Transcript Post Financial Crisis -

Post-Financial Crisis:
Options for Africa
Joseph E. Stiglitz
African Development Bank
January 11, 2010
Lessons from the Financial Crisis
• No country is immune from crisis
– We are less sure than we were before
about what we mean by “good
institutions” and “good policies”
• Many thought that the U.S. had both
• But it clearly did not
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Lessons from the Financial Crisis
• Developing countries have been among the
innocent victims of the crisis
– Affected through financial markets, trade, investment,
and remittances
– Countries that were most integrated into the global
economic system were most affected
• Globalization is a double-edged sword
– But some countries have managed globalization better than
others
• But even those that were less integrated have been affected
• Magnitude of impacts differ
– Those with financial surpluses better able to withstand crisis
– Those with better safety nets have done better
– Those with better regulated financial systems have done better
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Lessons from the Financial Crisis
• Crisis has exposed weaknesses in certain
economic theories/policies
– Especially policies that advocated deregulation,
unfettered markets
• As exemplified by Washington Consensus policies
• Capital and financial market liberalization contributed to the
rapid spread of the crisis around the world
– Theories based on “rational expectations” and
“rational behavior” called into question
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Multiple examples of irrationality
Bubbles do exist
Booms and busts have marked capitalism from beginning
But market advocates forgot the lessons
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Some Lessons for
Economic Theory/Policy
• Central bank doctrines also shown to be flawed
– Non-independent central banks did better than independent
central banks
– Focus on inflation detracted from focus on growth, employment,
and financial sector stability
• Loss from crisis orders of magnitude greater than any losses from
inflation
– Bernanke/Greenspan doctrines that one can’t tell a bubble
before it breaks, that central banks don’t have instruments to
deal with bubbles, and that it is better to clean up mess after the
bubble breaks than to deflate the bubble have all been shown to
be badly flawed
• Government played vital role in saving the economy
– But that means government has a responsibility to prevent crises
from happening
– Especially true for developing countries—they can’t afford the
kinds of actions that the US and Europe took
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Some Further Lessons for
Economic Theory/Policy
• Unfettered markets are not self-correcting, not necessarily
stable, not efficient
– Financial markets failed to perform their central role in managing
risk and allocating capital at low transaction costs
– Had high transaction costs
• Not all innovations are “good”
– Financial innovations did not increase overall efficiency of the
economy
– Did not help ordinary individuals manage the risks that they
faced
– Increased risk
– Financial sector repeatedly resisted innovations that would have
improved the well-being of society
• An efficient electronic payment mechanism
• An efficient mortgage system
• Indexed government securities
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Some Further Lessons for
Economic Theory/Policy
• Underlying problems
– Misalignment of incentives
• Social returns not equal to private rewards
• Problems of corporate governance
– Pervasiveness of agency problems
• Modern capitalism markedly different from nineteenth century
capitalism
– Pervasiveness of externalities
• America’s financial markets imposed huge costs on
America’s workers, homeowners, taxpayers, retirees…
• America’s failures imposed huge costs on rest of the world
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The Big Lesson
• What is required is the appropriate
balance between the market and the
state
– Balance will differ from country to country
and from time to time
• Government has a role not only in
“preventing accidents” but also in
promoting good innovations
– Industrial policies
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The Crisis will have Long-Run
Impacts on the Global Landscape
• Some of the policies pushed on
developing countries caused the crisis,
exacerbated the magnitude of the
downturn, and contributed to the rapid
spread
– Undermining the “authority” of those
institutions and individuals who pushed these
policies
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New Global Governance
• The move from G-8 to G-20 is an important step
– But there are still 172 countries not represented
• Only one sub-Saharan country in G-20
– G-20 lacks political legitimacy and representativeness
– Failed to mobilize adequate funds to help the poorest
countries
• Most of the money was in the form of short-term loans
• And G-20 turned to the same institutions that played a key
role in the failures
– Though the IMF has made marked changes in some of its
stances
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Other Successes and Failures
• Rhetoric against protectionism may have helped
modulate protectionist response
– But still, most of the G-20 took protectionist actions
• Reforms to the international institutions important
– Choosing the head on the basis of merit long overdue
– But reforms still too little and too slow
• Failed to get agreement on global regulatory reform
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Reforms have been slow in coming
And are not likely to be adequate
Suggesting another crisis down the road
Especially because of the poor conduct of the bailouts, which
has exacerbated the too-big-to-fail problems
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• Recognized importance of dealing with global
imbalances
– Imbalances weren’t responsible for this crisis, but
could cause next
• But solution was not well thought out
– US needs to save more
– But if China were to consume more, would have little
effect on US exports
– Real problem is not too much global savings
– Real problem is too little investment directed at global
needs
• Climate change
• Development
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• Failed to recognize/address key global
problems
– Growing inequality
• Weakening global aggregate demand
– High levels of risk/failure of financial markets
and international institutions to manage risk
well implies high demand for reserves
• Weakening global aggregate demand
– Uncertainty about the price of carbon
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Copenhagen—A Major Failure
• No agreement on how to share the burden
– Not even an agreement on what should be
the underlying principles
– Though there was some reaffirmation of longstanding principles of common but
