Info Service on Finance and Development (Mar12/04)
Dear friends and colleagues,
We are pleased to provide you with a round up of some key discussions that took place at the joint session of the UN General Assembly Second Committee on economic and finance affairs and the ECOSOC in November 2011 at the UN Headquarters in New York.
1) Developing countries emphasize impacts of the economic recession, call for development-centered globalization
2) Top UN officials call for job creation to overcome recession and avoid a new crisis
3) Joseph Stiglitz on need for Global Economic Coordination Council, highlights problems with excessive focus on austerity in the global economy.
Below is the third article.
Stiglitz on need for Global Economic Coordination Council, highlights
problems with excessive focus on austerity in the global economy
At a joint meeting of the United Nations General Assembly Second Committee (on economics and finance) and the Economic and Social Council (ECOSOC) in New York late October 2011, Joseph Stiglitz, professor of international affairs at Columbia University, gave a briefing to member states in which he warned that the crisis was not yet over and global economic cooperation is urgently needed to stem the ripple effect of financial and economic malaise.
Speaking on the current state of the global financial system, Stiglitz said that the global financial system is not repaired and the problem of ‘Too Big To Fail’ financial institutions and banks are still thriving. Some of the issues are bad accounting, lack of transparency, and derivatives. For example, the very bank that failed in Europe had previously passed what is called a ‘stress-test.’ Financial regulators thought they were in good shape, making it difficult for investors to know otherwise. However, the fact is that the markets know that the investors do not know the real situation in banks and financial institutions. So, Stiglitz asked the question of “how there can be a concept of ‘a return of confidence’ when there is no basis for that confidence?”
Stiglitz recalled that “in March 2009, the pundits had begun discussing the return of ‘green shoots’ in the global economy. But in a very short period of time, these ‘green shoots’ turned ‘brown,’ as the credibility of those who had made this forecast was undermined. So where does this all take us today since the financial system is still broken?”
Issues such as climate change, energy markets and fossil fuels have been “completely ignored as policymakers focus on short-term problems while the long-term problems continue to get worse.” However, some solutions exist. Stiglitz noted that the “most likely prospect is that of a Japanese style malaise. This echoes the conclusion of the 2009 Commission Report on the global financial and economic crisis, which predicted that what happens in one part of the world will ripple out to other parts.”
Emerging market economies, while having endured the crisis with much more economic health than developed countries, “will be somewhat affected as they continue to grow in spite of the turmoil in Europe and America. But clearly, this can only happen if developed countries can do better, global economic cooperation.” One of the recommendations of the 2009 Commission Report was the creation of a Global Economic Coordination Council, which is a “silver lining in this cloud of current turmoil as we recognize the need to coordinate globally and prioritize the undertaking of serious reforms.”
The US economy is experiencing rapid changes that have deep implications for the near future of the world economy, said Stiglitz. At one point the aggregate US savings rate was close to zero, however today it hovers around 5 - 6%. And yet, we hear from the economic experts claim that the American consumer is coming back. This drastic change in the savings ratio in American society is a demonstration of the inequality gap in the US, where the bottom 80% of society has saved between zero to -10%. The American situation has been “peculiar and unsustainable,” and “American consumers are not coming back, nor should they be.”
The crucial question here is what will fill the demand gap that American consumers have left? Some financial experts produce analyses of a ‘savings glut.’ However, the problem is not so much a glut as much as the fact that the global financial markets did not safeguard its revenues and savings, and allocate them to productive needs that serve the needs of the real economy.
How then are the global financial markets to be addressed? “When the G20 got together, they said they wanted some parts of the planet to consume more. But our planet cannot possibly survive if people were to consume as materialistically as Americans do. Thus, a fundamental change must occur in the nature and pattern of global investments, toward a deeper restructuring of the global economy,” said Stiglitz.
With regard to the IMF, Stiglitz noted that since the onset of the crisis in 2008, there has been much more openness and flexibility in policy stances and economic ideology than ever before. Earlier this year, the IMF addressed the link between stability and inequality by admitting that if stability is essential to macroeconomic policy and equality essential to stability, then the inequality problem is also essential to macroeconomic policy. This in and of itself is a major change, as is the IMF’s change in perspective on capital account management.
The significance of productivity growth is also not acknowledged as much as it should be in the international community. If a country does not restructure its economy, rampant unemployment is often the result. If the rate of productivity growth is higher than the demand for manufacturing goods, unemployment will result, which will in turn hinder manufacturing productivity.
Stiglitz said that “net GDP increases with productivity, leaving winners and losers in every scenario. And even though the winners could compensate the losers, when the markets are not working, people will get trapped.”
For the Least Developed Countries, there is a greater challenge. The pervasive need for “infrastructure and technology investment is one of the biggest problems.” Even for many African countries that “followed all the instructions of economic liberalization and integration, the capital is just not flowing.”
One cause of this lack of capital investment in infrastructure and technology is the lack of equitable governance and effective policies in the Bretton Woods Institutions of the IMF and World Bank. Although there is a global recognition of the governance problem in the Bretton Woods Institutions, nothing has been done about it yet.
The emerging market economies today have a far higher income than the US and the EU had when the Bretton Woods Institution was created. “This is a time when people in the South should consider creating new institutions and arrangements of their own in the global economic architecture,” said Stiglitz, “and one aspect of this is the concept of a Global Economic Coordinating Council,” a proposal put forward by a Commission that Stiglitz led during the UN conference on the global financial crisis in 2009.
