are the entrepreneurs; they are the ones who make the economy work.

JOSEPH STIGLITZ: That’s an old theory, called trickle-down economics, which has been discredited. In the last four or five years, the U.S. GDP increased every year 2 percent, 3 percent, 4 percent—not up to our potential; we could have done better. But the people in the middle have become worse off. The median family income has fallen by about $1,500. The people at the bottom have suffered even more; poverty rates are up. This is a clear example of trickle-down economics not working. Yes, the people at the top are doing fantastically, but the people even in the middle are losing out.

The answer is that the people who are the innovators of our economy would be willing to do the innovation if they got a few million. They don’t need a billion or a hundred million. If you give the CEO of a company $50 million or you give him $75 million, is he going to work that much harder because you give him $75 million rather than $50 million? If he is the kind of person who says, "I'm not going to work hard if you only give me $50 million," he is not the person you want running America’s big enterprises.

JERE VAN DYK: On the subject of inequality and the rise of poverty in the United States, you made a very interesting statement in an article you wrote for Foreign Affairs. You wrote that China, with which we have a $220 billion deficit, is neither democratic nor open, but yet it has gone far to alleviate poverty. The United States is open and democratic, yet inequality here is greater than it has been in the past. Would you explain this?

JOSEPH STIGLITZ: China has been growing at 9.7 percent for 30 years. It has made sure that a considerable part of the fruits of that growth have gone to the people at the bottom. Poverty rates have been reduced from 60 percent down to under 20 percent. Approximately 300 million people have moved out of poverty—the most dramatic reduction in poverty the world has ever seen in this short a span of time.

But what's remarkable about China is that with all their progress they're not content. They have just announced their 11th five-year plan, and they say, We're not doing well enough for the poor. We want to focus our attention on the rural sector, to increase their income, and other parts of our society that have not benefited."

That comes because their government, at least at the very top, is genuinely committed to ensuring that the benefits of the growth create a society in which the fruits of the growth are reasonably widely distributed, even in a market economy. At the very beginning, they said they wanted to create a market economy with Chinese characteristics. One of the things they meant by Chinese characteristics is they wanted to be sure they did not have the kinds of inequality that exist in many of the advanced industrial countries.

Now, the problem in the United States is that we have a democracy, albeit flawed with campaign contributions and gerrymandering. Some people worry about the contestability of elections. In market economies, competition makes the market work, and we have a way of measuring the intensity of competition. If one firm, Microsoft, dominates the market, that’s probably not competition. Sometimes you can have potential competition, but typically potential is not enough; you need guys in there fighting it out to drive increases in productivity.

Unfortunately, in our electoral process, the way we have shaped many of our electoral districts, there is one party that wins year in and year out. For instance, there has been an enormous drop in confidence in the president, whose approval ratings have gone down to 34 percent. The vice president is down to 18 percent. And yet, many people think that the Congress is so non-contestable that, while there has been a huge shift in public opinion, it won't be reflected in Congress. When perhaps five or ten seats will move, it is not very responsive to popular sentiment.

Systems of proportional representation tend to be more contestable. When you don’t have contestable elections, you open yourself up to corruption, and to the role of special-interest groups behind government. And America, for the most part, is better than many other countries, in that the government officials themselves don't get the money.

The oil companies give big contributions to the government, to a particular party; the party repays them; the profits go up; they then give more contributions. We call that exchange. It's not market exchange; it's an exchange which is corrupting. The price of oil and natural gas has skyrocketed. There have been stories in The New York Times describing how royalties to the government from whose land much of this oil is coming have not increased. That is because they were able to get legislation that allows them to enjoy these special benefits.

It's all within the law, it's all within democracy, but democracy has been tilted in the favor of special interests and against the general good.

This has happened periodically in the United States. It happened at the end of the 19th century, until you had the Progressive movement with Theodore Roosevelt, who said "We have to do something about this." We may be in another one of these critical periods where the corruption has increased so much that a backlash may be inevitable.

JERE VAN DYK: Some people feel that the price of oil is so high because of a greater demand from China, from India, because their economies are growing so fast.

JOSEPH STIGLITZ: The demand for oil from India, China, and other emerging countries has been growing for years. This demand has been a bit faster, but not much faster, in the last few years. The market in 2003 saw China and India growing, but it also saw prices of oil staying right where they were.

One dramatic factor has changed: instability in the Middle East caused by the Iraq war. The Middle East is the low-cost producer of oil. When you bring instability into the Middle East, people don’t want to invest. Nor do they want to invest in other areas, where the cost of production is so much higher.

If peace is restored in the Middle East, the price will go back down to $25.00, and if you invested in $40.00 or $45.00 or $50.00 oil, you will lose.

JERE VAN DYK: Talking about fossil fuels, how do you promote growth and also deal with greenhouse emissions, global warming?

JOSEPH STIGLITZ: I was on the International Panel on Climate Change (IPCC) that reviewed the scientific evidence on this in 1995. But even we did not foresee how fast it would happen. The Arctic icecap is now expected to melt within 70 years. All over the world, the melting of glaciers will lead to rising sea levels, huge changes in climate. Most people believe it may be contributing to the violence of some of the storms we’ve had.

