Stiglitz in the current issue of Vanity Fair is afraid how poor countries will respond to the global crisis and the record of American hypocrisy on economic policy (like what America prescribed for itself in 2008-2009 vs. what it prescribed for Asia during 1997 crisis). All of this will tarnish market economics so much, fears Stiglitz, that poor countries will turn away from markets altogether in favor of some heavy-handed state planning and socialism. Stiglitz, who is not usually considered market economics’ best friend, is right to be scared.
It’s rare for your regular working-class economist to be the FIRST to worry, so forgive me if I point out that I expressed almost identical fears to Stiglitz’ fears nine months ago in the Wall Street Journal. (On the minus side for crystal ball-gazing, one of my star exhibits for socialism noveau was Honduran president Zelaya, who was just overthrown last weekend.) And then I worried some more about this in Foreign Policy (January/February 2009).
One of the reasons to be worried is the precedent from the 1930s Depression – not the usual worry about a huge wave of global protectionism. No, the worry is about the intellectual precedent that the Depression so discredited markets that government planning and intervention became the default model of development economics for the next 30 years – the 1950s through the 1970s.
I’m thrilled to have a heavyweight like Joe Stiglitz to make this case better and more credibly than I could (along with providing a cheap excuse to recycle a couple of my old columns). The issue now is not subtleties about the right type of financial regulation, global vs. local standards, or calibrating fiscal stimulus. The issue in development now is the revival of the big markets vs. state planning debate. Let’s hope it comes out differently this time than it did for early development economics after the Depression.
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I’ve noted this in Southern Sudan. We had some seminars in Juba by African leaders about economic growth, and several comments were made about whether we should be following America’s lead and nationalising firms and banks. Bad news.
Government subsidies and financial support for various private industries in USA creates unfair competition. And other countries have to provide similar support for their private companies in order to avoid loosing out.
The only problem is that poor countries don’t have the money to support their private companies like that. Their only possible defense against unfair competition is tariffs and regulatory trade barriers.
There is already a situation like that in agricultural trade. Agricultural subsidies in the rich countries have prompted the poor countries to create trade barriers for agricultural products. And the same might eventually happen for all industries that USA and other rich countries choose to subsidize.
Er, your article is not ‘nearly identical’ to Stiglitz’s at all. Stiglitz takes a much more nuanced view, arguing that “what is required for success is a regime where the roles of market and government are in balance” but that developing countries which were subjected to hypocritical and destructive neoliberal policies by the IMF or which swung to a Friedmanite extreme after the collapse of communism will give up on markets altogether. Reading your stuff, anyone would think that free markets and minimalist government was a sure-fire route to prosperity for all, which Stiglitz would vigorously contest, correctly in my view.
Stiglitz is also quite clear that “Today only the deluded would argue that markets are self-correcting or that we can rely on the self-interested behavior of market participants to guarantee that everything works honestly and properly.” Would you agree with that? Your recent writings and the fact that you think the worst that could happen is that we return to the policy regime of the first few post-war decades (a regime which helped deliver remarkably high growth in rich and poor countries, by the way) suggest otherwise.
I think every poor country will follow its own path. Some will be governed well, others stagnate, and still others will do badly. As usual, the results will be completely random.
I am sure Stiglitz & Co will afterwards give a reason for the success stories and thus explain the consequence. That’s what economists tend to do for a living.
His fears and predictions don’t matter, however important he thinks his dogma of the market and democracy may be.
Great conversation happening right now at whiteafrican.com over capitalism in Uganda (in the context of should ‘we’ charge the ‘poor’ or should services be free for Google’s new SMS service there).
How patronizing rich-country economists are:)
Stiglitz is a bit useless since being so busy with politics and the fighting with free-marketers he is incapable of detecting what the financial regulators in Basel did to development when they, on top of what the market already charges for risk, arbitrarily concocted some minimum capital requirements based on a vaguely defined risk as measured by the credit rating agencies.
According to these regulations if you can hustle up a triple-A rating then the bank lending you capital needs only to back your loan with 1.6 percent in equity but if you are a poor unrated corporation then they have to put up 8 percent… and guess who pays for that?
These regulations lowered the flag for the big global race after the triple-As and, in just a couple of years, over 2 trillion dollars followed the triple-As to finance the increase of values of houses in the US, instead of financing other much more useful things like mitigating climate change, creating sustainable jobs and others.
Psst! Why don’t we just throw out some of the dinosaurs so that we can do some good thinking inside the box instead of us always being told to go outside to think? http://subprimeregulations.blogspot.com/
Now in the midst of the crisis why do we not discuss more what we want to get out of our banking system so that next time we get a financial hangover, as we surely will, the party has at least been worth it.
Even though I already quoted two of my own columns on this piece, I still overlooked an opportunity for self-promotion — quoting yet another column I did in Forbes in January 2009 that also noted how economists are returning to orthodoxy:
http://www.forbes.com/2009/01/29/davos-economic-basics-opinions-contributors_0130_william_easterly.html
More serious than my excessive self-promotion is how widespread this “back to basics” movement is.
I’m very glad to see this. Foreign Policy recently published a real Marxist promoting Marxism,
http://www.foreignpolicy.com/story/cms.php?story_id=4856
the kind of insanity I thought we were done with once and for all. In the face of this kind of real danger, Stiglitz’ remarks do redeem him slightly, though I’ll never forgive him for endorsing Naomi Klein’s book. A bit more context on why this issue is important,
http://www.dailyspeculations.com/wordpress/?p=3862