PUBLIC SECTOR, PRIVATE SECTOR: NEW NATIONAL AND INTERNATIONAL FRONTIERS PARIS, OCTOBER, 2003

GLOBAL PUBLIC GOODS AND GLOBAL FINANCE: DOES GLOBAL GOVERNANCE ENSURE THAT THE GLOBAL PUBLIC INTEREST IS SERVED? Joseph E. Stiglitz Columbia University

GLOBAL PUBLIC GOODS PURE PUBLIC GOODS: NON-RIVALROUS CONSUMPTION CONSUMPTION BY ONE PERSON DOES NOT DETRACT FROM CONSUMPTION OF OTHERS –Knowledgewhen I tell you something, I know it, and you know it –National defense NON-EXCLUDABILITYDIFFICULTY OF EXCLUDING OTHERS FROM ENJOYING BENEFIT

TYPES OF PUBLIC GOODS LOCAL PUBLIC GOODS: BENEFITS ENJOYED ONLY BY THOSE IN LOCALITY A local clean river A local fire department NATIONAL PUBLIC GOODS: TRADITIONAL FOCUS OF ANALYSIS GLOBAL PUBLIC GOODS: BENEFITS ENJOYED BY EVERYONE ON GLOBAL

MARKET FAILURE MARKETS FAIL TO PROVIDE AN ADEQUATE SUPPLY OF PUBLIC GOODS FREE RIDER PROBLEM EVERYBODY HOPES OTHERS WILL PROVIDE

INTERNATIONAL EXTERNALITIES EXTERNALITIES: ACTIONS BY ONE PARTY WHICH HAVE AN EFFECT ON OTHERS –POSITIVE: FOR WHICH THEY ARE NOT COMPENSATED R & D –NEGATIVE: FOR WHICH THEY DO NOT PAY COMPENSATION POLLUTION

INTERNATIONAL EXTERNALITIES EXTERNALITIES THE EFFECTS OF WHICH ARE POTENTIALLY GLOBAL IN REACH (IN CONTRAST TO LOCAL EXTERNALITIES, THE EFFECTS OF WHICH ARE FELT ONLY IN A SINGLE LOCALITY)

MARKET FAILURE MARKETS PRODUCE TOO LITTLE OF GOODS WITH POSITIVE EXTERNALITIES MARKETS BY THEMSELVES PRODUCE TOO MUCH OF GOODS WITH NEGATIVE EXTERNALITIES

GOVERNMENT AND MARKET FAILURES WHENEVER THERE IS A MARKET FAILUREPUBLIC GOODS OR EXTERNALTITIESTHERE IS A POTENTIAL ROLE FOR GOVERNMENT GOVERNMENT ACTIONS CAN TAKE ON A VARIETY OF FORMS –TAXES AND FINES –REGULATIONS –GOVERNMENT EXPENDITURES

EXAMPLES OF GLOBAL PUBLIC GOODS/EXTERNALITIES INTERNATIONAL SECURITY GLOBAL ENVIRONMENT GLOBAL HEALTH KNOWLEDGE INTERNATIONAL ASSISTANCE THE GLOBAL ECONOMY –STABILITY –STANDARDS

INCREASING NEED FOR COLLECTIVE ACTION INCREASING GLOBALIZATIONTHE CLOSER INTEGRATION OF THE COUNTRIES OF THE WORLD AS A RESULT OF THE LOWERING OF TRANSPORTATION AND COMMUNICATION COSTS AND THE REDUCTION IN MAN-MADE BARRIERS

INCREASING NEED FOR COLLECTIVE ACTION WITH GLOBALIZATION, GREATER INTERDEPENDENCE WITH GREATER INDEPENDENCE, GREATER NEED FOR COLLECTIVE ACTION –Greater role for global externalities –Greater role for global public goods

COLLECTIVE ACTION REQUIRES MECHANISM FOR DECISION MAKING GLOBAL GOVERNANCE WITHOUT GLOBAL GOVERNMENT INTERNATIONAL TREATIES INTERNATIONAL INSTITUTIONS –IMF –WTO –WORLD BANK

INTERNATIONAL INSTITUTIONS BUT THEY ARE FLAWED Undemocratic, non-transparent Smokestack structureWTO run by trade ministers, IMF by Finance Provides ample opportunity for special interests to prevail FAILURES NOT A SURPRISE

