Public Policies and Macroeconomic
Strategies of the New Emerging Giants
Joseph E. Stiglitz
Caracas
October 10, 2007
1
The Changing Role of
Developing Countries

China and India, with 2.4 billion people, growing
at historically unprecedented rates
 Countries that were marginalized, excluded
from the global economy are closing the gap
between themselves and advanced industrial
countries
 China at close to 10% for 30 years
 India recently at more than 8%
 Engine of global economic growth

Global growth at 5% for past couple years has
been almost historically unprecedented

Increased demand for commodities has helped
developing countries
2
Historical Perspective


1820: China had 1/3 of global GDP, India
more than 15%
1814-1828: Industrial Revolution and
tariff barrier knocked out Indian export
• Indian textile export to Britain fell by twothirds
• British export of textile to India rose five
times
3
China and India: Share in World GDP
35%
30%
25%
20%
China
India
15%
10%
5%
0%
1000
1600
1820
1913
1973
1998
Angus Maddison, World Economy, 2001
4
Real annual GDP Growth in BRICs:
2000-2006
Source: Euromonitor International from International Monetary Fund (IMF),
International Financial Statistics. Note: 2006 data are preliminary.
5
Current Perspective

Globalization has played major role in their success
 Access to markets
 Access to technology
 Lower communication and transportation costs

50 percent compounded annual decline in
telecommunication cost in the 1990s
• Fiber optic glut during the Internet Bubble slashed
telecom cost
• Scanners convert data to image file - 160 pages per
minute.
• They took advantage of globalization, managed
globalization far better than other countries
6
Common Element of Success

Heavy investments in education and technology
• Comparative advantage not just based on
unskilled labor
• Closing knowledge gap
• In case of India, long term investments (IIT and
IIS) have finally paid off (large number of
engineers)
• In China, active technology policies have assisted
development of new sectors
• Both are concerned about strengthening


Especially University education
China: “New Innovation System”
7
Strong Macro-economic policies

Keeping exchange rate “reasonable”
• Hard to grow with over-valued exchange rate
• Especially hard problem for resource rich countries

Part of “resource curse” (“paradox of plenty”)
• Built up reserves to protect themselves against vagaries
of international markets



China took more active role in managing exchange rate
China built up larger reserves
Managed to keep inflation limited
• But neither was obsessed with inflation

Both restricted short term capital flows
• Insulated them from vagaries of market
• Gave them more room for macro-management
8
Concern about Poverty


China has moved more than 300 million out of
poverty
China has better health and education statistics
• But India is closing gap in health statistics

Both countries have moved reduction of poverty
and inequality to center of agenda
• Necessary for political and social stability
• Growing urban and rural divide, regional disparities, in
China, growing overall inequality
• Innovative programs to help rural sector
• Both countries must create large number of jobs for new
entrants to labor force

India is having difficulties in doing so
9
Some Differences
India’s Success


Colonial legacy of English legal
system facilitates global integration
Began with internal reforms, moving
to business-friendly policies
• Followed by external liberalization
10
China faced special problem


Moving from Communism to Market
Economy
Pragmatic policies
• Marked contrast with other countries
(other than Vietnam) making the
transition
• Examples: still have not fully liberalized
capital markets
11
Contrasts

Infrastructure—China’s is far better
• Though in telecom India has had impressive
success

China’s high savings rate means it does not
require foreign capital
• Only needs to acquire technology, access to
markets
• Not needing to borrow made them less affected by
vagaries of international financial markets

China talking about moving away from export
dependence
• Trying to reduce domestic savings rate
12
And Similarities

11th “five year plans” are focusing on
environment, education, and especially higher
education, and inclusive growth (reducing
inequality)
• Unless environmental problems are addressed,
growth will not be sustainable
• Unless growth is more inclusive, growth may not
be politically and socially sustainable

Both are facing major problems in land
acquisition for development
13
DEVELOPMENT IN THE LAST 50
YEARS: SUCCESSES AND
FAILURES



