Joseph Stiglitz, Professor at Columbia University and winner of the 2001 Nobel Prize for Economics, says that despite some improvements the global economy is far from robust and a slowdown is still in sight. The complimentarity of investment in climate change and poverty, the reemergence of the IMF and the state of the US economy were some of the issues which he touched on during interviews with newspaper editors in Copenhagen on October 11.
Q: The financial crisis has hindered developing countries from making contributions to climate change. Will it also hinder the likelihood of reaching an agreement on this and then moving forward and addressing the problems of climate change mitigation?
A: In a way the economic crisis should provide an opportunity for more rapidly addressing climate change. The point is a very simple one: we are in a world right now in which there is excess capacity: supply exceeds demand, and one of the most effective ways of trying to increase global aggregate demand is to increase spending on climate change mitigation. It’s not asking people to give up their resources but asking them to maximise the potential of existing resources and use some of that increased production to help towards climate change.
There is an enormous waste of resources in the private sector, it has really failed by misallocating resource capital when they should not have and we are bearing some of the costs. But the major cost of the crisis happens after the crisis. It’s not misallocation of resources but underealisation of capacity. Now the worry is that in meeting the challenges of economic crisis many Governments have accumulated huge debts. They have become wary of spending money on things that are really important, like climate change. And that’s a real danger, as it is real short-sightedness, and short-sightedness of political leaders will inhibit our ability to address climate change.
Q: The focus on climate change is distracting attention from poverty reduction. Does this pose a serious risk for the millions of people living in poverty?
A: If there is a risk, it may be complimentary. Let me give a couple of examples. One of the initiatives which we at Columbia University have been working on is one developed with a group of countries called the Rainforce Coalition. This has put forward the notion that we avoid deforestation. The developing countries are providing a very important global public good, carbon storage, carbon sequestration via Rainforce which is also having very serious environmental benefits on biodiversity, for which they are not now being compensated. The result is that there are incentives not to preserve that public good, at great cost to global climate change. If we give money to the developing countries, that is Rainforce countries, to help provide incentives for maintaining their rainforce, that will give them money to help their development at the same time as helping climate change in a very serious way. That’s one example of many where climate change and poverty reduction are really complimentary.
I think to explore this fully is an important issue. The other side, of which we are also fully aware, is that if we don’t do something about climate change that will generate more poverty. So the failure of Copenhagen discussions would be a very important step in creating more poverty. The two things are very closely linked and if we do the right things they are very much complementary.
Q: Given the improved financial indices is this not a good time for preparing new strategies?
A: Very clearly things are better than they were a year ago. We have pulled back from the precipice. But in a meaningful sense the global slowdown is in sight. Economists refer to crisis in terms of a series of quarters of negative growth. But for most citizens the recession means [whether] they can get a job. For homeowners it means whether there is equity in their home, whether its prices go down 10-20-30-40 percent, for business it is whether they can sell the goods that they have the capacity to produce. In these perspectives the recession is not over, and in many respects, particularly in employment, it might get worse.
For the US the official unemployment rate is 9.8 percent, but the broader unemployment rate shows that one out of 6 Americans cannot get a full-time job. The broader rate calculation includes discouraged workers, workers who have stopped looking for a job but are not employed and those who accept a part-time job because there is not a full-time job available. There are hundreds of people who have applied for disability pay who would be working if they could get a job. It’s true that the labour market situation in America is worse than at the outset and from this point of view the recession is going on.
You will hear from some people in the administration and elsewhere that jobs always like recovery. Yes, it’s true, but we don’t have a recovery with the ability to create jobs. The Labour growth rate at present is 1 percent, productivity growth is 2.5 percent. That means you are not growing at 3 and more percent and therefore not creating work fast enough to create jobs among new interest groups on the labour market. No one forecasts anything near that growth rate by 2010-2011. We may have a good third quarter in 2009, there will be some robust growth, but that will not be sustained.
Q: In their discussion about global imbalance the G20 have said that the US needs to save more but China needs to spend more and save less. Is this strategy right in your view?