KEY PROBLEMS FAILURE TO ADDRESS CRITICAL GLOBAL MARKET FAILURES ATTEMPT TO USE INTERNATIONAL ARENA TO ACHIEVE OBJECTIVES THAT HAVE LITTLE TO DO WITH CORRECTING GLOBAL MARKET FAILURES –BUT RATHER ARE AN ATTEMPT TO ACHIEVE IN THE GLOBAL ARENA WHAT THEY COULD NOT ACHIEVE AT HOME –PRECISELY BECAUSE THE INTERNATIONAL INSTITUTIONS ARE LESS DEMOCRATIC AND TRANSPARENT

EXAMPLE: GLOBAL FINANCIAL SYSTEM KEY FAILURES/EXTERNALITIES AN ECONOMIC DOWNTURN IN ONE COUNTRY HURTS OTHERS CAPITAL MARKET IMPERFECTIONS MAKE IT DIFFICULT FOR COUNTRIES TO FINANCE EXPANSIONARY FISCAL POLICY

REMEDY IMF CREATED TO PROVIDE FINANCE AND PEER PRESSURE TO ENSURE EACH COUNTRY MAINTAINS AS CLOSE TO FULL EMPLOYMENT AS POSSIBLE

STRANGE TIDES OF HISTORY IMF TYPICALLY ONLY PROVIDES MONEY WHEN COUNTRY AGREES TO CONTRACTIONARY POLICY BEGGAR-THY-SELF POLICIES EVEN WORSE THAN BEGGAR-THY- NEIGHBOR POLICIES LED TO DISASTROUS CONSEQUENCES IN EAST ASIA AND ELSEWHERE

EXPLANATIONS GOVERNANCE –US SOLE COUNTRY WITH VETO POWER –US REPRESENTED BY TREASURY –FINANCIAL MARKETS TRADITIONAL POSITIONSTRONG ANTI-KEYNESIAN PERSPECTIVES

EXPLANATIONS –CONSISTENT WITH IDEOLOGY –CONSISTENT WITH INTERESTS INFLATION IS BAD FOR BOND MARKET RECESSIONS CUT BACK IMPORTS, BUILD UP RESERVES, NEEDED TO REPAY CREDITORS

BROADER SET OF OBJECTIVES IMPROVE STABILITY OF FINANCIAL SYSTEM BUT IN FACT ARGUED FOR CAPITAL MARKET LIBERALIZATION –EVIDENCE THAT IT LEAD TO INSTABILITY –AND DID NOT LEAD TO INCREASED GROWTH RESULTHIGH LEVEL OF INSTABILITY –HUNDRED COUNTRIES WITH CRISES IN LAST THIRTY YEARS

GOING BEYOND THE MANDATE WHY DID THE IMF PUSH CAPITAL MARKET LIBERALIZATION? WASNT NECESSARY TO MAKE INTERNATIONAL ORDER WORK –NOT LIKE A STANDARD THAT HAD TO BE AGREED UPON –IF IT WAS GOOD FOR COUNTRY, COUNTRY HAD AN INCENTIVE TO ADOPT IT –IF ANYTHING, CAPITAL MARKET LIBERLALIZATION RESULTS IN A NEGATIVE EXTERNALITY ON OTHERS FROM RESULTING INSTABILITY (CONTAGION)

CML TRIED TO ACHIEVE INTERNTIONALLY WHAT COULDNT BE ACHIEVED AT HOME (OTHER FORMS OF INVESTMENT GUARANTEES) TRIED TO ACHIEVE AT WTO WHAT COULD NOT ACHIEVE IN IMF BASED ON SPECIAL INTERESTS RATHER THAN GLOBAL INTERESTS

OTHER MARKET FAILURES POOR COUNTRIES ARE FORCED TO BEAR RISK OF EXCHANGE RATE AND INTEREST RATE VOLATILITY WHILE IN WELL PERFORMING MARKETS, RISK WOULD BE TRANSFERRED FROM THOSE WHO ARE LESS ABLE TO THOSE WHO ARE MORE ABLE TO BEAR RISK

FUNDAMENTAL PROBLEM: GLOBAL RESERVE SYSTEM PROMOTES INSTABILITY INEQUITABLE

INSTABILITY SUM OF TRADE DEFICITS EQUALS SUM OF TRADE SURPLUSES MEANS THAT IF SOME COUNTRIES ALWAYS RUN SURPLUSES (CHINA, JAPAN), REST OF WORLD RUNS DEFICITS DEFICITS LIKE HOT POTATOIF ONE COUNTRY ELIMINATES DEFICIT, SHOWS UP SOMEWHERE ELSE THAT COUNTRY THEN HAS A CRISIS

