Globalization and Sustainable Growth: A New Paradigm Joseph E. Stiglitz Barcelona June 7th, 2002

2 Views before September 11, Enron, Argentina:  Globalization increased openness to trade and capital flows provided the best promise for growth  Free markets American style provided the best economic system  The New Economy brought unprecedented prosperity  End of the Business Cycle

3 Since the beginning of the millennium (I)  American recession and global slowdown : Business cycle had not been repealed  Bursting of Tech Bubble The New Economy had been partly hype  Enron Scandal America had preached good “accounting” but practice deficient Corporate Governance was a problem everywhere Political interference in setting standards, bail-outs (LTCM) Without good information, resources misallocated  California Electricity Scandal Deregulation again failed Markets had been manipulated

4 Since the beginning of the millennium (II)  September 11 Globalization had facilitated not only the flow of goods and services across borders US policy on secret offshore banking centers had facilitated financing terrorists  Argentina Failure of sixth major bail-out IMF hadn’t learned the lessons of East Asia—contractionary policies worsen economic downturns Privatization had contributed to crisis Fixed exchange rate system had contributed to crisis Throughout the region, countries are asking  Why does U.S. advocate expansionary fiscal policy when it has recession, but contractionary fiscal policies in developing countries?  Has globalization failed us? Has reform failed?

5 Since the beginning of the millennium (III)  More general dissatisfaction with globalization IMF failed to fulfill its mandates Trade Agenda imbalanced Rules of the game set by North for North –or for special interests in the North  Problems are exacerbating American Unilateralism  Incongruity between America’s free trade—free market rhetoric and practice Steel tariffs New farm bill Airline bail-out

6 The Risk Going Forward n Swing of the Pendulum to the other extreme

7 My perspective (I)  Globalization can be a powerful positive force Globalization of knowledge Globalization of civil society Greatest successes in countries of East Asia which took advantage of globalization, But on their own terms  Markets are essential for economic growth But markets need to be regulated Balance between excessive and insufficient regulation Find the right regulatory framework

8 My perspective (II)  Key problem is governance of globalization Just at time when we need international institutions most, there is least confidence Undemocratic (in the broad sense of term) and non-transparent Allowing undue influence of special interests Disproportionate role of U.S.—only country with veto power at IMF Of special concern when U.S. pursues unilateralist polices Pursuing unbalanced “Washington consensus” doctrines A global financial system prone to crisis Reluctance to address key policy issues, such as bankruptcy, in effective way

9 The Way Forward  Not to abandon international institutions, but to reform them  Key question for Europe: How should it deal with the U.S.: the role of global consensus building versus hard bargaining How can it present a united front to counterbalance U.S. while respecting diversity of views and interests  Aspiration: Global system which works, and not only for the few in the more advanced countries, but for everyone in all of the countries.