Austerity won’t work, says Stiglitz2 min read . Updated: 08 Jan 2013, 10:39 PM IST
Stiglitz says the chances of austerity measures improving economies in Europe is close to zero
Bangalore: Nobel Price winning economist Joseph Stiglitz on Tuesday said the chances of austerity measures improving economies in Europe is close to zero.
Speaking at a public discussion in Bangalore, the former chief economist of the World Bank said austerity measures would work only if a country’s exports were able to fill the hole left by cuts to government expenditure. “That cannot happen in Europe or the United States," he said. “The prospect of this working is close to zero or none."
Referring to a study by Harvard economists on expansionary contraction, Stiglitz said the only instances of economies growing after governments cut expenditure were those where the countries’ trading partners were also growing.
Stiglitz said the International Monetary Fund had performed several austerity experiments in Thailand, Bolivia, Indonesia and Argentina, and all of them had failed. “The experiments have a 100% track record," he said. “Every time austerity was tried, the economy went from a downturn to a recession, and from a recession to a depression."
He pointed to Greece and Spain, which are currently battling depression and unemployment rates close to 25%. “I don’t understand why so many countries, after having seen this, have one after the other tried it. It’s very hard to understand how people persistently work against the evidence."
In the US, Stiglitz said inequality has increased significantly in the past 30 years. The richest 1% of the population get 20-25% of the nation’s income and about a third of the wealth. This has worsened since the economic crisis of 2008, he added. “One year after the crisis, 93% of growth went to the top 1%," he said.
Stiglitz said the overall median income in the US now is lower than it was in 1996, and the median income for a full-time male worker is lower today than it was in 1965. “These inequalities are reflected in health indicators. For instance, while overall longevity has increased in the long run, at the bottom, longevity is decreasing."
Stiglitz argued that inequality eventually led to a weaker economy as it prioritized rent-seeking activities over more productive activities. Inequality also leads to instability and it’s not a coincidence that there was an increase in inequality in the run-up to the Great Depression in the 1930s or the 2008 financial crash, he added.
Ravi Kanbur, professor at Cornell University and former economist at the World Bank, said the initial conditions before an economy was opened up mattered in determining inequality. He cited the example of Korea and Taiwan, where land reforms and a progressive education system led to high growth with high equity in the 1960s and 1970s.
Kanbur said that in the case of China, inequality initially decreased since reforms were initiated in 1978, but increased after a while. “Since the focus on an export strategy, there has been a sharp rise in inequality between the coastal regions and inland areas in China," he said.
Robert Wade, professor from the London School of Economics, said inequality in the US and Europe has been so high that governments should place a limit on income concentration at the top.