The Challenges Facing the Economy Today Professor. Joseph E. Stiglitz Professor of Economics & Finance Columbia University New York

Marked Change in Perspective in the Last Five Years East Asia crisis, Russian crisis, Latin American crises September 11: Concerns about terrorism, secret bank accounts Iraq War: Disruption to multilateral system, uncertainty about oil prices

Marked Change in Perspective in the Last Five Years From euphoria of New Economy to worries about global slowdown Bursting of dot.com bubble, broader global stock market declines Recession in U.S., Germany, Japan-first global recession of new era of globalisation Corporate, banking, accounting scandals in U.S., elsewhere

Marked Change in Perspective in the Last Five Years Economic mismanagement in U.S. A tax cut that failed to provide adequate stimulus, return of soaring fiscal deficits Continued growth in trade deficits Anemic response to corporate scandals

Marked Change in Perspective in the Last Five Years Europe’s hand’s tied Stability pact limits scope for fiscal stimulus ECB has difficult task balancing different economic situations in different parts of the continent But narrow focus on inflation, problems of earlier decades, has meant that it has failed to respond to current situation, contributing to weakness in Europe

Marked Change in Perspective in the Last Five Years Europe’s hand’s tied Full impact of strong Euro on exports may not be felt for months Large changes in exchange rates can leave both Europe and America the loser –Weaker dollar may lead investors to pull money out, leaving a weaker U.S. stock market, U.S. economy –Stronger Euro will make exports harder, imports from countries tied to dollar (like China) easier

Marked Change in Perspective in the Last Five Years Japan mired in structural problems, political stalemate

Consequences Marked slowdown in capital flows to emerging markets And even in FDI Major recessions, depressions in Latin America

A Quick Tour Around the World Korea China Brazil Russia

Brightest Spot: Korea Quick recovery from East Asia recovery Rapid growth Marked institutional changes Re-orientation towards China Strengthened domestic consumption (consumer credit) –May have over done it Election of President Roh viewed by many as even bigger break from the past

Bright Spot: China Good economic management avoided Global financial crisis Robust growth, FDI Smooth change in political leadership

Bright Spot: China Problem: large trade surplus-may be subject to pressure, especially from U.S. But U.S. trade deficit due to macro-economic management, not Chinese trade policies Competition from China causing problems throughout developing world Impact of SARS?

Bright Spot: Brazil Weathered electoral crisis Lulu seems to be demonstrating that he can be an effective, democratic leader But there remain some difficult reforms ahead And debt is large enough that future remains precarious Loss of confidence Disturbance within global financial markets (increased risk premium)

Bright Spot: Brazil Bright spot: India Managed to sustain high growth for almost two decades Through several changes of government Process of gradual opening But large public deficit remains worrisome

Mixed Picture: Russia Rapid growth after ruble crisis Showed the devastating effect of an overvalued exchange rate Helped by high oil prices By real exchange rate has increased, and benefits of devaluation attenuate over time

Mixed Picture: Russia Government finances should have improved even more in good times: what will happen if oil prices fall? Some improvement in private sectors, both small and large enterprises, some seeming improvements in corporate governance But Mafia elements, oligarchs still play important role Enormous concentration of economic power Prospects of growth slowdown

Global Worries Failure to address problems of global financial architecture Still succession of crises, one after another Developing countries still have to bear risk Bankruptcy reform moved into deep freeze

Global Worries Economic globalisation outpaced political globalisation American unilateralism Impending breakdown of Doha round of trade negotiations? New impediments to globalisation Iraq War did not solve problem of global terrorism New visa requirements and security precautions Backlash against globalisation?

Global Worries And new worries about those that countries that have been left by the side In Africa, middle east Bypassed by globalisation Growing poverty, despair In Africa-devastation of AIDS

New Optimism Growing recognition of the importance of, need for, international rule of law Growing recognition of the importance of, need for, stronger global democracy Unilateralism not viable in long run At least recognition of problems of international economic institutions and arrangements Reflected in discussions of trade, debt restructuring, and capital market liberalisation

New Optimism Growing recognition of special problems confronting Africa In many emerging markets, new popular leadership, trying to avoid extremes of earlier generations, a balance between government and the market