Many countries here in the UN have criticized the G20 for its lack of inclusivity, representativeness, and political legitimacy. “Therefore, a small group is needed to have concrete and informed discussions about how to deal with these matters.” A framework in which this can be done has already been laid out, and there is recognition that there are numerous difficulties to this endeavor. In 2009 when it was clear “that the world was heading to disaster collectively, there was a coming together, a collective spirit.”
“However, now some countries argue that austerity should be pursued while other countries argue for economic expansion. I have argued that austerity would be the wrong measure and that many of the countries currently undergoing austerity do have the fiscal space for expansion. However, there is some caveat between the countries that can afford to undertake countercyclical expansion and the countries that can’t. The US and Germany can both afford to, but Greece cannot. Therefore, fiscal expansion should be done by only those countries that can afford to do so in their fiscal space.”
Coordination is difficult, but lack of coordination is even more difficult, said Stiglitz. In a world of automatic and immediate externalities, when one country does something it impacts another. That is why the world economy has experienced “competitive devaluations, stimulus, contraction, consumption, production and savings.” He emphasized that we have to coordinate in a global economy by identifying the externalities that connect all countries. Policymakers and people need to be made more globally aware that when a policy intended to help our own countries is carried out, it must be have positive effects on other countries and it must work towards the creation of global governance institutions.
In the EU sovereign debt crisis, there has been “too much attention on austerity.” The austerity-mode supported by the European Union follows the ideology of the ‘growth and stability pact,’ which presupposes that all you need to do is keep your budgets balanced and everything in the economy will work out. Clearly, this has not turned out to be true.
Contrary to the monetary union of the Eurozone, a real fiscal union would be a viable solution. Such a fiscal union would involve a collective pooling of wealth that can be fairly shared. “But that is a very big deal,” Stiglitz cautioned, “and whether that will happen fast enough is also a big question. I don't doubt the commitment, but I doubt the mind-set. The mind-set in the Eurozone tends to be one of ‘We are not a transfer union.’ But if you don’t share resources and reassure each other, in some sort of solidarity, you are not a union that works on a monetary level. The monetary union cannot endure without some level of fiscal coordination, which means that having a common currency requires more than just the currency itself.”
The European Central Bank has been undertaking the kind of activity that is necessary for the most basic rescue, such as buying the risky bonds of indebted countries. Stiglitz argued that the mandate of the European Central Bank is “still stuck in the last century which simply maintained inflation. The ideological reluctance to address a broader range of issues, such as employment, equity, stability, etc, is proving to be a serious problem.”
The Middle East has experienced a profound kind of disillusionment, where the people said “we tried capitalism and we tried socialism, and both didn't work,” said Stiglitz. Their regional monetary arrangement undermined what was a good economic model. “And there are many different forms of a market economy. There are options and alternatives. The Washington Consensus model didn't work even in Washington. However, there are other models that can work, and that is the big lesson for the world. The world has seen two bad experiments, including capitalism in the North and socialism in autocracies. Both didn't work.”
With regard to trade, Stiglitz said that one of the most important mechanisms by which a country can provide assistance to itself is through trade. In the Doha development round, the US and the EU reneged on their commitments. Europe’s Everything But Arms initiative is “very important, and unfortunately, the US has not done the same.” Another major problem is that the US has not opened its markets to 97% of products from Least Developed Countries. Stiglitz concluded by saying, “I think it is important for the US to join in that effort of opening up the doors to the poorest countries. But the current climate is one where trade liberalization is not politically feasible.”
In the discussion with the audience that followed a representative from the IMF pointed out that the US savings rate used to be a problem because it was excessively low, and now it is the opposite scenario of a high US savings rate becoming a problem. How can the US find a balance between consumption and demand, asked the IMF representative.
The representative from the International Labor Organization stated that Stiglitz has reiterated a “powerful and important hypothesis, which is that when the rate of productivity growth outstrips the growth of aggregate demand, there will be a problem in the real economy. At the ILO, our findings are similar. If we disaggregate growth into productivity and employment, the increasing encouragement from international institutions to developing countries to achieve higher growth also implies reaching for higher productivity. But to achieve high productivity, local economies also need employment and demand, and this is a very hard nutshell to crack.”
The representative from Venezuela thanked Stiglitz for a “very important contribution,” and highlighted that the “G77 is very concerned about the negative consequences and impacts of the ongoing global financial and economic crisis. To address this concern, 133 countries support the creation of a Panel of Experts that could provide independent and technical advice to member states in the UN General Assembly.”
The chair of the Least Developed Countries group, Nepal, said that “when we look at our own situation, where as an LDC country we have huge challenges to face, we are increasingly worried that the EU and the American economies are still going through crisis, and that is a major challenge for all of us. This is especially true in light of the fact that the G20 remains an un-representative group, we LDC countries are not included in a meaningful way, so, how do we make sure that decisions are not made in wholly non-representational and un-inclusive manner?”
The ECOSOC chair highlighted that the global community cannot ignore the fact that the “MDGs have been seriously challenged by the global financial crisis. Many of the gains of previous years in developing countries have been reversed and undermined by the crisis.” He stressed that the “international community requires the kind of collective global action today that the world saw in 2008 and 2009. Unfortunately we are not seeing this.” +