It's an even more important problem for developing countries. In Bangladesh, one of the poorest countries in the world, about a third of the country will be inundated with global warming because of the sea level. People are already crowded together, 130 million living in a very small space.

Our consumption of gasoline and energy is causing death—and will continue to cause death—elsewhere in the world. This is the foreseen consequence of our profligacy in energy, particularly emissions.

How do we maintain our standard of living and reduce emissions? The answer is not as hard as it seems.

Countries like France and Japan have a perfectly high standard of living. They use a half to a third of the amount of emissions that we do.

I hate to sound like a broken record, but it’s the special interests. The automobile and oil companies make profits—or they did make profits—from selling big cars, from high consumption of oil.

The real challenge is that if the rest of the world consumes energy at the rate that we do, if it emits carbon at the rate we do, the future of this planet will be very bleak. We won’t survive.

Are we going to claim privilege and say, "We're special; we can consume, but everybody else has to suffer, they have to figure out how to get along without energy," or are we sharing this one planet, on the basis of fairness, and we all have to assume obligations and responsibilities?

The interesting thing is that China, still a poor country—its per-capita income is one-eighth of that of the United States—has already made big efforts recently to increase its energy efficiency, reduce its emissions. It has increased taxes on gasoline and on other oil products; it has imposed taxes on wood products. They are trying to discourage use of wood for chopsticks because that leads to cutting down forests. They put a tax on chopsticks, because they said, "We can't contribute as much as we have to environmental degradation." So they are beginning to take their responsibility. The question is: Are we?

JERE VAN DYK: Clearly, you feel that we are all one community, one large global village. Why is it then that so many in the United States feel that, "America is the engine that drives the world economy, we don't need to deal with some of these critical issues somewhere else, because we're the ones that everyone else looks to, we're the ones that push the world economy"?

JOSEPH STIGLITZ: The increase in global GDP from China in the last couple of years has been equal to that of the United States. They are a much smaller economy, but they have been growing much faster.

But the basic issue is a very simple one: Do we believe in democracy? We all share one planet and we have to get along. We can't build walls that insulate us from the rest of the world, and if we did our standard of living would plummet. We don’t have the resources. We buy lots of goods from abroad. We are dependent on others, and vice-versa. If that is the case, then we have to learn how to live as a global community. We know the principles that we believe in in governing our own community—democracy, one person, one vote—and those principles must be extended as we try to govern ourselves as an international community.

We believe strongly that other people shouldn’t tell us what to do, except when what we do affects others. In this case, greenhouse gases are an issue where we are affecting others. We will be leading to death and destruction elsewhere in the world, and it's right for them to say: "You're part of this. You could have global warming and hurricanes in America, and suffer the consequences. " But that's not the physics of the world that we live in.

JERE VAN DYK: Is the United States headed in the right direction economically? What changes would you make?

JOSEPH STIGLITZ: One example of our turn in the wrong direction in trying to make a global community work is our failure to create a fair trade regime. We’ve been trying to increase the profits of our corporations, which is natural. But when you're the leading democracy in the world, sometimes you have to put yourself above the special interests within your country. If we want to create a world that we feel comfortable and safe living in, we have to realize that if we don’t play by fair rules of the game, others won't either. We have to work to create the rule of law and obey that rule of law.

We talk about others opening up markets for our investment. And the European Union says the same thing. But all of a sudden, when an Indian company, Matel, wants to buy a European steel company, everybody says, "Oh no, this is a threat." When a Chinese company wanted to buy Unocal—an American oil company—we said, "Oh, no." But the curious thing about that example is that most of Unocal’s oil was owned in Asia. The rules that we were proposing would be rules under which Unocal would not even exist as a company.

The Golden Rule—do unto others as you would have them do unto you—is a simple ethical precept discussed by philosophers under a fancier name, Kant's categorical imperative.

The question is: Are we living by that ethical framework in our international relationships? The answer is no. I gave the example in terms of trade, but I could talk about each of the other areas in the global landscape.

Domestically it's the same issue. Our society is facing growing inequalities. The people at the top have been doing very well. Those in the middle and at the bottom have not been doing so well. We should view America and the world as a community.

At home, to be able to respond to the new global competitive framework, we should invest more in education, science, research, technology. We need to build better safety nets, realizing that in global competition there will be some losers. We want to help them go into another field. We don’t believe in the Darwinian survival of the fittest. As a community, you help others who are not doing well to help themselves. Most people don't want to be dependent. If you give them a little help, they will go forward on their own. The second thing is better safety nets.

And finally, recognizing the increasing disparity in our society, we should introduce more progressive taxes. We have been doing the opposite.

So at home our economy is not performing as well and is not well prepared for the future. Not to speak of the huge debt with which we are burdening our children.

Abroad, we want to strengthen global democracy, but that means practicing what we preach. We can't be unilateralists. We can't say to other countries, "We believe in democracy but you do what we say." We have a community and we have to act as a community, which means caring about those who are less fortunate.

If we had a fairer trade regime, America as a whole would benefit. We are keeping out cheaper goods from abroad that would help our consumers, make them better off, assist developing countries, and even help our own growth.

JERE VAN DYK: Dr. Stiglitz, thank you very much for being with us today.

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