Service on Finance and Development (Nov08/01)
Speaking at an interactive panel discussion on the global financial crisis at the UN General Assembly in New York, Stiglitz, a Professor at Columbia University, said that while the crisis bore a "Made in the United States" label, it was in fact worldwide and required a global response that must be consistent with justice and social solidarity for all countries, reflect an understanding of the necessary balance between Government and markets, and respect the principles of democratic due process, including full transparency.
"We are now at another Bretton Woods moment", he said, noting that the Bretton Woods Institutions had been founded principally to maintain global economic stability and employment, not to push capital and financial market liberalization or promote contractionary fiscal policy in the midst of a depression or a recession.
Liberalization had led to advanced growth, but also increased instability, and the global financial system had often worked to the disadvantage of developing countries, said Stiglitz, pointing out that the current crisis also threatened to exacerbate poverty in developing nations, and the IMF had failed so far to propose adequate regulatory reform measures to avert the danger.
That situation must change, he said, adding that the creation of an external shock facility was a good idea, as was creating a multilateral reserve system with greater stability. There must also be more global cooperation in setting macroeconomic policies, and the creation of a global financial regulatory commission should be studied urgently.
The one-day special meeting was convened by General Assembly President Miguel d'Escoto Brockmann of Nicaragua, who has also set up a high-level task force, chaired by Prof Stiglitz, to review the global financial system and reform of the international financial architecture.
At a press conference at UN Headquarters Thursday, it was announced that the composition of that body would be made public in the near future and work was underway to formulate the terms of reference for that body (see below for highlights of that press conference).
Opening the interactive panel discussion, Brockmann said that the world was in the midst of a complex economic crisis; the dimensions of which were not yet clear, but which would have game-changing consequences. What had once been benignly described as "irrational exuberance" had now been exposed for what it was: "unbridled greed and pervasive corruption" enabled by Governments that had lost sight of their responsibility to protect their citizens. The credibility of the dominant stakeholders had been shattered.
Brockmann said that it was not reasonable to recommend that a little tinkering would restore prosperity or confidence. In the short term, of course, financial managers in the public and private sectors were attempting to assess the extent of the damage and taking actions to prevent the global economy from tipping into worldwide depression -- a nightmare difficult to contemplate. While States must pick up the pieces, it would be folly to put it back together again as it had been. The international community had the responsibility and the opportunity to identify longer-term measures beyond protecting banks, stabilizing credit markets and reassuring big investors. The stakes were too high for half measures and quick fixes put together behind closed doors.
Noting that many recommendations had been heard in recent months, Brockmann emphasized that solutions must involve all countries in a democratic process. It was time to stop viewing the global economy as the private dominion of exclusive clubs. The G-8, G-15 and G-20 were no longer sufficient in their scope to solve the current problems. Long-term solutions must include the G-192; only full participation within a truly representative framework would restore the confidence of citizens in Governments and financial institutions. Therefore, it was necessary to take advantage of the unique forum provided by the United Nations to build agreement on the new financial architecture required by the international community.
(At a press conference at UN headquarters, when asked if his call to include all the Member States of the United Nations -- the G-192 -- in the search for long-term solutions to the crisis was realistic, Brockmann said that it was time to stop viewing the global economy as the private dominion of such exclusive clubs as the G-8 or G-15. The only realistic way out of the crisis was to proceed democratically, in an inclusive manner.)
The response must be multifaceted, the General Assembly President told the interactive discussion, taking into account the poor of the world. Member States had solemnly promised to meet their commitments to financing for development, and throughout the crisis, they must ensure that those promises were kept. Today's discussion should be candid, not restrained by the powerful taboo against challenging the gods of the marketplace and institutions that had imposed the dysfunctional policies that had led to the present breakdown.
The solution was not to be found in poorly conceived regulations that would be discarded at the first sign of renewed "exuberance". And certainly, they were not to be found in the next bubble that would evaporate, leaving elites astonishingly richer, and well-intentioned citizens feeling robbed, bewildered and dangerously angry. Above all, there was a need to address the billions of people without enough to eat, much less retirement savings to worry about, Brockmann stressed. That required some fundamental shifts in mindsets. It was necessary to take into account the current confluence of crises and resist the temptation to restore a status quo ante that was not viable.
All nations, including the rich and powerful, must be subject to financial discipline, otherwise, there would be no effective international regulations, he said, adding, that would not happen overnight. "Our deliberations must be calm and thoughtful. But let us be guided by a passion for justice and fairness and inclusiveness. By including new voices, we can begin to restore that all-important sense of trust -- in each other, in our Governments, the United Nations and other international institutions."