INSTABILITY US ACTS AS A COUNTRY OF DEFICIT OF LAST RESORT US ONLY COUNTRY THAT LIVES BEYOND ITS MEAN YEAR AFTER YEAR INCREASING INDEBTEDNESS TO FOREIGNERS INHERENT PROBLEM: AS DEBTS BECOME LARGE, WILL FOREIGNERS CONTINUE TO BE WILLING TO HOLD DEBT

DEFLATIONARY BIAS TO THE GLOBAL ECONOMY AS BILLIONS AS BURIED IN GROUND EVERY YEAR, RATHER THAN SPENT ON GOODS IN PAST, INFLATIONARY BIAS OF CENTRAL BANKS KEPT STRENGTH TO GLOBAL ECONOMY BUT MAY NO LONGER BE TRUE

INEQUITABLE SYSTEM AS US LENDS TO DEVELOPING COUNTRIES AT HIGH INTEREST RATES, AND BORROWS FROM THEM AT LOW INTEREST RATES (AS THEY HOLD US TREASURY BILLS AS RESERVES) LARGE NET TRANSFER FROM DEVELOPING COUNTRIES TO US

SIMPLE REMEDY GLOBAL GREENBACKS OR SDRS ISSUED ANNUALLY TO OFFSET ADDITIONS TO RESERVES TO FINANCE GLOBAL PUBLIC GOODS INCLUDING SUPPORTING DEVELOPMENT VARIETY OF MECHANISMS TO ALLOCATE FUNDSBUT OUTSIDE OF IMF

SDR PROPOSAL COUNTRIES WILL ONLY HAVE PROBLEMS WHEN DEFICIT EXCEEDS SDR ALLOCATION WILL NOT BE INFLATIONARYEMISSIONS ONLY OFFSETTING DEFLATIONARY BIAS US WOULD GAIN FROM GREATER INSTABILITY AND BIAS IT CREATES FOR AN EXCESSIVELY STRONG DOLLAR

SDR PROPOSAL BUT SHORTSIGHTEDNESS MAY RESULT IN RESISTANCE, AS US SEES LOSS OF SEIGNORAGE BUT REST OF WORLD COULD FORCE US TO GO ALONG BY FORMING A CLUB, MEMBERS WHICH AGREE TO HOLD EACH OTHERS CURRENCY AND ISSUE SDR

FINANCING GLOBAL PUBLIC GOODS SDRS COULD BE IMPORTANT SOURCE OF FUNDS MANAGING GLOBAL NATURAL RESOURCES –GREENHOUSE GAS EMISSIONS –SEABED, GLOBAL FISHERIES

ALTERNATIVE SOURCES OF FINANCE ATTACKING GLOBAL NEGATIVE EXTERNALITIES –TAX ON CROSS BORDER SHORT TERM CAPITAL FLOWS –IS IT ADMINISTRATIVELY FEASIBLE? GLOBAL LOTTERY

CONCLUDING REMARKS GLOBALIZATION IMPLIES GREATER IMPORTANT OF GLOBAL PUBLIC GOODS GOOD PERFORMANCE OF GLOBAL ECONOMIC SYSTEM IMPORTANT GLOBAL PUBLIC GOOD BUT RULES OF GAME ARE SET BY GLOBAL INTERNATIONAL INSTITUTIONS THAT ARE UNDEMOCRATIC AND NON TRANSPARENT

CONCLUDING REMARKS SO SPECIAL INTERESTS OF ADVANCED INDUSTRIAL COUNTRIES PREVAIL RESULTING IN ORIGINAL MISSION NOT BEING PURSUED BROADER AGENDA OF GLOBAL STABILITY NOT BEING EFFECTIVELY ADDRESSED

QUITE CONTRARY: –POLICIES HAVE LED TO GREATER INSTABILITY –EXACERBATED ECONOMIC DOWNTURNS NEW ITEMS ADDED TO AGENDA –NOT NECESSARILY FOCUSED ON ADDRESSING GLOBAL PUBLIC GOODS IMPORTANT TO FIND WAYS OF FINANCING GLOBAL PUBLIC GOODS

SDR PROPOSAL PROVIDES IMPORTANT SOURCE OF FINANCE AT THE SAME TIME CONTRIBUTES TO GLOBAL STABILITY AND INCREASES GLOBAL EQUITY