The Nobel Laureate and Columbia University Professor, Joseph Stiglitz, argues that a major lesson from the financial crisis that erupted in 2007-2008 is that state has a crucial role to play in economic development, both in preventing crises and implementing adequate measures to avoid an amplifier effect turning them into depression.
Joseph Stiglitz, former World Bank Chief Economist, delivered this message in Tunis, at the AfDB Temporary Relocation Agency, in an intervention to staff and to diplomatic corps, as part of the AfDB Eminent Speakers Program.
The eminent economist criticized the American economic management system that has been prevailing over the last few years, for its inefficiency, and the economic theories that support it.
The crisis has indeed shown that liberalization of capital markets and lack of control contributed to the rapid spread of the crisis around the world. Central banks are also part of the problem. The emphasis they placed on inflation control has shifted the focus off growth, employment and financial stability. In short, the financial crisis has exposed the weaknesses of the conceptual theories dominant in recent years: deregulation, lack of constraints, financial system’s ability to self-regulate, and rational behavior of economic actors.
Contrary to what had been anticipated by the proponents of this doctrine, the better off have grown richer. The poorest were the main losers of this game: at the same time seeing their incomes decline and their meager assets, including real estate, carried away by their inability to service their mortgages.
Conclusion, said Professor Stiglitz: unrestricted markets are not self-corrective, nor necessarily stable nor efficient. The famous “financial innovations” supposed to bring more discipline to the market have not led to greater efficiency or contributed to increase wealth for the greatest number.
They have rather increased the risk of the global financial system. With the crisis, these financial innovations have led to the transfer of their adverse effects to all American taxpayers, and even to the world at large.
While recognizing that the increasing the G8 to the G20 was an important step forward in developing a new global governance system, Mr. Stiglitz finds nevertheless that 172 countries are not yet represented: only a single sub-Saharan Africa is part of G20.
Reforming international institutions has become urgent; current reforms undertaken are still too timid and too slow, says the American economist. He advocates for the establishment of a new international structure focusing on the opportunities offered by large reserves of global liquidity, but less reliant solely on the U.S. dollar.
Accordingly, said Mr. Stiglitz, the possibility of another crisis is all the more certain. Of course, like all analysts have pointed out, the United States should save more, but the real challenge is to mobilize investments to the real issues that matter: mitigating climate change and catering for the needs of developing countries: infrastructure, private sector development, good governance.
On climate change and the last Copenhagen Summit (7-18 December 2009), Mr. Stiglitz believes that it represented a missed opportunity. He said that a strongest agreement would have contributed significantly to global economic recovery.
Although Africa is also severely impacted by the crisis, the latter does carry opportunities. Countries must take opportunity of the current context to diversify their economies and lessen their excessive dependence on export of raw materials, invest more in agriculture, identify new sources of funding and look to do more trade with Asia. This does not exclude competing with Asians though, since Africa offers lower costs of labor, an incentive for foreign investors.
To fully grasp these opportunities, governments have a crucial role to play. The financial sector can be a key instrument, for example by setting up national development banks, less short-term profitability oriented than the private sector.
States should also create conditions conducive to private sector development, which involves the strengthening of governance. Stronger governance would force governments to better prepare for future crises, for example by strengthening social protection systems.
Previously, Mr. Stiglitz concluded, governments focused on stability, not enough on growth, and often saw neither one nor the other. Sustainable real growth can be reached only through stability and shared prosperity.