During the panel discussion, Nobel Laureate Stiglitz said that the global crisis required a global response from the United Nations -- the one institution that was inclusive and had political legitimacy. Four general principles should guide that response: it must be consistent with justice and social solidarity; the bonds of social solidarity must go across national boundaries; it must reflect an understanding of the necessary balance between Government and markets; and it must respect the principles of democratic due process, including full transparency.
The economy in general and the financial markets, in particular, must serve society, he said, underlining also that financial markets were not an end in themselves. What was good for the markets was not necessarily good for the economy. The notion that the wealth earned in the markets would "trickle down" to everyone had been proven ineffectual.
What happened in the financial and other sectors of society affected other markets, Stiglitz said, adding: "The United States Government and Governments of other countries have allowed banks to grow to the point where they are not only too big to fail, they're also too big to bail out." The entire world had borne the consequences of the market failures. The "trickle-down" effect had not worked. The bail-out had helped the banks, but too little had been done for homeowners losing their homes and workers losing their jobs. The response violated basic democratic principles of good governance and transparency.
The financial crisis was now global, and it had impacted emerging markets with no responsibility for causing it, said Stiglitz. Any global solution must pay due regard to and assist those countries. If not, poverty reduction would be threatened around the world. In the past, the global financial system had often worked to the disadvantage of developing countries. There had been inadequate and, in some cases, no representation of emerging market countries in decision-making.
Stiglitz also noted that reform of the governance structure of the International Monetary Fund (IMF) had been inadequate and insufficient. That must change; decision-making must reside within international institutions with broad political legitimacy and adequate representation for middle-income and least developed countries. Only the United Nations had that broad legitimacy. It had set up the Bretton Woods Institutions, but the world had changed a great deal since their inception. "We are now at another Bretton Woods moment."
He said that, in the past, the IMF and the World Bank had followed specific economic perspectives that said markets were best. Capital and financial market liberalization may have brought the benefits of advanced growth, but it had also increased instability. In the current crisis, advanced and industrialized countries needed to work in synergy with developing countries, as guarantees provided by Governments in the latter may not have the guaranteed credit provided by those in the former.
Recalling his testimony before the US Congress last week, Stiglitz said that he had outlined the necessary reforms. Self-regulation would clearly not suffice, and current enforcement of antitrust laws was inadequate and lax. What was needed were reforms in transparency and disclosure standards and limits on leveraging, a focus on safety in national financial systems and comprehensive regulation. There was a need to consider the creation of commissions to establish the safety of new financial products and their appropriateness for new financial parties. The creation of a global financial regulatory commission should also be studied urgently.
However, it was not enough to have good regulations, he said, emphasizing that they must also be enforced. Special interest groups should not dictate policy and decisions. Industrial associations could not be relied upon to set standards, and credit rating agencies could not be relied upon for risk assessment. The General Assembly, working with the Economic and Social Council, and other UN agencies, such as the International Labour Organization (ILO), must assess the broader social and economic impacts of the financial system.
Mr. Prabhat Patnaik,
Professor at the Centre for Economic Studies and Planning,
To overcome the irrationality inherent in such an arrangement, Keynes had suggested what he called a comprehensive "socialization" of investment, whereby the State, acting on behalf of society, always ensured a level of investment in the economy and, hence, a level of aggregate demand, that was adequate for full employment. That prescription entailed not only a jettisoning of the free market system, in favour of State intervention, but also restraints on the free global mobility of finance, since meaningful State intervention could not be possible if the nation-State faced internationally mobile capital. The reason for the undermining of Keynes was that the agency that was supposed to carry out that management was the nation-State.
What the world was seeing today was the end of the latest bubble boom, Patnaik said. The reliance on bubbles had acted as a substitute for the earlier regime of Keynesian demand management; it was now management through the creation and sustenance of bubbles, rather than through the pace of public spending. Not surprisingly, the frequency of financial crises associated with the bursting of those bubbles had increased greatly after 1973, and the capitalist world was, even now, headed for a major crash. Governments in advanced countries had still not recognized the onset of a crash, proceeding on the assumption that the injection of liquidity into the system was all that was needed. But the injection of liquidity was inadequate in a situation where a recession had started. Credit would not start flowing simply because banks could access more liquidity. There must be adequate demand for credit for viable projects, by solvent and worthwhile borrowers, and that was not happening.
Moreover, countries of the developing world would not escape the effects of a depression, he warned. Their export earnings in both merchandise and "invisibles" would be hit, causing unemployment and output contraction on the one hand, and foreign exchange crises, exchange rate depreciation and accentuated inflation on the other. An area of special concern was the inevitable decline, in terms of trade for primary commodities, that would push cash-crop growing peasants into even greater distress and destitution. Another concern was the loss of food security that would inevitably occur over much of the developing world.
