by Joseph E. Stiglitz, 2001 Nobel Laureate in Economics
Remarks at the roundtable on "New Proposals on Financing for Development"
February 20, 2002
It is a pleasure to be here.
Let me first begin by seconding what George said. The initiative that he described is a concrete measure that could represent a real achievement of the Monterrey Conference.
I want to reflect a little bit the spirit, though, of the Norwegian Minister's remarks in saying that I think one of the things that could be accomplished at Monterrey is a beginning of a broader set of initiatives to provide more sustained development finance to fight against poverty and to achieve the millennium goals that have been agreed upon by the nations of the world. So what I want to do today is to describe this more ambitious program. It's obvious that there won't be agreement in Monterrey on the details but what I think can happen at Monterrey is the beginning of an initiative to make this a reality.
I first want to put this in the context of what has been happening in terms of globalization. As globalization has proceeded the countries of the world have become more economically integrated. Just as one hundred and fifty years ago when national economies became fully formed, there was a need to create national public goods, so there is in today's world of globalization a greater need for a whole range of global public goods-including health education, environment and development. The issue then, having recognized the importance of global public goods is, how do we finance them? And it's clear that the current arrangements for financing are inadequate. We need a system of finance that is not dependent on the vagaries of the national parliaments. There is a way of resolving this and at the same time addressing what I view as an underlying economic problem of the global economic system. And that has to do with the system of reserves that we have. The current system is inequitable. It creates a downward bias and global aggregate demand, and it contributes to global instability. I want to try to argue that there is an alternative way which addresses this economic problem and at the same time provides a source of finance for development.
The fundamental problem is that, given the instability in the global economy, countries must put aside out of their income a certain amount of reserves every year. The reserves today are estimated to be somewhere between 1.6 and 2 trillion dollars. Every year as trade grows and incomes grow, part of the income that people receive is set aside into these reserves. And in that sense there is a downward bias-it's a subtraction from global aggregate demand. The provision of international liquidity for example is the SDR, but I will try to make this in a far more general way and not necessarily dependent on the IMF but through new arrangements. The provision of new liquidity at the international level would undo this downward bias and can undo it without representing any inflationary pressures on the global economy. The proposal would also address a currently ongoing source of instability.
A basic principle in describing the international relationships is that the sum of deficits has to equal the sum of surpluses. (I know that those of you who deal with data know that that is not quite true; there's the errors and omissions. But if we measure things correctly, the sum of deficits would be equal to the sum of surpluses.) It's a tautology but it's one that is fairly insightful. It means that if there are a couple of countries around the world like China and Japan that insist on maintaining surpluses, then there would have to be deficits somewhere else in the world. As long as there are surpluses in two countries the rest have to have deficits. There is no way of getting around it. And no amount of preaching at the deficit countries to "get rid of your deficits" will get rid of the deficits. Right now we have a system in which the deficits are like hot potato. One country has a crisis and as result of that crisis it gets rid of that deficit. But that deficit doesn't disappear in the global system. It shows up somewhere else because the sum of the surpluses has to equal the sum of the deficits. And so as that hot potato appears somewhere else some other country has a crisis. And the system is perpetuating this system of instability. It would be even worse if it were not for the fact that the United States shows an amazing willingness to maintain a high level of deficits and the world seems to tolerate that.
But that brings me to the third issue-the current system is also highly inequitable. The fact that the richest country in the world is able to maintain levels of consumption beyond its income is just the reverse of what we would normally think of as an equitable system. There should be flows of capital going from rich countries to poor countries, not from the poor countries to the rich countries. Yet under the current system there is this reverse flow that George talks about. Moreover, the current system imposes an increasingly heavy burden on the developing countries. Because of the increased level of instability that has appeared over the last 25 years--partly associated with opening up of capital markets to short term capital flows (which can be very destabilizing)—developing countries have had to put increasing amounts aside in reserves. There is a high cost to this. There's an opportunity cost. These reserves could be used for schools, education, factories, creating employment. The nature of the transfers are fairly apparent. Think of the standard wisdom that a developing country ought to maintain reserves equal to short term foreign denominated liabilities. If a firm in a country borrows from an American bank at, let's say, 18% interest, the country has to set aside reserves. Often it holds those reserves in the form of US Treasury Bills. That means the current arrangement involves the country borrowing from the United States at 18% and then lending to the United States at 3%. It may be good for the United States but it's hardly good for the developing country and hardly consistent with general principles of equity. So the basic point I want to raise is that by having a monetary mission of global money we could offset the dollar bias and enhance global stability by breaking this link between the deficits and surplus that I described before. This would increase global equity.
There is an alternative way of thinking about this. One can think of the countries of the world as members of a co-op. The amount of money that is set aside in reserves represents a limited call on others for purchasing power in the event of crisis. Because the amount is limited it puts into place an appropriate incentive in using that limited call on others. The proposal that I described has a form of incentive compatibility. That is to say it is possible that this system could go forward without universal agreement. Obviously since one country is benefiting from it there would be some incentive for that single country to drag its feet. But there are ways of designing this that would provide appropriate incentives. For instance, going back to the formulation of thinking of this as a co-op, if the members of that co-op agreed to hold reserves only in the form of other countries who belong to that co-op, then it would put strong incentives for everybody to join in this agreement.
Now there are important issues of how this global liquidity would be allocated and George in his talk described one mechanism. I think the use of existing institutional arrangements has certain marked advantages particularly in the short run. I want to emphasize that this is only one of several innovative proposals that ought to be put on the table. And I want to mention very briefly two others. The first is that it makes sense to recognize that there are a larger amount of global natural resources-atmosphere, oceans, sea beds, and rainforests. It seems appropriate to recognize that the revenues from the efficient management of these global natural resources ought to be devoted to the provision of global public rights including development. A second set of proposals has to do with trying to create better risk management for finance. One has to recognize the current arrangements have placed the burden of risk on the developing countries. Again, this is inconsistent either with equity or principles of efficiency. An efficient risk allocation would put more risk on those who are more able to bear the risk. Yet in the 1980s when interest rates became very high it was the rest of the developed countries that bore the consequences of that increase in interest rates. Similarly in the more recent 90s crises a great deal of the burden of adjustment was imposed on the developing countries.
So what we need to think about is mechanisms-perhaps through the multilateral institutions-to put more of the risk burden on the international community. We need to think of the kinds of proposals of bankruptcies and standstills that I and others have long advocated, rather than the kinds of large bailouts that have been used, the burden of which ultimately ends up being borne by taxpayers in the developing countries because the loans that pay for the bail outs are almost always repaid.
Finally, let me emphasize that these new innovative proposals should not undermine our commitment to debt relief and to new ODA. The argument that what is of issue is not how much to spend but rather how well we spend it is really a shameful excuse for not stepping up to the global responsibility of the world's richest country. The research that has been done at the World Bank and elsewhere has shown that aid can be effectively spent and is being effectively spent. And the irony today is that we know a lot more about how to spend aid more effectively than we did in the past. If anybody says there's not evidence that aid can be well spent, then they just haven't look at the record. I think the Monterrey meeting is an important issue. The issues of finance go beyond finance ministers and central bank governors. There are issues which affect the lives of all the people in the developing world. And its appropriate that a UN meeting should be convened in which these boarder issues are discussed and in which the problems of how we can strive to reach the millennium goals more effectively.