TWN Info Service on Finance and Development  (Apr09/03)
1 April 2009
Third World Network

Stiglitz Commission presents proposals to General Assembly
Published in SUNS #6669 dated 27 March 2009

New York, 26 Mar (TWN) -- Professor Joseph Stiglitz on Thursday presented the recommendations of the Commission of Experts on the global economic crisis, at the second day of the UN General Assembly's thematic dialogue on the financial and economic crisis.

Chairing the morning session, Korean ambassador In Kook Park, highlighted the new institutions that had been proposed by the Commission. These include a new credit facility, an IPCC-type expert group on the global economy, an Economic Council under the UN, a financial products safety commission, an international bankruptcy court and a new system of global reserves.

Stiglitz, who chairs the Commission, and is a Nobel prize-winning economics professor at Columbia University, said the summary of proposals is a work in progress. It is remarkable to get consensus among the diverse group of Commission members on very contentious issues, he said.

He added the Commission agreed to focus on the impact of the crisis on developing countries and on the poor in all countries. The summary of recommendations can still be added to, and the Commission will still be writing a longer document that will be finalized by the end of May in preparation for the UNGA June summit on the economic crisis.

Stiglitz said there is an underlying problem, the irony that there is insufficiency of aggregate global demand. As is result there is excess supply, rising unemployment, and the consequences will be severe in countries with less social protection. Some 200 million could be pushed into poverty. In the North, millions of families are facing loss of homes and jobs.

Clear we have failed to create a stable economic system that provides adequate social protection, said Stiglitz. The particular irony is that of insufficient aggregate demand in a world which has huge unmet needs, including the need to restructure our economies in light of global warming and fulfil the MDGs.

There are two sources of insufficient demand - inequality in the world, and mismanagement of the East Asia crisis and subsequent crises. The result is that countries accumulated large reserves to protect themselves. This has gone into trillions of dollars. This may be rational for each country but not so globally. It is understandable why countries increased their reserves, but money that is set aside is reducing aggregate global demand.

The unbridled consumption of the US consumer fuelled growth of past years, said Stiglitz. There is a basic flaw in the system that it requires the richest country to spend beyond its means to have growth in the world. That system is now broken, at great cost to all.

Moreover, even after we fix the US economy, we cannot go back to the previous situation, said Stiglitz. The US consumers cannot be profligate again. "We don't want another bubble to replace the previous bubbles," he said. "We are in the midst of an economic crisis which we will recover from but the climate crisis is more serious and long-term that we are uncertain we can recover from."

Another set of problems contributing to the crisis are monetary policies that did not focus on financial stability and long-term growth but on inflation. The view that low inflation is necessary and sufficient for long-term growth has been shown to be wrong. There was lack of focus on financial instability.

This is compounded by the wrong regulation framework, said Stiglitz. We allowed banks to grow too big to fail, and we did not enforce strong competition policy. Many TNCs are larger than small countries and there is a unfair balance. We thus need a global competition authority, he added. He also said there was the wrong incentive system. Participants in markets responded to incentives that led to failure. He attributed these perverse incentives was to bad corporate governance.

Globalisation has brought large benefits especially to those who opened up their markets including financial markets. However it facilitated a contagion, spreading the mistake of the centre, with global consequences. That failure spread around the world. The US can bear the consequences, said Stiglitz, but many poor countries are not in such a position. The irony is that countries that are adversely affected are those that opened themselves up to the global economy the most.

This highlights that economic globalisation outpaced political globalization. Countries became more inter-dependent, but we don't have the political institutions to prevent the adverse consequences, he said. We have a step forward to create a system that is less likely to have the problems we have.

This is a global crisis in the modern globalization age. The decoupling hope that Asia would save Europe from the US downturn has turned into a myth. You can't have a problem in the world's largest economy without having effects on the rest of the world, said Stiglitz. Thus, the response also has to be global. There is the G20 process, but there are 192 countries and 172 of them are not in the G20. Thus, said Stiglitz, we need inclusive representative institutions with political legitimacy reflecting the world. So far, the locus of response is still at the national level. Each government is looking at its own costs and benefits.

This, he said, represents many serious problems. First, it does not take account of the spillovers of national policies. Unless we have a coordinated global response, the magnitude of the response will be too low.

Each country as it frames its stimulus package tries to maximize the benefits it gets. In the 1930s there were beggar-thy-neighbour policies. Even today each country asks how to design a stimulus which is good not for the world but for itself. Thus the global response will be lower (than if a global approach is taken).

Second, said Stiglitz, this is troublesome when it leads to protectionism. According to a World Bank report, 17 of the 20 countries of the G20 have engaged in protectionism since their first meeting, the most publicized being the Buy American provision in the US stimulus package.

Stiglitz also said that the trading system was not designed with the global crisis in mind. There is a WTO procurement agreement but is mostly among developed countries. The US says it won't violate WTO agreements in the Buy American provision, and this means it will buy goods from other developed countries but will discriminate against developing countries.

There is a need to rethink the regulatory structures, said Stiglitz. However, the scope of policy change is inhibited by bilateral FTAs, especially those parts in the FTAs that relate to financial services. We now know the philosophy of unfettered markets is wrong but the FTAs were framed in this flawed economic philosophy, he said. We need a global response. Every country must have a stimulus package except for one problem, that the developing countries don't have the resources to take the stimulus packages. There will thus be an imbalanced global response unless there are funds for developing countries.

An important recommendation is that developing countries need access to substantial additional funding. This could be through the developed countries setting aside 1% of their stimulus packages for developing countries, the IMF to issue the SDRs to help countries in need, and a variety of regional approaches too.

Stiglitz added that there is also a need for mechanisms to disburse these funds. They should be distributed in ways that give developing countries policy scope, especially for counter cyclical policies. The East Asian crisis saw countries being asked to do pro-cyclical policies which was counter productive as the policies were contractionary.

Whatever assistance is given should be done without inappropriate conditionality, stressed Stiglitz. There are problems with existing institutional arrangements, for example the slow progress in reform of IMF and World Bank The pace of reform is not fast enough and competition in disbursement is good, so many mechanisms should be explored.

Stiglitz said the Commission proposed to mobilise additional funds through a new credit facility which is a matter of urgency. Whatever the form is chosen, the new facility should have a more democratic governance with stronger representation of developing countries.

On longer-run reforms, Stiglitz highlighted two issues I want to highlight two issues - a global reserves system and a UN economic council. He said a new reserves system has been long discussed. When the Bretton Woods system was created, the economist Keynes had in mind a new global reserves system. He recognized the disadvantages of a reserve currency linked to a country.

Meanwhile, globalization was developed and the need is all the greater now. The current reserves system contributes to instability and to insufficient demand and is inequitable. Developing countries lend trillions of dollars to the US at near zero interest rate. They do it because they want to protect against financial instability.

Stiglitz added that you can't have a stable reserve system when the dollar's value is volatile. This is the time in which a new global reserves system can be created. It can be done in a number of ways, for example bottom up or top down. Efforts at the regional level, like the expanded Chiangmai Initiative, are also on going.

The second proposal he highlighted was a new global economic coordinating council. There can be a IPCC-type expert group, and a political body of a coordinating council. The council can be a body that identifies gaps in the system. After the Argentinian crisis there was talk of the need for a sovereign debt mechanism, but there was no outcome. A function of this council is to identify the gaps in the institutional structures, and identify what can be done and give proposals. Other Commission members also spoke on specific points following Stiglitz's presentation, and several delegations then responded. +