1. THE GLOBAL ECONOMY IN THE AFTERMATH OF THE IRAQ WAR
JOSEPH STIGLITZ
ISMA ANNUAL CONFERENCE
MADRID
27 JUNE 2003

2. THE GLOBAL ECONOMY WAS WEAK BEFORE THE IRAQ WAR
THE RUN-UP TO THE WAR WEAKENED IT FURTHER
BUT THE RESOLUTION OF THE WAR DID NOT RESOLVE THE UNDERLYING WEAKNESSES
THE GLOBAL ECONOMY REMAINS WEAK

3. THE RUN-UP TO THE WAR EXPOSED FURTHER WEAKNESSES IN THE GLOBAL GEO-POLITICAL SYSTEM
WEAKNESSES EVIDENCED EARLIER
AS ECONOMIC GLOBALIZATION HAD OUTPACED POLITICAL GLOBALIZATION

4. THE END OF THE WAR HAS NOT RESOLVED TENSIONS IN THE MIDDLE EAST AND HAS BROUGHT TO THE FORE CERTAIN LONG STANDING PROBLEMS
CREDIBILITY OF POLITICAL LEADERSHIP
PROBLEMS OF DEBT

5. I. STATE OF THE GLOBAL ECONOMY
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 pricesMarked change in perspective in the last five years
Iraq War: Disruption to multilateral system, uncertainty about oil prices

6. Marked change in perspective in the last five years
From euphoria of New Economy to worries about global slowdown,
From the Roaring 90s to the malaise of the new millennium
Bursting of dot.com bubble, broader global stock market declines
Corporate, banking, accounting scandals in U.S., elsewhere
Recession in U.S., Germany, Japan—first global recession of new era of globalization

7. I. STATE OF THE GLOBAL ECONOMY
US WENT INTO RECESSION IN MARCH 2001
STILL A LARGE, AND GROWING, GAP BETWEEN ACTUAL PERFORMANCE AND POTENTIAL

8. PROSPECTS FOR THE U.S. ECONOMY WEAK
Economic mismanagement in U.S
Anemic response to corporate, accounting, banking scandals
A tax cut that failed to provide adequate stimulus,
Return of soaring fiscal deficits—put strong demands on global capital markets
Continued growth in trade deficits

9. Economic mismanagement in U.S PRESENTS MAJOR UNCERTAINTIES
Will the world be willing to continue to finance these deficits
Potential changes in sentiments could have major effects on exchange rates
Only weaknesses in Europe, elsewhere have prevented further decline in dollar
Large changes in exchange rates can be negative sum:
U.S. gains on exports
But weaknesses in financial markets may more than offset these gains
Europe hurt doubly: stronger exchange rate, weaker American, global economy

10. I. STATE OF THE GLOBAL ECONOMY: EUROPE’S HANDS ARE 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

11. EUROPE’S HANDS ARE 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

12. I. STATE OF THE GLOBAL ECONOMY
Japan mired in structural problems, political stalemate

13. STATE OF THE GLOBAL ECONOMY:
Emerging markets mixed picture
LATIN AMERICA
CHINA
RUSSIA
ELSEWHERE

14. Emerging markets mixed picture
Major recessions, depressions in Latin America
Brazil weathered storm, but at what cost? And how stable?
Argentina on road to recovery, without the IMF

15. Emerging markets mixed picture
China has had robust growth, but
Weak dollar has contributed to China’s competitive advantage
Widespread blame on China for U.S. trade deficit (as in earlier disputes with Japan)
Widespread blame on China by developing countries (Mexico, and seeming failure of NAFTA)
Will China’s position be sustainable?
But low (competitive) exchange has been important for China’s growth and employment creation—important for political stability

16. Emerging markets mixed picture
Russia: slower growth as effect of earlier devaluation wears off and oil prices decline, continued problems in establishing market economy
India: impressive growth, worrisome fiscal deficits
Korea: impressive recovery, redirection of economy

17. Weak state of global economy
Consequences
High level of global uncertainty
Marked slowdown in capital flows to emerging markets
And even in FDI
There are normal restorative forces, they move slowly, government is not doing as much as it could

18. II. THE RUN-UP TO THE WAR EXPOSED FURTHER WEAKNESSES IN THE GLOBAL GEO-POLITICAL SYSTEM

19. Economic globalization outpaced political globalization
Rules, institutions governing globalization largely set by advanced industrial countries, special interests in those countries, for their own advantage
Inequitable: developing countries not only have not reaped “fair share” of benefits, in some cases worse off

20. Economic globalization outpaced political globalization
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

21. Economic globalization outpaced political globalization
And new worries about those that countries that have been left by the side
In Africa, middle east
Bypassed by globalization
Growing poverty, despair
In Africa—devastation of AIDS

22. Economic globalization outpaced political globalization
American unilateralism
Evidenced earlier in response to global warming, strategic arms, international criminal court

23. Economic globalization outpaced political globalization
Impending breakdown of Doha round of trade negotiations?
Key role of agriculture for developing countries
Intellectual property—drugs, biopiracy
New issues—competition, investment

24. Economic globalization outpaced political globalization
New impediments to globalization
Iraq War did not solve problem of global terrorism
New visa requirements and security precautions
Backlash against globalization?

25. III. THE END OF THE WAR HAS NOT RESOLVED TENSIONS IN THE MIDDLE EAST AND BROUGHT TO THE FORE CERTAIN LONG STANDING PROBLEMS
CREDIBILITY OF POLITICAL LEADERSHIP
PROBLEMS OF DEBT

26. PROBLEMS POST WAR Iraq Reconstruction
Challenge: Creating a viable market economy with
Large debt overhang
War destruction
Movement from socialism to a market economy

27. PROBLEMS POST WAR Movement from socialism to a market economy
Badly managed elsewhere
Major advantage over Russia: existence of entrepreneurial class
Major disadvantage: lack of human capital
Risks: American ideological approach, rapid privatization
Low receipts to government
Asset stripping
Viewed as illegitimate

28. PROBLEMS POST WAR Debt overhang U.S. position:
Russia and France should foregive debts
Earlier contracts not “legitimate,” can be abrogated
America has made its “contribution”: $80 Billion spent on war
But U.S.
opposes systematic procedure for bank restructuring
Elsewhere has insisted on contracts being honored

29. Debt overhang Fundamental questions raised
Should there be an international “rule of law”—or should such questions be decided on an ad hoc basis?
Odiose debts and illegitimate contracts: Are there principles which should guide such judgments, or should such questions be decided on an ad hoc basis?
Lack of clear answers contributes to market uncertainty

30. NEW OPTIMISM
Growing recognition of the importance of, need for, international rule of law

31. NEW OPTIMISM
Growing recognition of the importance of, need for, international rule of law

32. NEW OPTIMISM
Growing recognition of special problems confronting Africa

33. NEW OPTIMISM
In many emerging markets, new popular leadership, trying to avoid extremes of earlier generations, a balance between government and the market