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