Joseph Stiglitz is one of the most acid critics of those he calls “free market” fundamentalists”. His research on market failures and assymetric information made such contribution to economics that, in 2001, he was awarded with the Nobel prize. Thanks to the Central Reserve Bank of Peru (BCRP), one of the most influential economists was in Peru and shared his views on the current outlook.
There are many sources of economic risk in the world, specially from China and the Federal Reserve. What are your views on the topic?
The global economy is slowing down. China is slowing down, we don’t know by how much, but the important thing is that much of the uncertainty has to do with the rate of growth of the service sector in China. It’s unambiguous that the growth of their more traditional sectors, which are the major source of demand for natural resources, will be diminished; so for countries who exports these resources, that’s bad news.
The big debate in the USA is about the increase in the FED rate. In a fundamental sense, from a global perspective, this is not a big deal. Whether it raises in december or next march, it will be a slow increase and the American economy remains weak. The growth anemic, much lower that it was before the crisis. The labor market is weak, and it is reflected in the lowest participation since decades ago. It is so weak that wages are stagnating of even declining; so when I look at the American economy, I sign with those who say “who’s recovering?”. Certainly, marginalized groups in the USA are still facing a very hard time.
To me, the one other source of uncertainty is Europe, because for the moment we have changed our focus to the refugee crisis, away from the Greek crisis and the greek problem is not being solved. The program they imposed on Greece is a guarantee of depression, and the Greeks may be optimistic now, but as long as they stick with the program of 3.5% of primary surplus by 2018, we now that by 2018 the depression will still be there. To me these factors are probably the most important in the medium term prospect of the world’s economy.
In this context, which is the main challenge for emerging markets like Peru?
Over the medium term, it is clear that these countries need to renew their efforts in economic diversification. There is been excessive reliance on natural resources. When things were good there was little attention paid to taking the revenues generated by those resources and diversifying the economy more broadly. There has to be careful exchange rate management, which needs to be competitive exchange rate that will promote exports and imports substitution.
I think in many of latin American countries it will mean making sure there is much more investments in education and infrastructure, in which the public sector needs to play an important role so the private sector can do what it can do.
Do you believe it is a good time to start implementing structural reforms?
When you ask about structural reforms it really depends on which structural reforms. Some were probably bad reforms. We know that under the “structural” reforms many people have talked about financial markets deregulation or liberalization; even though those reforms led to crisis. You don’t want to do those things that lead to crisis.
What do you believe are good structural reforms?
I think they need to ensure there is increased competition, tax laws that encourage a better distribution of income, shared prosperity and don’t distort the economy. In the USA, for example, we have tax laws that encourage speculation, including land speculation. No one has ever shown that land speculation leads to more land. That’s a total distortion. A problem that America has come to realize is that our tax system led to a distorted financial sector, which led some of our more talented young people going into the financial sector rather than work on more productive activities.
I think structural reforms taming the financial system, serving the economy rather the economy serving this sector, is a kind of structural reform that is very needed. Finally, the major issue facing the world today is climate change. What good does it do to have an economy if we cant live? To me, another important reforms is one that leads us to a green economy.
How important has this deregulation of financial markets been?
Very much. When we’ve analyzed the American economy we noticed that growth in the decade of World War II was much faster than after the structural reforms that began in 1980. Those reforms that emphasize the financial sector deregulated actually led to slower growth and more short termism meant less long term investment. Now the big agenda to me is what we call “re-writing the rules”: realizing that markets don’t exist in a vacuum. The rules regarding corporate governance, bankruptcy, every aspect of our society structure markets in a way which either lead to more long term thinking or short term thinking or more shared prosperity or an outcome where the benefits go to a very few.
We now realize that the grand experiment that began in the USA around 1980 with Reagan has been a total failure.
How do you see this failure in the data?
The top 10% has done reasonably well, the top 1% has done very well, but the bottom 80% to 90% of Americans have seen their incomes stagnate over a third of a century. Those at the bottom have wages, adjusted for inflation, that are the same they were almost 45 years ago. It’s almost half a century of stagnation. So an economy which, over the period of one third to one-half of a century, does not deliver for the majority of its citizens is a failed economy. Unfortunately too many of Latin America look up to the USA as the model and now the real task is to say oh, yes, it has some good things: best university system in the world, many things to emulate. However, its overall economic structure has failed very badly to the vast majority and elsewhere countries really ought to learn both the lessons of where we succeeded and where we failed.
How does a crisis impact on income distribution? Does it deepen the inequality?
These consequences of economic slowdown I do not believe are inevitable. They happen if you don’t think about them. In the USA, in the first three years of our recovery 91% of the gains went to the top 1%. That’s a failure. We relied on trickle down economics. We have a lot of money to the banks: US$ 700,000 millons, but we didn’t pay any attention to ordinary home owners. what we could have done is rely more on trickle up economics. Give more to ordinary homeowners, help small or medium sized enterprises.
Kind of like what Iceland implemented to face the crisis…
Iceland is an example of a country that did it well. That would have focused on those who were suffering rather than focusing on those who created the problem in the first place. Again, the answer of re-writing the rules, thinking about why we are in this shape, rather than reinforcing the mistake, which is what the USA government did. To correct them would mean we’d have a more shared recovery and a more shared downturn.