differentiated responsibilities
• No agreement by developed countries on
how to fulfill their previous financial
commitments to developing countries for
mitigation and adaptation
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A Missed Opportunity
• Addressing problem of global warming
could have helped fuel robust recovery
– Uncertainty about future price of carbon will
weaken investment in energy sector
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• Potential large costs to Africa
– Region likely to be affected by global warming
– With fewer resources to finance adaption
• Need incentives to maintain forests
– Providing a global public good
– One positive development at Copenhagen
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A New Global Balance
of Economic Power
• Growth in Asia continues to be robust
• With benefits to commodity exporters around the world
• China’s influence growing
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As countries recognize the need for diversification
Countries that were more diversified did better
China played large role in debate over global reserves
Without agreement with China, a deal in Copenhagen was not
possible
– China is playing an increased role in Africa
• Impact on aid already evident
• Impact on investment likely to grow
– China’s economic model has obviously worked
– And many find its policy of non-intervention attractive
• Though there may be long-run consequences for civil rights,
democracy
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A Post-Crisis Economic
Strategy for Africa
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Global Diversification
Diversification of sectors
Industrial Policies
Agriculture
Managing Resources
Preparing for the Next Crisis
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A Post Crisis Economic Strategy
for Africa: Global Diversification
Globalization has changed economic geography
• Should take advantage of new markets in Asia
• And new sources of investment funds
• Ready to take advantage of rising wages in Asia
which will change global comparative advantage
• But Africa should recognize that it must break
out of commodity-dependence
– Whether it is Western or Eastern
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A Post Crisis Economic Strategy
for Africa: Sectoral Diversification
• Structural adjustment contributed to the deindustrialization of Africa
– 14.3% manufacturing share in 2006 less than
15.9% in 1965
• Even countries that followed Washington
Consensus policies have attracted little
investment outside of natural resources
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The Developmental State
• Markets on their own won’t lead to Africa’s development
• Government will need to take a role
• Including by pursuing Learning, Industrial, and Technology Policies
(LIT)
– Recognizes that what separates developing countries from developed is
not only a gap in resources but also a gap in knowledge
– Finance can be key instrument (developmental banks)
• Private financial markets not developmentally oriented
• Typically much too short term focused
• Great Recession forcing a rethinking of capital and financial market
liberalization policies
– Government needs to provide the pre-conditions for private sector
• Physical and institutional infrastructure
• Education and health
• But government has to do more than that
• In almost every successful country, governments have pursued such
policies
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Agriculture
• LIT policies also apply to agriculture
• In recent decades there has been a lack of investment in
agriculture
– Infrastructure (roads, irrigation)
– Technology
• But also weaknesses in institutional infrastructure
– Credit markets
– Marketing
– Extension services
• With the result that productivity and incomes are low
• With such a large fraction dependent on agriculture, only
way to address poverty, meeting MDGs
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• Land is key issue
• Africa has moved from land abundance to land
scarcity
– Climate change may be exacerbating problems
• But institutional arrangements have not
changed in ways that reflect this
• Will be one of key challenges going forward
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Managing Resources Better
• Many African countries will remain resource
dependent
• But resource wealth has to be carefully
managed
– Countries like Chile that did so have managed storm
better
– Maximizing value obtained
• Using new global competition to extract the maximum rents
– Making sure that resources are well used
• Transparency is key
– Macro-economic management
• High level of volatility
• Risks of exchange rate appreciation (Dutch disease)
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Key Lessons
• Some countries have managed
resources well (Botswana); most have
not
– Rich countries with poor people
– Resource extraction doesn’t give rise to
employment; as a result of appreciation, there
is often job destruction; little “learning”
– Lower growth, more inequality (natural
resource curse)
– If wealth below ground is not reinvested
above ground, country is poorer
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Preparing for the Next Crisis
• Advanced industrial countries have not addressed their
fundamental problems
– Banking sectors more concentrated; too-big-to-fail problem
worse
– Global imbalances little improved
– Little progress on climate change
• Strategy requires reducing exposure to risk and
increasing capacity to respond to risk
– Objective of diversification strategy
• And a strategy of greater regional cooperation, greater self-reliance
– Greater care in liberalization strategies
– Stabilization funds/build-up of reserves
• Those countries with large reserves performed better
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• Learning the lessons from this crisis
– Without government intervention the world
would have been in a major depression
– Need to strengthen state capacities, get a
better balance between the market and the
state
– Inflation targeting achieved neither growth nor
stability
• New frameworks required for monetary policy
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• Even if we had managed this crisis
perfectly, there will be crises in the
future
• Need to be prepared
– Automatic stabilizers
– Flexible systems of social protection
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Goal: Sustainable Growth with
Stability and Shared Prosperity
• Before, too much focus on stability,
too little on growth
• In the end, there was neither growth
nor stability
• What growth that occurred was not
shared and was not sustainable
• Comprehensive post-crisis agenda
provides an alternative way forward
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THANK YOU / MERCI
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