East Asia- stupendous growth
Africa- a decline
Latin America- disappointments
• First, the lost decade of the 1980s
• Then, seven years of growth
• Then, seven years of malaise 19972004
• Last couple of years--strong growth


Based largely on commodity price boom
Generated by China’s growth
14
Until recent commodity price boom

Growth since 1990 at half of what it
was in earlier periods
• 6.80% 1950-1980: Asian Tiger level
• 5.72% 1930-1980: Respectable level
• 2.3% 1994-2004: Poor performance
under Washington Consensus
15
ECONOMIC GROWTH: EAST ASIA,
LATIN AMERICA AND BRAZIL
8.00%
7.8%
7.3%
7.00%
6.00%
5.6% 5.5%
5.00%
4.00%
2.7%
3.00%
2.1%
Brazil
East Asia
Latin America
2.00%
1.00%
0.00%
1960-1980
1990-2004
16
ANOTHER COMPARISON: GDP
GROWTH IN TWO PERIODS (19601980 and 1994-2004)
8.00%
7.6%
7.3%
7.00%
6.00%
5.6% 5.5%
5.00%
4.00%
2.7%
3.00%
2.5%
Brazil
East Asia
Latin America
2.00%
1.00%
0.00%
1960-1980
1994-2004
17
GROWTH RATES: BRAZIL,
CHINA AND INDIA
16
14
12
10
8
6
Brazil
China
India
4
2
0
-2
-4
-6
1990
91
92
93
94
95
96
97
98
99
2000
01
02
03
2004
18
2005 and 2006 GDP Growth




Brazil: 2.9% in 2005, 3.7% in 2006
Russia: 6.4% in 2005, 6.7% in 2006
China: 10.2% in 2005, 10.7% in 2006
India: 9.2% in 2005, 9.2% in 2006
Source: The World Bank
19
LATIN AMERICA ALSO EXPERIENCED
TREMENDOUS VOLATILITY OF GROWTH
Grow th in Latin America
7%
6%
5%
4%
3%
2%
1%
0%
1950
1960
1970
Source:GDP Grow th Rate: WDI, World Banks
1980
1990
20
AND UNEMPLOYMENT HAS
BEEN RISING
Unemployment Latin America
10
9
Unemployment Rate
8
7
6
5
4
3
2
1
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source:GDP Growth Rate: WDI, World Banks; Unemployment Rate: ECLAC.
2000
2001
21
DECLINING PER CAPITA
INCOME IN LATIN AMERICA
Declining Growth GDP Per Capita - Latin America
3%
2%
1%
0%
1960
1970
Source:GDPGrowth Rate: WDI, World Banks
1980
1990
22
LATIN AMERIA: INEQUITABLE SHARING
UNDER THE WASHINGTON CONSENSUS




Washington Consensus policies produced
only limited growth
But even when growth did occur, it was
not equitably shared
Washington Consensus was at best
indifferent, and at worst hostile, to policies
that would have promoted equality
Failures are not surprising:
• - Trickle down economics do not work
• - Equality issue not even considered
23
POVERTY RATES IN LATIN
AMERICA: 1980-2001
16
14
12
10
Brazil
Latin America
8
6
4
2
0
1981
1984
1987
1990
1993
1996
1999
2001
24
THE CONTRAST BETWEEN EAST ASIA AND LATIN
AMERICA AND THE FRAYING OF THE WASHINGTON
CONSENSUS





Unlike Latin America, East Asia did not follow
Washington Consensus policies in some important
respects. They
• Were slow to liberalize capital markets
• Were slow to liberalize trade
• Adopted strong government industrial policies,
including creating some successful government
enterprises
Policy differences account for much of the
performance differences between East Asia and Latin
America:
- More growth and faster growth
- Benefits of growth more widely shared
- And more stability (the only exception being the
1997 crisis, from which all but Indonesia recovered
quickly, and which was partially caused by not
25
following their traditional policies)
WASHINGTON CONSENSUS: A
BRIEF SUMMARY

Development strategies based on
market fundamentalism
• Emphasizing privatization, liberalization
and macroeconomic (usually meaning
price) stability
• Downscaling and minimizing the role of
government