Furthermore, said Patnaik, the current need was not just for injections of liquidity into the world economy, but also the injection of demand. That could occur only through direct fiscal action by Governments around the world. Taking the world economy as a whole, the new growth stimulus would have to come not from some new speculative bubble, but from enlarged Government expenditure that directly improved people's livelihoods, both in the advanced and the developing economies, and that was geared towards improving the world's food grain output, by revamping peasant agriculture.
Professor of International Affairs, The New School, said that, as the
crisis of historically unprecedented magnitude and scope unfolded, there
was a need to turn attention to its implications for poor people in
poor countries, and for safeguards against such downside risks that
threatened human security. Impacts on developing countries were caused
more by recession in the real economy than by the financial market crisis.
Despite implementing sound macroeconomic policies, and building up huge
reserves and surpluses to protect themselves against the risks of global
financial instability, emerging economies such as
She warned that developing countries would feel the impact of the fall in commodity prices, the contraction of markets for export goods due to economic downturn, a decline in official development assistance as donor countries sought to find budgetary savings to finance their rescue plans, and a decline in many forms of private capital flows, particularly remittances.
It was important to learn lessons from the responses to the economic crises of the 1980s, 1990s and 2000, she said, recalling that they had applied orthodox stabilization policies and disregarded the priorities of protecting the poor and vulnerable. Particular attention must be given to not cutting budgets for aid, social safety nets, and measures in order to combat global warming.
She also pointed to the double standard of counter-cyclical measures for rich countries and pro-cyclical measures for poor countries, as well as Keynesian economics for rich countries and neo-liberal economics for poor countries. While big financial stakeholders too big to fail had been rescued, there had been no safeguards for the human system and no rescue for billions of people struggling to survive even in normal times.
Replying to a question, Patnaik said that the question of financial architecture had an important governance dimension, but it could not be detached from the question of how the development paradigm would be visualized in the years to come. Countries could not think in terms of simply making minor adjustments to existing financial structures while waiting for the next bubble to appear, and think it would not burst quickly. States should be "non-bubble based".
People did not often realize, he said, that the original Bretton Woods Conference actually had an objective, which was to push towards full employment in the world. The objective had not been to institutionalize free capital mobility. The Bretton Woods Institutions had subsequently continued, even though the system had collapsed, because the institutions had shifted towards neo-liberal stances that had replaced the Bretton Woods system.
Stiglitz reaffirmed the importance of the human dimension, reiterating
that financial markets were a means to an end, and not an end in themselves.
While the crisis bore a "made in the
However, the inadequate
response to the crisis by the
Stiglitz also said that he had less confidence that the IMF was the appropriate place to respond to the crisis, although the world may have no choice, in the long run, but to rely on it. The Fund had not anticipated or prevented the problem, and so far, it had not proposed adequate regulatory reforms to prevent a recurrence.
"How could the IMF be viewed as the solution, when they are so linked to the financial markets which are the cause and the philosophy behind the markets which are the cause of the problem," he asked, adding that the G-1 had the veto in the IMF, but the G-1 was the source of the problem.
At the founding of the IMF, he said, its main responsibility had been to maintain global economic stability and employment, not to push capital market liberalization or to promote contractionary fiscal policy in the midst of the depression and the recession. Today's concern was that, in the case of some bail-outs, the Fund was proposing the same polices that had failed in the past, cutting out aid for basic services exactly when they were most needed.
The good news was that there was discussion of creating an external shock facility, Stiglitz said, adding that it was also necessary to create a multilateral reserve system with greater stability. "When you socialize risk and privatize profits, that is not what a market economy is about. The financial markets did not do what they were supposed to do, which was to manage risks and allocate capital." The flaws in the financial system were now obvious.
During the discussions
at the panel session, the
Responding, Stiglitz said that the Doha Round had not addressed the problems of the Uruguay Round, which was supposed to address development concerns, particularly in developing countries. The so-called free trade agreements were not free trade agreements, but managed trade agreements. A free trade agreement need only be three pages long, in which countries agreed to remove tariffs, subsidies and barriers. There was a need for a genuine opening of trade, but it was also necessary to rectify the mistakes of previous trade rounds. Developing countries needed more than just aid; they needed opportunities to earn an income.
Pedro Paez Perez, Ecuadorian Minister for Economic Policy Coordination and President of the Ecuadorian Presidential Commission for the New Regional Financial Architecture, Banco del Sur, said that it was important to detail the key conditions for emerging from the crisis, in order to begin to launch a response. The crisis clearly showed the increasingly intensive and massive process of expropriation by private initiative, which was a paradox. The model, supposedly based on private initiative, had actually become a mechanism to deprive the vast majority of people of that initiative. Today's forum might be the only discussion that could create a space in which mankind could express its different voices and ultimately find a way out of the crisis.
