Prof Stiglitz Interview – Stay away from mindless liberalisation

Prof Stiglitz asserts that the current global crisis is a lesson for those who are pushing an agenda of mindless reforms India was lucky enough to have a central bank governor in Y V Reddy. He did a very good job as a regulator protecting India from the excess. Indian economy did very well during the last few years. The question is whether it is sustainable. A good thing is that the Indian government is very much aware of sustainability and benefits of equitable share. But there are a lot of forces encouraging liberalisation in the wrong way

JOSEPH Eugene Stiglitz who had worked as Chief Economist at the World Bank and later as a chair of President’s Council of Economic Advisors during Bill Clinton’s presidency was in the Capital last week to deliver the Tenth D T Lakdawala Memorial Lecture organised by the Institute of Social Sciences.
Stiglitz had won Noble prize in 2001 along with George A Akerlof and A Michael Spence in economics for theory of markets with asymmetric information that stresses importance of selective intervention of government for a better market. In an exclusive interview to K S Narayanan of The New Indian Express, Prof Stiglitz (Columbia University) asserts that the current global economic crisis is a lesson for those who are pushing agenda of mindless liberalisation. He also lashed at the outgoing Bush presidency and multilateral forums like the IMF for precipitating the crisis.

Excerpts from the interview:

Q: Your lecture was laced with digs at Bush presidency, Wall Street and the IMF and their response to the crisis.

A: The reality is it has been tragic for many people in the United States.The magnitude of their tragedy is that people lost their homes, lost savings and dreams. People thought Wall Street understood risks and thought they were geniuses and deserved salaries worth millions of dollars. Now, they are ridiculed as gamblers, frauds. There is a great amount of disillusionment with the system.

Q: Don’t you think greed and fear rule most of the financial and capital markets?

A: The issue is not so much about what rules these markets. If these people had engaged in speculation which affected themselves it is one thing. But they put the American economy in a risk that ordinary tax payers had to pay trillions of dollars to rescue them.

Q: Is the crisis an apocalypse for the world economy?

A: No. The crisis is a moment of reflection of our economic system. There are economic systems that will survive. The real part of the economy continues to be there. The finance part of the economy is not real. We put much emphasis on them and let them tell us on how to run the economy. But they don’t even know how to run a bank.

Q: So, it is not a crisis of real economy.

A: No. It is a crisis of our understanding of what makes economy work.

Q: How far the Wall Street continues to influence US economy despite plunging the world economy into a recession?

A: After making all these mistakes we have allowed Henery Paulson, former CEO of Goldman Sachs, throw away hundreds of billions of dollars. They continue to exercise a great influence at the great cost of American people and economy.

Q: Does the crisis point to the autism of American state?

A: The Bush administration was very responsive to the needs of big business and financial markets. Hopefully, the Obama administration will become more responsive to the needs of ordinary Americans. The big issue is after spending so much money on stimulus and bailout packages whether there will be enough resources to address some of social problems facing the country and the world.

Q: Don’t you think that the crisis calls for people with a different mindset in the US administration?

A: President Barack Obama wanted to restore the confidence in financial markets and have their confidence. Historically, economic advisors have good relations with financial markets and financial markets have enjoyed people’s confidence. But they have lost the confidence now. Anybody from Wall Street will not be trusted.

Q: How far do you think US invasion of Iraq led to the crisis?

A: I think excessive interventionism of the United States is not responsible for the crisis. But the war on Iraq led to higher prices of oil and contributed to the crisis. This made the economies weaker and made it difficult to respond to the crisis.

Q: You are critical of multilateral institutions like IMF.

A: They are part of the problem. IMF did not do its job of preventing the crisis. Instead it accelerated the crisis by pushing the deregulatory philosophy.

Q: Several countries have announced stimulus packages. What about regulatory systems?

A: So far, nothing has been done. It takes time to put these regulations in place. There was little discussion at the G-20 Summit meeting in November at Washington. There will be a lot of resistance from those who made money during the crisis.

Q: What do you expect the individual countries to do?

A: The United States is the worst culprit. A whole agenda of reform on risky products, risky behaviour, etc. has to be undertaken. This could be tip of iceberg and things could be even worse.

Q: Do you think India and China can press for a change in the Global Financial Architecture?

A: There is a history of solidarity among developing countries and India is one of the leaders of the Non-Aligned Movement. That solidarity is important as to how to address the current financial crisis.

Q: How is India handling the response to global financial crisis?

A: India was lucky enough to have a central bank governor in Y V Reddy. He did a very good job as a regulator protecting India from the excess. Indian economy did very well during the last few years. The question is whether it is sustainable. A good thing is that the Indian government is very much aware of sustainability and benefits of equitable share. But there are a lot of forces encouraging liberalisation in the wrong way This crisis is a lesson for those who . are pushing that agenda.

Q: Should India open up its finance sector?

A: You should stay away from mindless liberalisation as long as you can. Some people are mistaking that India is not ready As long as India stays a small . economy, these capital flows will be destabilising.

Q: You are against tax havens.

A: Tax havens are not particularly responsible for the global crisis. But they make it very difficult to deal with the crisis.