Problems lie with both what was on
the agenda and what was not
26
SOURCES OF FAILURES


View of the economy
- Including the relationship between
economic success and political and
social stability/structures
Objectives:
• Not just increases in GDP
• But, achieve sustainable, equitable
democratic development
27
SOURCES OF FAILURES



Confusions between ends and means
The pursuit of rapid privatization in the former Soviet Union
• Contributed to the enormous increase in inequality
• Compromised the legitimacy of private rights,
undermined market economy
• And did not lead to faster economic growth
Capital market liberalization-- “supposed” to lead to more
stability, growth
• Did not lead to faster economic growth
• But did lead to more instability
• Even the IMF has begun to recognize the problems
• Might have had predicted effects in models with perfect
information and infinitely lived individuals
 But would not in models with credit rationing and
finitely lived individuals
 Evidence supports latter view
28
WASHINGTON CONSENSUS
AND EQUALITY

Justifications for ignoring equity
• It was argued that one could separate equity
and efficiency considerations, and economics
should just focus on efficiency
• Trickle-down economics meant that the poor
gain if growth is pursued and attained
• There were really no “trade-offs”- the single
best policy would benefit everyone

Could essentially leave economic
policymaking to technocrats to find that
“best policy”
29
PROBLEMS WITH THESE
JUSTIFICATIONS




These arguments are neither theoretically or empirically correct
Modern theories emphasize that equality and efficiency cannot be
separated
• Agency theory
• The arguments for land reform
 Sharecropping attenuates incentives just as taxes do
Washington Consensus policies did serve the interests of
technocrats
• And established special interests
Too much faith in markets
• Even under the best of circumstances, there is no reason to
believe markets are consistent with social justice
• But even if one did not care about equity, distribution of
income, there is an important role for government because of
market failures
30
IMPORTANCE OF EQUITY

Equity is an “end” in itself
• GDP a bad measure of success

GDP can increase even as the country gets poorer
•
•
•
•

Latin American debt
Resource depletion, environmental degradation
Better to focus on NNP
Even better to take account of liabilities
There can be rich countries with poor people
• Better to focus on median income
• Median household income in the US is declining, even as
GDP increases

Equity promotes growth and even efficiency
• Better use of human resources
• Social and political sustainability
31
MARKET FAILURES

One of the most important findings of modern
economic theory is that with imperfect
information and imperfect risk markets (that is
‘always’ the case) markets are not efficient (e.g.
Greenwald-Stiglitz)
• Adam Smith was ‘wrong’
• The reason the invisible hand often seems invisible is that it is
not there
• Exemplified by problems of conflicts of interest, herding
behavior, bubbles that were evident in the 90’s
 With massive misallocation of resources during the boom
 And massive losses from under-performance of the
economy after bursting of bubble
• Estimated in excess of $1 Trillion
32
MARKET FAILURES IN
DEVELOPING COUNTRIES


Problems are particularly significant in developing
countries
Markets also by themselves do not produce
efficient outcomes when technology is changing
or when there is learning about markets
• Such dynamic processes are at the heart of
development
• There are important externalities in such dynamic
processes
• Giving rise to an important role for government

Successful East Asian countries recognized
this role
• The Washington Consensus policies did
33
SOURCES OF FAILURE OF THE
WASHINGTON CONSENSUS


Because the Washington Consensus did
not understand the limitations of markets,
it focused on too limited a set of
instruments
It ignored:
•
•
•
•
•
•
Land reform
Industrial policies
Strengthening the financial sector
Improving education
Competition policy
Governance issues in both the public and
private sector
34
PROBLEMS WITH MACRO
POLICY

Problems reflected in macro policy (an area in
which it was concerned)
• Too narrow a view of objective—controlling inflation



Good policy also looks at growth and employment
Controlling inflation does not automatically lead to faster
growth
And indeed it may hamper long run growth
• Lower GDP now is associated with lower GDP long into the
future
• Stabilization and growth policies are interconnected


