Chennai: Economist Joseph Stiglitz has been in the news recently with French President Nicolas Sarkozy endorsing his call to relinquish “GDP fetishism” and focus on broader measures of well being. In a telephone interview with Mint from New York, the 2001 Nobel laureate in economics talks about the shaky state of the global economy, sustainable development and the free rope given to the International Monetary Fund (IMF) in the Group of Twenty (G-20) nations. He speaks about China’s advancement, the US’ lack of progress in climate change policies, and his criticism of “market fundamentalism”—a belief that free markets are the best way to solve problems. Fellow Columbia University professor and free-trade proponent Jagdish Bhagwati has been critical of Stiglitz’s argument. Edited excerpts:
What is your perception of the global economy? Are the green shoots emerging?
I think it is true that it is emerging and it is in a much better stage than it was soon after Lehman Brothers collapsed. But that doesn’t mean that the global economy is heading towards a strong recovery. And the question that remains unclear is what will provide an impetus to the economy that America’s total consumption did in the years before the crisis.
You have mentioned that Asia could emerge out of the crisis sooner.
The point is that right now it appears that China and India have so much room to grow based on the expansion of domestic consumption that they can and they have to resource it, particularly China with its large reserves, to continue to stimulate their economy. But the problem is that they are too small by themselves to provide impetus to the global economy. It will help, particularly commodity producers, but it is not sufficient to solve the world’s problems.
Europe is probably taking the direction that America takes.
Europe has the same problem as America has. And they and America are going to face the problem of fiscal stringency because many of them went into the crisis with deficits and high levels of national debt that makes it difficult to sustain the kind of fiscal stimulus they need at this time.
What about Wall Street, where is it headed? Financial businesses continue to be big contributors to some countries’ gross domestic product (GDP).
That is one of the big issues that we have, to restructure our financials in our economy. The financial sector was over quoted and we will have to downsize it and the question is, how can we do that? That is going to be a big challenge. One of the problems is that the way we have been restructuring it recently in effect has strengthened the parts that do not contribute to our economy down the road.
Moving on to the G-20, do you think it will replace the G-7 and G-8?
I am expecting that to be one of the announcements to come out of the G-20. The G-7 or G-8 is going to be dead and the next meeting in Canada will be the next G-20 meeting as opposed to the next G-8 meeting.
What will this mean for countries such as India which will now be placed on the high table? Will it get tougher?
Copenhagen worry: Economist Joseph Stiglitz says the most difficult issue regarding climate change talks is not a scientific disagreement about what needs to be done, but figuring out a way of burden sharing. Ramesh Pathania / Mint
India will be at the table. The real question is whether it will speak out not only for its own interests but that of other developing countries. I have been a little bit surprised at the willingness of the G-20 to give as much rope to the International Monetary Fund (IMF) when so many of the developing countries realize that the IMF is still controlled by the United States, which still has veto powers, has some of the flawed policies or models that led to the crisis and led to its spreading. So, I have been very disappointed that the developing countries have not raised their voice to say that we cannot delegate the responsibility for managing the global economic system to an institution that still faces these kind of structural flaws.
There are suggestions for peer reviews of economic policies of the G-20 nations. Is that workable?
My understanding, from what I have heard, is that some of the countries that agreed to it basically agreed to it because it will have no effect. Otherwise, why would you delegate responsibility to an institution that you don’t have much confidence in. If the member countries thought that it would have a bigger effect, they would not have been able to reach an agreement.
So, I think that is unfortunately a part of the problem, that the agreement was arrived at only because some people believe that it is not going to have much impact.
What about some of the changes they are suggesting to IMF?
The problem is that many of the measures are too small and too slow. There is very little evidence that they will be enough. Let me make it clear that many of these things are strong movements in the right direction and I would not want to undermine these. But we shouldn’t make the mistake and think that that will really solve the problem. They just haven’t gone far enough.
Regarding climate change, a lot of leaders haven’t really gone into specifics regarding measures they plan to take. What do you think will happen in Copenhagen?
I still remain hopeful that there can be an agreement of overall principles. I think it is going to get agreement on commitment partly because in the United States it remains difficult to get through Congress any legislation that would enable America to go to the meeting with a strong commitment. The most difficult issue, I think, is not a scientific disagreement about what needs to be done, but figuring out a way of burden sharing. And that is the topic that is so contentious that people don’t even want to talk about it in those terms.
Still, a lot of countries are coming up with their own unilateral policies.
That is why I am optimistic. Many countries are coming up with their own proposals. That means there will be significant progress. The US and China are doing 40% of the emissions. From what I have gathered, China, while it won’t make commitments, is actually doing a great deal. The real laggard in this remains the United States and so that is obviously the major source of concern. And at some point, the international community will decide that it will have to put more pressure on the United States. Particularly because they want to support (US President Barack) Obama as the president they are reluctant to do it at this time, but inevitably there may not be any other choice.
What could the new measure for growth being endorsed by countries such as France mean for India and China which are patting themselves on their backs based on the kind of GDP growth they are witnessing?
One of the points we focus on is that you have to look at sustainability and America didn’t look at that and had debt finance their expansion. But we also emphasized the importance of sustainability by measured environmental degradation and resource depletion. But if you took that into account, the growth in India and China would look diminished. In India, there are particular problems. For example, in agriculture some of the growth has come from depleting groundwater and that is not sustainable and while agricultural growth has been limited, even that limited growth may not be sustainable and that should be an important warning.
If there had been better metrics, the people would have realized that some of this growth would have been borrowed from the future.
Jagdish Bhagwati recently was critical of your usage of the term market fundamentalism.
Let me put it this way, a lot of people are looking at India’s history of excessive government intervention in the market (in the past), worry that when I talk of the limitations of the market that I am suggesting that India or other countries go back to that past. And of course, I never suggested that. The question is how do you achieve the right balance between the market and the government.