Global Recession : Stiglitz

A Global Recovery for a Global Recession

by JOSEPH E. STIGLITZ

This article appeared in the July 13, 2009 edition of
The Nation.
June 24, 2009
See the entire article at The Nation

This is not only the worst global economic downturn of
the post-World War II era; it is the first serious
global downturn of the modern era of globalization.
America's financial markets failed to do what they
should have done--manage risk and allocate capital
well--and these failures have had a major impact all
over the world. Globalization, too, did not work the
way it was supposed to. It helped spread the
consequences of the failures of US financial markets
around the world. September 11, 2001, taught us that
with globalization not only do good things travel more
easily across borders; bad things do too. September 15,
2008, has reinforced that lesson.

A global downturn requires a global response. But so
far our responses--to stimulate and regulate the global
economy--have largely been framed at the national level
and often take insufficient account of the effect on
others. The result is that there is less coordination
than there should be, as well as a smaller and less
well-designed stimulus than is optimal. A poorly
designed and insufficient stimulus means that the
downturn will last longer, the recovery will be slower
and there will be more innocent victims. Among these
victims are the many developing countries--including
those that have had far better regulatory and
macroeconomic policies than the United States and some
European countries. In the United States a financial
crisis transformed itself into an economic crisis; in
many developing countries the economic downturn is
creating a financial crisis.
The world has two choices: either we move to a better
global regulatory system, or we lose some of the
important benefits that have resulted from
globalization. But continuing the status quo management
of globalization is no longer tenable; too many
countries have had to pay too high a price. The G-20's
response to the global economic crisis, crafted at
meetings in November in Washington and in April in
London, was a beginning--but just a beginning. It did
not do enough to address the short-term problems nor
did it put in place the long-term restructuring
necessary to prevent another crisis.

A United Nations meeting in late June hopes to continue
the global discussion begun at earlier G-20 meetings
and to extend this discussion to what went wrong in the
first place so that we can do a better job of
preventing another crisis. The global politics of this
meeting are complexEighth, unless regulation is comprehensive there can be
a "race to the bottom," with countries with lax
regulation competing to attract financial services.
Ninth, if that race happens, countries will have to
take action to protect their economies--they cannot
allow bad practices elsewhere to harm their citizens.
And tenth, regulation has to be comprehensive across
financial institutions. As we have seen, if we regulate
the banking system but not the shadow banking system,
business will migrate to where it is less well
regulated and less transparent.

Despite this broad consensus, the G-20 said little or
nothing about some key issues: what to do with banks
that have grown not only too big to fail but (according
to the Obama administration) too big to be financially
restructured? The G-20 failed to ask the hard
questions: if these big banks' shareholders and
bondholders are insulated from the risk of default, how
can there be market discipline? What will replace that
discipline? The G-20 has talked about the rapid return
of "private capital," but what does this bode if
private capital returns without market discipline?
There was also talk of continuing to allow over-the-
counter derivatives-trading with no transparency. But
without transparency of each trade--to assess the
nature of the counterparty risk--how can there be
market discipline?


From the perspective of the developing countries,
though, not enough was done about bank secrecy in
offshore as well as onshore centers. Developing nations
are often criticized for corruption, but secret bank
accounts wherever they may be facilitate corruption,
providing safe haven for stolen funds. Developing
countries want this money returned and want access to
information that will allow them to detect secret
accounts.

Financial and capital market liberalization--as well as
banking deregulation--contributed to the crisis and to
the spread of the crisis from the United States to
developing countries. Advanced industrial nations are
reluctant to admit that these policies, which they
pushed so hard on developing countries, are part of the
problem. No wonder, then, that the G-20 did not argue
for a reconsideration of these longstanding policies.

The global economic crisis highlights the deficiencies
of existing international institutions. As developed countries struggle to ensure a quick
recovery, they need to think of the effects of their
actions on developing countries. It is time to begin
the restructuring of our global economic and financial
system in ways that ensure that the fruits of
prosperity are more widely shared and that the system
is more stable. This task will not be accomplished
overnight. But it is a task that must be begun, now.

About Joseph E.Stiglitz
Joseph E. Stiglitz is University Professor at Columbia
University. He received the Nobel Prize in Economics in
2001 for research on the economics of information. Most
recently, he is the co-author, with Linda Bilmes, of
The Three Trillion Dollar War: The True Costs of the
Iraq Conflict.