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Stiglitz criticises multiple shortcomings of the G20 agenda

Speaking on the eve of the G20 summit at Pittsburgh at a gathering of non-profit groups, Nobel laureate Joseph Stiglitz provided an assessment of what the G20 has achieved so far and where it has fallen short.  Bhumika Muchhala reports.

THE key problems in the world economy and financial markets that have led to the deepest recession since the Great Depression have not yet been effectively addressed by the Group of 20 (G20). Instead, the world is witnessing how the very banks that were deemed 'too big to fail' are only getting bigger, having been offered  carte blanche by the world's most powerful leaders, Nobel laureate Joseph Stiglitz has said.

This view was voiced by Stiglitz at an event in Pittsburgh organised by a coalition of non-profit organisations and social movements. Stiglitz was speaking to an audience of several hundred on the eve of the G20 summit.


'Ersatz capitalism'

According to Stiglitz, one of the major problems with the international financial system is big banks. 'Our "too big to fail" banks are only bigger today, and meanwhile, we did not give enough funds to the smaller banks who lend money and create jobs,' said Stiglitz.

The US financial crisis response policy did not focus on lending. Instead, it focused on the institutions whose primary activity is gambling, making profits by trading, not by lending. Risk management as it is currently practised is not reflected in the rewards given to bank and investment firm gamblers, he added.

'I call the bank bailouts an "ersatz capitalism," marked by the privatising of gains and the socialising of losses,' said Stiglitz.

The Obama administration's way of dealing with America's ailing banks is actually a win-win-lose proposal, where the banks win, investors win, and taxpayers lose. This distorts incentives, and the US has not even begun to address the incentives problem underlying the subprime crisis.

The financial sector regulation enacted so far has not been enough, he stressed, noting that there are five lobbyists from Wall Street institutions for every Congressman in the US government. For years, the financial sector has been pushing deregulation, massive bailouts of banks and investment firms, and innovative ways to stifle major financial regulations that are needed to ensure that crises do not keep recurring.

There is a valid fear that these lobbyists will drive the crisis-response agenda in Congress. While France and Germany have been pushing very hard on incentives, the US has done almost nothing on the issue of 'too big to fail' banks, he said.

One of the key questions is how to get financial institutions to do what they are supposed to do, which is to provide financial assistance to taxpayers and communities. While the G20 has been trying to stop risk-taking, they are still not directing banks to provide taxpayers and homeowners with, for example, mortgage assistance. Other countries have sound systems in place for doing so, Stiglitz told the gathering.

The US financial market has resisted doing what the people in a society expect and need it to do. The best that could be hoped for out of the G20 summit was that it would set an agenda for the next meeting.

Stiglitz said that while the G20 is marginally better than the G8 or the G7, there is still only a little more possibility of democratic accountability than previously. Although it is easier to organise 20 leaders than 192 on a practical level, there is not a single representative for sub-Saharan Africa in the G20 other than South Africa. In relative comparison to the G192 of the United Nations, the G20 does not reflect the voice and priorities of the global community, he added.


Global governance

Stiglitz stressed the need for global governance. In economics, there is the concept of externalities, in that what one person does affects another. The US financial market had enormous negative effects on the rest of the world. Through the process of deregulation, the US exported not only its toxic assets, but also its recession. And yet, the US has not taken responsibility for its actions in the rest of the world.

'The global economic recession is not over, and it is not likely to be over for a very long time,’ Stiglitz told the gathering. The emerging 'green shoots' are not strong enough to provide the legs needed for a substantial boost in global and national employment. 'That means if we are not growing by a GDP rate of at least 3.2%, employment will not reach pre-crisis level. This is not time to be talking about an exit strategy.'

The poorest of the middle class in the US became 4% poorer in 2008 than 2007, said Stiglitz. Most Americans were told not to be bothered by the fact that their income is going down. Americans were instead told to consume as if their income is going up, and to do so by borrowing, which proves beneficial for banks.

However, he added, that model has now been broken. Most Americans have to accept that their standard of living is going to go down, and nobody has been talking about that so far. The issue of global imbalances, the surpluses of emerging market and developed nations juxtaposed with the deep deficit of the US, is at the centre of the discourse of what caused the crisis.

One response to addressing China's large trade surplus is a suggestion that China and some other countries need to have more flexible labour market policies (i.e., lower wages and less labour law practices). This is not the answer, said Stiglitz. Germany and France have done much better than other countries because of job market protections.


IMF loans

A global response is now necessary from the G20. ‘Developing countries have been much worse affected than even the United States, and they do not possess the resources that we in the United States have,’ said Stiglitz.

At the previous G20 summit held in London on 2 April, world leaders committed a substantial amount of money ($1.1 trillion), but almost all of it ($750 billion) was through the International Monetary Fund (IMF).

'This is a problem,’ said Stiglitz, ‘because most developing countries are just recently getting out of a major debt overhang, and the IMF's loans exacerbate debt problems. Second, the IMF is the very institution that promoted free capital markets and economic and financial liberalisation.’

The fact that the G20 allocated its funds almost entirely to the IMF means in part that the world does not yet have the right kind of institutions for effective crisis response. However, this does not mean that countries have to rely completely on the IMF.

He noted that other global institutions, such as the International Labour Organisation, should be among the institutions given responsibility to implement some of these solutions.

Bhumika Muchhala is a researcher with the Third World Network. The above is an edited version of an article which first appeared in the South-North Development Monitor (SUNS, No. 6781, 29 September 2009), which is published by TWN.

*Third World Resurgence No. 228/229, August-September 2009, pp 14-15


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