Stiglitz speaks on the global economy

One of the banner events of the Center for Development Economics (CDE) 50th anniversary celebrations was the lecture last Wednesday evening by Joseph Stiglitz, the Nobel-prize winning economist who served as senior vice president and chief economist at the World Bank from 1997 to 2000 and chaired the Clinton administration’s Council of Economic Advisors.

“I could introduce Joe by saying he’s written a few articles. That’s like saying that some banks made bad loans,” quipped Jerry Caprio, professor of economics and former World Bank colleague of Stiglitz, introducing him to the capacity crowd in the ’62 Center’s MainStage. “If you care about the environment, please don’t print out his CV. It was 58 pages, but that was yesterday.”

In recognition of the CDE’s anniversary, Stiglitz discussed the evolution of development economics over the last 50 years.
“It’s been a remarkable half century,” he said. “Fifty years ago, it was almost inconceivable that the successes of development would be so far beyond anything anybody could have dreamed of.” He noted the astounding economic growth and reduction of poverty in China but added that such successes have been counterbalanced by development failures, especially in sub-Saharan Africa.

“When I first went there in 1969, right after some of the countries had become independent, there was the tremendous hope that after throwing of the shackles of colonialism they would be able to grow,” he said. “But poverty has increased.”

Because of these disparate outcomes, there has been a gradual realization that “growth is necessary, but not sufficient, for long-term poverty reduction.” Stiglitz pointed out that, despite growth in GDP and per capita GDP in the United States, most Americans have not enjoyed any growth in income in the last 12 years. “The last 50 years have been a struggle for answering two questions: How do we get growth and how do we make sure that when we do have growth the benefits are widely shared?” he said.

According to Stiglitz, the framework for this analysis has shifted gradually over time.

“Fifty years ago, the idea was a simple one,” he said. “The major thing that separated rich and poor countries was a shortage of capital, so the World Bank lent to developing countries at relatively low interest rates.” When such lending failed to bring transformation, the focus shifted to policy – specifically, policies founded on the neoclassical argument that efficient allocation through undistorted prices is at the core of all good economies. Stiglitz contended that the neoclassical model ignored real-world characteristics; governments who followed these prescriptions did not enjoy economic growth.

Subsequently, a third agenda emerged: institutions.
“Economists finally admitted that markets didn’t cover everything,” Stiglitz said. “Institutions help complete the markets; they were efficiency-enhancing. The combination of good institutions and markets would lead to the successes that everyone would hope for.” Even this epiphany, however, was qualified: Some institutions – such as caste systems or Jim Crow laws – reinforce inequalities, thus impeding economic development.

Stiglitz emphasized the difficulty both of determining an institution’s quality and of reforming subpar institutions.
“If Americans looked closely at the Fed, this institution that they have taken as sacrosanct, they would realize that its performance has been dismal and that the accountability within it is an embarrassment,” he said. “In spite of the failures, the bill that was just passed in Congress gave more powers to a failed institution.” Stiglitz also offered an example of poor institutions in developing countries: While IMF and World Bank representatives promote privatization to increase efficiency, “every once in a while you see the light bulb go off in the eyes of a corrupt government official who realizes that privatization gives them the chance to steal not only this year’s revenue but the discounted value of all future revenue,” he said.

On the other end of the spectrum, Stiglitz emphasized that economic development hinges on the cultivation of ideas. “The core question in my mind in development strategies today is, ‘How do we reduce the gap in knowledge?’” he said. “If you look at any successful country like Korea or China, they were implicitly creating institutes of learning. They had explicit policies for the transfer of technology.” Stiglitz expressed optimism that this new focus on knowledge and technology would generate lasting growth.

However, he emphasized that growth does not mean an equal allocation of its benefits. “Not only is growth often not pro-poor, it is often anti-poor when it is accompanied by high levels of unemployment and instability,” Stiglitz said. Nevertheless, he added that the last decade has seen significant progress in innovations to make growth pro-poor, ranging from conditional cash transfers and microcredit loans to improved cooking stoves and oral rehydration therapy.

“What’s interesting about many of these innovations is that they are broad based and touch on many issues,” he said.

In closing, Stiglitz linked lessons on economic growth back to the current financial crisis.

“The silver lining on the cloud of this global recession is that it’s going to provide new perspectives on economic policies, and offer a rare chance to reshape this thinking,” he said. “We should realize that some countries have actually been pursuing the right policies for a quarter century and have succeeded in increasing growth and reducing poverty. Perhaps it’s time for us in advanced industrial countries to learn from them.”