Transcript World Economic Crisis: Lessons and Consequences

World Economic Crisis:
Lessons and Consequences
Joseph E. Stiglitz
Tunis
January 2010
Some Key Lessons of the
Global Economic Crisis
• Markets are not self-adjusting, self-correcting
• Markets are not necessarily even efficient
• There is an important role for government to
play
– In providing a safety net for the economy
• Without government intervention the world would have been
in a major depression
– In providing social protection for individuals
– And in preventing crises in the first place
– Need to strengthen state capacities
Neo-liberal Policies Did Not Even
Work in the Home of Neo-liberalism
• Imposing huge costs on homeowners,
taxpayers, workers, and society more generally
– National debt in US trillions of dollars larger than it
otherwise would have been
• Compromising other social objectives
– Lost output in the trillions of dollars
– If government is to bail out banks (which it has done
repeatedly), it has to reduce the likelihood of the
occurrence of these disasters
• Regulation essential
• Self-regulation won’t work
Problems Going Forward
• Bailouts and stimulus packages were not
designed with a vision of where the economy
and the financial sector should be going
– Financial system less able to fulfill its critical social
role
– Another crisis may be even more likely in the not too
distant future
– Other problems have continued to fester
• Including problems associated with growing inequalities
Exit
• Too soon to begin exit
• But huge debt and expansion of monetary
base leading to political demands for exit
• Policies were not designed with an eye to
exit
• Result is that exit will be difficult
• Implication: Risk of a double dip
Some Implications for
Developing Countries
• IFI’s talked about countries adopting good
policies and institutions
– Less clarity now about what that means
– Inflation targeting achieved neither growth nor stability
• New frameworks required for monetary policy
– Capital and financial market liberalization contributed
to the creation of the crisis and its rapid spread
– There needs to be more focus on issues of risk
management and information asymmetries
Some Implications for
Developing Countries
• A more balanced developmental model
• With a more balanced role for government
• Other failures of “old model”
– Growing inequality—trickle down economics
didn’t work
– Instability—this is one of many crises
– Low growth—countries that followed a more
balanced role grew faster (East Asia)
• Failures universal (Eastern Europe, Latin America,
Africa)
Some Implications for
Developing Countries
• Risk of crises in the future
– Developing countries have to be prepared
• To manage risk
– Diversification (sectoral and geographic)
– Circuit breakers (restrictions in capital flows)
– Reserves
– Macro-economic policies (automatic stabilizers,
surpluses in good times)
• To protect their citizens
– Social protections
Some Implications for
Developing Countries
• Way that developed countries have responded
to crisis poses some threats to developing
countries
– In short run, there is a problem of speculative capital
flows inducing bubbles and instability
– And slow recovery may lead to more protectionist
pressures
– Further problems in the long run
• High levels of borrowing may lead to high rates of interest in
the future
• Contributing to problems of highly indebted countries
• And making growth more difficult
Some Implications for
Developing Countries
• But global meltdown not the only crisis
• While attention was focused on meltdown,
other problems may have become worse
– Climate change
– Energy
– Food shortages
– Poverty
– Terrorism
Copenhagen:
A Missed Opportunity
• Addressing problem of global warming
could have helped fuel robust recovery
– Uncertainty about future price of carbon will
weaken investment in energy sector
• Potential large costs to Africa
– Region likely to be affected by global warming
– With fewer resources to finance adaption
A New Geo-Politics
and Geo-Economics
• New Global Governance
– The move from G-8 to G-20 is an important step
• But there are still 172 countries not represented
– Only one sub-Saharan country in G-20
• G-20 lacks political legitimacy and representativeness
• Failed to mobilize adequate funds to help the poorest
countries
– Most of the money was in the form of short-term loans
– And G-20 turned to the same institutions that played a key
role in the failures
» Though the IMF has made marked changes in some of its stances
Failure of G-20
• Recognized importance of dealing with global
imbalances
– Imbalances weren’t responsible for this crisis but
could cause next
• But solution was not well thought out
– US needs to save more
– But if China were to consume more, would have little
effect on US exports
– Real problem is not too much global savings
– Real problem is too little investment directed at global
needs
• Climate change
• Development
Failure of G-20
• Failed to recognize/address key global
problems
– Growing inequality
• Weakening global aggregate demand
– High levels of risk/failure of financial markets
and international institutions to manage risk
well implies high demand for reserves
• Weakening global aggregate demand
– Uncertainty about the price of carbon
A New Global Balance
of Economic Power
• Growth in Asia continues to be robust
• With benefits to commodity exporters
around the world
• U.S. and Europe likely to remain strongest
economies for foreseeable future, but
China’s role will grow
China’s Growing Influence
•
•
•
•
As countries recognize the need for diversification
Countries that were more diversified did better
China played large role in debate over global reserves
Without agreement with China, a deal in Copenhagen
was not possible
• China is playing an increased role in Africa
– Impact on aid already evident
– Impact on investment likely to grow
• China’s economic model has obviously worked
• And many find its policy of non-intervention attractive
– Though there may be long-run consequences for civil
rights, democracy
The Developmental State
• Not just preventing “bad” things from
happening (through regulation)
• Not just creating a good environment for
the private sector
• But actively promoting development
Markets on Their Own Won’t Lead
to Africa’s Development
• Government will need to take a role
• Including by pursuing Learning, Industrial, and Technology Policies
(LIT)
– Recognizes that what separates developing countries from developed is
not only a gap in resources but also a gap in knowledge
– Finance can be key instrument (developmental banks)
• Private financial markets not developmentally oriented
• Typically much too short term focused
• Great Recession forcing a rethinking of capital and financial market
liberalization policies
– Government needs to provide the pre-conditions for private sector
• Physical and institutional infrastructure
• Education and health
• But government has to do more than that
• In almost every successful country, governments have pursued such
policies
Goal: Sustainable Growth
with Stability and Shared Prosperity
• Before, too much focus on stability, too little on
growth
• In the end, there was neither growth nor stability
• What growth that occurred was not shared and
was not sustainable
• Globalization can play an important role
• But globalization will have to be managed better
than it has been
– Better global rules
– Better national policies