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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