Among the factors that had led to the crisis was that the financial system had asphyxiated the productive machinery, both at its centre and periphery, he said. That had brought about further speculation. For that reason, it was very important to recover productivity, and link it with trade issues and development financing. If a predatory niche market in the international division of labour was creating structural vacuums in the balance of trade, that could be temporarily resolved, but that hole could only become larger, depleting the patrimony of a nation and its labour force. The alternative would be systemic charity from the North to the South, which would not be effective. It was, therefore, important to find a solution to the crisis with a healthier financial system.
It was also essential
that States think about relaunching growth from a territorial perspective,
based on communities, and from the angle of sustainable development,
as well as economic, social and cultural rights, the
Given the speed
and depth with which the crisis was unfolding, a regional
Depending on the political possibilities of each country in the current situation, it was important to explore different institutional arrangements, Perez added. They included defining a multilateral agreement to share information about and monitor monetary policy; establishing a single agreed monetary policy definition framework; and, ultimately, fixing a compulsory shared policy. Restrictions on capital movements should not be excluded where politically viable. Among the more flexible options in the spectrum of possible exchange rate regimes, the regional monetary agreement would be limited to a formal cooperative commitment, in the absence of formal commitments about any parity grid among regional partners. The commitment would be to permanently monitor exchange rate policies, and to share regularly ex ante information on the respective national policy mixes and macroeconomic development.
In his closing remarks
following the day-long interactive discussion, General Assembly President
Brockmann said that he was heartened by the enthusiastic and constructive
participation of Member States in the initial dialogue, and by the support
that they had expressed in continuing to use the Assembly and the United
Nations system as a forum for the unfolding process. Panellists and
delegates alike had acknowledged that the Organization was a uniquely
representative and democratic body with the convening power to bring
together all the stakeholders in that global pursuit. Non-governmental
organizations were also stakeholders and would give voice to civil society's
recommendations at the International Conference on Financing for Development
From what Member States had heard today, it was very clear that there was broad-based agreement on the need to work together to identify long-term solutions to the faltering governance of the global economy.
He said that the United Nations was accustomed to dealing with problems without borders, especially those that no single Government or group of Governments could solve on their own. Its system of regional commissions, specialized agencies, funds and programmes maintained a global presence, working with national Governments throughout the world. It drew on a deep pool of expertise and wisdom that would be very helpful in providing support for long-term solutions to the crisis.
Meanwhile, at a press conference at UN headquarters, General Assembly President Brockmann told journalists that the only realistic way out of the global financial crisis was to proceed democratically, in an inclusive manner, and there was no better place to do that than in the General Assembly.
Calling for giving a voice to those who "suffer the consequences of the decisions that have not been made by them", he said that the current financial crisis presented opportunities for change. In particular, he spoke about the plans to form a high-level task force to review the global financial system. The composition of that body would be made public in the near future, and work was under way to formulate the terms of reference for that body.
Asked if his call to include all the Member States of the United Nations -- the "G-192" -- in the search for long-term solutions to the crisis was realistic, Brockmann said that it was time to stop viewing the global economy as the private dominion of such exclusive clubs as the G-8 or G-15. The only realistic way out of the crisis was to proceed democratically, in an inclusive manner.
Agreeing on the
need to ensure wide participation in the discussions, from which consensus
would hopefully emerge, Prof Stiglitz identified the lack of credibility
and legitimacy of international financial institutions as among the
main problems that required attention. The fact that the International
Monetary Fund (IMF) was so dominated by "the G-1" made it
difficult for it to deal forcefully with the sources of the current
problem, which included the lack of regulation in the
According to Stiglitz,
one of the points presented very forcefully during the panel was that
the lack of inclusion could have a highly negative effect on the developing
countries. Also mentioned in the discussion was the fact that the contrast
between the counter-cyclical policies pursued by the
While there was
no dearth of ideas to tackle the crisis, it was important to make sure
that those ideas were on the international agenda, Stiglitz said. In
particular, a number of proposals had been discussed today, including
a whole list of regulatory and institutional reforms, as well as incentives
and a set of checks on the financial system. Suggestions had also been
made regarding the reform of the global reserve system and the rehabilitation
of the discussion that had been put on ice by the
Stiglitz added that one of the reasons the policies of the Bush Administration had worked so poorly was that there had been so little public discourse. For example, there had been no discussion of the first bank bailout ahead of time, and within weeks it became evident that the plan was flawed. The policy had been "trashed by every economist".
On the need for
bank supervision in the
While only part of today's severe crisis, predatory lending had played a significant role, he said. Going forward, such practices would have to be restricted. Some of that had already been done, but such belated action resembled closing a barn door after the horse had been let out. The reforms should involve not only changing the regulations, but also the regulatory structure to prevent the kind of "regulatory capture" that had occurred, "where you have the interest of those regulated reflected in the regulator".