A: I think that, while there is some truth in that, the real problem is that we should not be encouraging more consumption, we should not encourage the world to follow American leadership in this consumption pattern. As long as China aspires to the kinds of consumption the US has the planet is doomed. It is not feasible. China should change the quality of its consumption.
But from the global point of view the answer [to the crisis] is not more consumption. It is more investment in climate change and poverty reduction. We need investment in infrastructure, education, technology, across the whole board of return in the future. Education is one such thing because this affects quality of life today but also increases productivity in the future. That is what we need to do.
Q: How do we account for the resurgence of the IMF?
A: This question is from Argentina and I understand why it is puzzled by this. I think it is a complex thing. First, the IMF today is different from what it was in Argentina. I think Argentina may have helped change the IMF, partly because it showed that a country without IMF can grow much faster then it can with the IMF. After they scrapped the IMF programme they grew 9 percent for five years. It’s a remarkable success story. It also illustrates an important point that concerns debts. Kenneth Rogoff [IMF Chief Economist] talked yesterday and said that sovereign debt defaults are a common pattern which will repeat. These are problems which won’t disappear. But higher interest rates will be coming and there will be more difficulties.
The Argentina experience shows that getting a fresh start, even if it is in the most hostile environment, can be an appropriate way of going forward. Unfortunately we have not done that at global level. The UN Commission which I chaired recommended that this is one of the things we need to address at G20 because of the likelihood that there will be a problem of this sort. But Argentina has shown that it makes a great deal of sense to restructure your debts rather than to have this group debt. It also means that once you discharge debts, capital markets are forward looking and investors do not look back but forward, and there is a high likelihood they will thus make investments.
Q: You say that the IMF has changed partly because of its experience in Argentina and East Asia. But the record of IMF policy in many countries still remains a subject of controversy. What would you say about that?
A: The general consensus [about the IMF] is that they have been less stringent [in other countries] than they were in East Asia and Argentina and there is a debate whether they were as supportive as they could have been there. That’s a country-by-country debate. IMF has shown much greater flexibility in some programmes. Argentina always said that it would prefer an IMF programme but believed that no programme was better than a bad programme. It just never succeeded in getting a good programme. But if other countries succeed in negotiating a good programme – it has to be remembered that this is temporary money and has to be repaid – the IMF puts a great deal of stress on the restoration of confidence, and we believe that having an IMF programme builds this confidence.
What is still the case though is that G20 made a mistake but an understandable one. The poorest countries are emerging from debt forgiveness and don’t want to be saddled with another debt burden. IMF provides mainly short-term loans, which is not the way of providing money to poor countries.
Because of the historical legacy of the IMF there are many countries who are very reluctant to accept its money. Many with surplus funds are very reluctant to give money or use the IMF as a vehicle of disbursement, and that reflects the fundamental problems of governance not being adequately addressed. Globalisation requires global institutions, and if you had not have IMF you would have had to invent an institution like this, particularly in times of crisis. But the pace of reform of governance that IMF is undertaking is very slow and the scale of reform very limited. So we really need an effective institution which deals with the reform agenda and thinks about institutions and new mechanisms for the disbursement of funds. That’s again what the UN commission recommended. But the countries contributing money say they want more say, which is fairly understandable. The real risk now is that we will get into deadlock.
One side of the balance sheet is debts and the other assets. If you are borrowing you have more assets and can thus be better off. If you borrow money and spend it well the country’s economy will be stronger. If you are borrowing money to fight a war in Afghanistan, give tax cuts to rich people or bail out bankers, then you have a liability and have nothing to show for it, and unfortunately some countries are taking this second route rather than the first and they do need to worry about this.
Q: How do you see the current situation in other countries?
A: Every country has its own situation. Every country which had growth which was more dependent on a real estate bubble, and had a bloated financial sector, will have a bigger adjustment to make. Countries with flexible exchange rates will be able to adjust better. One of the ironies is that Iceland, which had probably the biggest financial collapse, is actually doing OK so far because they were able to let their exchange rate fall, and parts of that country are now doing very well, because all those resources that were previously diverted to the financial market are now being used well.
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