Relying on interest rates in crises limits use of debt
Weakens financial markets and impairs efficiency of
allocation of capital
35
PROBLEMS WITH MACRO
POLICY

Key role of finance in growth is
ignored
• Making credit available at affordable terms
• What matters is both availability and lending
rate (not just T-Bill rate)



Greenwald and Stiglitz, New Paradigm in
monetary economics
Importance of reducing T-Bill rates and spreads
Regulatory policy, competition policy and
standard macro-economic policy instruments all
have to be employed
36
There are many roads to success


But any critical mistake can lead to
failure
Some successful East Asian countries
invited in foreign direct investment
• Both others did not

Some successful East Asian countries
focused on large enterprises
• Others on small

Most shared common elements
described earlier
37
Brazil

Invented new concept: Export led non-growth
• Remarkable success in export success
• In which government policies played an important role

Innovative industrial policies
• Ethanol, Embraer have been global successes



Innovative poverty policies emulated around
world (zero hunger, contingent welfare
payments)
Innovative democracy policies (participatory
budgeting) emulated around world
But growth has been anemic
38
Brazil’s failure



Monetary policy—high interest rates
Leading to high exchange rate
Would have been difficult for any
country to grow with these macroeconomic conditions
39
Russia’s Failure

Decline during first decade of market
economy
• Market economy was supposed to improve
efficiency
• Lead to higher GDP
• Only led to higher poverty, huge and persistent
inequality

Has been growing
• Based on high oil prices
• Worry about retreat from market economy and
democracy

Mafia capitalism
• Is it sustainable?
40
Russia similar to other economies in
transition, other than China, Vietnam
2004 GDP per capita in % of 1990 GDP per capita
(PPP)
350
300
250
%
200
150
100
50
0
CHN VNM POL HUN KAZ
BLR ROM BGR RUS UKR
41
Average growth rates were dismal—gap
between countries and rest of world
increased
Average GDP per capita growth 1990-2004 (PPP)
10
8
6
%
4
2
0
-2
-4
CHN VNM POL
HUN KAZ
BLR
ROM BGR RUS UKR
42
In many countries, poverty rate
increased enormously
Poverty headcount ratio 2001/poverty headcount ratio
1990 (2$ line)
80
60
40
20
0
CHN
VT
POL HUN KAZ
BLR ROM BGR RUS UKR
43
INCREASES IN INEQUALITY
Gini coefficients in 1992 and 2002
50.0
40.0
30.0
1992
%
20.0
2002
10.0
0.0
BLR BGR CHN HUN
KAZ
POL ROM RUS UKR
44
OIL DEPENDENCE IN RUSSIA
45
While the Global Landscape Has
Changed, the World is Still Not Flat…


Growing disparity between richest
countries and poorest countries
Growing disparities within most countries
46
While the Global Landscape Has
Changed, the World is Still Not Flat…

Globalization has played an important role in
these disparities
 Predictable effect on inequality within
advanced industrial economies
 Effects on developing countries harder to
explain
 Africa has neither resources nor education to take
advantage of new opportunities
 Unfair trade treaties have compounded
problems in developing countries
 Problems compounded by asymmetric
liberalization
47
New Global Order



Provides unprecedented opportunities for
growth for those who can take advantage
of it
Provides unprecedented challenges in
economic management, with grave risks
for those who do not manage it well
Public policies are key
• Balanced role of market and government
• Need for development of broad political and
social consensus behind this balanced role
48
Summary: THE ROLE OF
PUBLIC POLICY IN THE
ECONOMY

There is an important role of government
in developing countries, not only to
• address market failures


Such as controlling conflicts of interest
And ensuring the safety and soundness of the
financial system
• promote growth and development



Through education and technology
Creating an enabling environment for the private
sector
But also to:
• promote equity, provide safety nets
49



Important roles in education,
technology, reducing poverty,
regulation, finance
Exploring wide range of instruments,
including new and innovative
instruments
Macro-economic stability with growth
• Focus on real stability, not just price
stability
• Focus on access to credit
• Focus on exchange rate
50

Successful emerging markets have
succeeded in managing globalization,
and in finding the right balance
51