THE GLOBAL ECONOMY IN
THE AFTERMATH OF THE
IRAQ WAR
JOSEPH STIGLITZ
ISMA ANNUAL CONFERENCE
MADRID
27 JUNE 2003
THE GLOBAL ECONOMY WAS
WEAK BEFORE THE IRAQ WAR
• THE RUN-UP TO THE WAR WEAKENED
IT FURTHER
• BUT THE RESOLUTION OF THE WAR
DID NOT RESOLVE THE UNDERLYING
WEAKNESSES
• THE GLOBAL ECONOMY REMAINS
WEAK
• THE RUN-UP TO THE WAR EXPOSED
FURTHER WEAKNESSES IN THE
GLOBAL GEO-POLITICAL SYSTEM
• WEAKNESSES EVIDENCED EARLIER
• AS ECONOMIC GLOBALIZATION HAD
OUTPACED POLITICAL
GLOBALIZATION
• THE END OF THE WAR HAS NOT
RESOLVED TENSIONS IN THE MIDDLE
EAST AND HAS BROUGHT TO THE
FORE CERTAIN LONG STANDING
PROBLEMS
– CREDIBILITY OF POLITICAL LEADERSHIP
– PROBLEMS OF DEBT
I. STATE OF THE GLOBAL
ECONOMY
Marked change in perspective in the last five years
• East Asia crisis, Russian crisis, Latin American crises
• September 11: Concerns about terrorism, secret bank accounts
• Iraq War: Disruption to multilateral system, uncertainty about
oil pricesMarked change in perspective in the last five years
• East Asia crisis, Russian crisis, Latin American crises
• September 11: Concerns about terrorism, secret bank accounts
• Iraq War: Disruption to multilateral system, uncertainty about
oil prices
Marked change in perspective in
the last five years
• From euphoria of New Economy to worries
about global slowdown,
• From the Roaring 90s to the malaise of the
new millennium
– Bursting of dot.com bubble, broader global stock
market declines
– Corporate, banking, accounting scandals in U.S.,
elsewhere
– Recession in U.S., Germany, Japan—first global
recession of new era of globalization
I. STATE OF THE GLOBAL
ECONOMY
– US WENT INTO RECESSION IN MARCH
2001
– STILL A LARGE, AND GROWING, GAP
BETWEEN ACTUAL PERFORMANCE AND
POTENTIAL
PROSPECTS FOR THE U.S.
ECONOMY WEAK
Economic mismanagement in U.S
• Anemic response to corporate, accounting,
banking scandals
• A tax cut that failed to provide adequate
stimulus,
• Return of soaring fiscal deficits—put strong
demands on global capital markets
• Continued growth in trade deficits
Economic mismanagement in
U.S PRESENTS MAJOR
UNCERTAINTIES
– Will the world be willing to continue to finance
these deficits
– Potential changes in sentiments could have major
effects on exchange rates
• Only weaknesses in Europe, elsewhere have prevented
further decline in dollar
– Large changes in exchange rates can be negative
sum:
• U.S. gains on exports
• But weaknesses in financial markets may more than
offset these gains
• Europe hurt doubly: stronger exchange rate, weaker
American, global economy
I. STATE OF THE GLOBAL
ECONOMY: EUROPE’S HANDS
ARE TIED
• Stability pact limits scope for fiscal stimulus
• ECB has difficult task balancing different
economic situations in different parts of the
continent
• But narrow focus on inflation, problems of
earlier decades, has meant that it has failed to
respond to current situation, contributing to
weakness in Europe
EUROPE’S HANDS ARE TIED
Full impact of strong Euro on exports may not be
felt for months
Large changes in exchange rates can leave both
Europe and America the loser
– Weaker dollar may lead investors to pull money out,
leaving a weaker U.S. stock market, U.S. economy
– Stronger Euro will make exports harder, imports from
countries tied to dollar (like China) easier
I. STATE OF THE GLOBAL
ECONOMY
• Japan mired in structural problems,
political stalemate
I.
STATE OF THE GLOBAL
ECONOMY:
Emerging markets mixed picture
LATIN AMERICA
CHINA
RUSSIA
ELSEWHERE
Emerging markets mixed picture
• Major recessions, depressions in Latin
America
– Brazil weathered storm, but at what cost?
And how stable?
– Argentina on road to recovery, without the
IMF
Emerging markets mixed picture
• China has had robust growth, but
– Weak dollar has contributed to China’s
competitive advantage
– Widespread blame on China for U.S. trade deficit
(as in earlier disputes with Japan)
– Widespread blame on China by developing
countries (Mexico, and seeming failure of NAFTA)
– Will China’s position be sustainable?
– But low (competitive) exchange has been
important for China’s growth and employment
creation—important for political stability
Emerging markets mixed picture
• Russia: slower growth as effect of
earlier devaluation wears off and oil
prices decline, continued problems in
establishing market economy
• India: impressive growth, worrisome
fiscal deficits
• Korea: impressive recovery,
redirection of economy
Weak state of global economy
•
•
•
•
Consequences
High level of global uncertainty
Marked slowdown in capital flows to
emerging markets
And even in FDI
There are normal restorative forces,
they move slowly, government is not
doing as much as it could
II. THE RUN-UP TO THE WAR EXPOSED
FURTHER WEAKNESSES IN THE
GLOBAL GEO-POLITICAL SYSTEM
Economic globalization
outpaced political globalization
• Rules, institutions governing
globalization largely set by advanced
industrial countries, special interests in
those countries, for their own
advantage
– Inequitable: developing countries not only
have not reaped “fair share” of benefits, in
some cases worse off
Economic globalization
outpaced political globalization
Failure to address problems of global
financial architecture
– Still succession of crises, one after
another
– Developing countries still have to bear risk
– Bankruptcy reform moved into deep freeze
Economic globalization
outpaced political globalization
• And new worries about those that
countries that have been left by the
side
– In Africa, middle east
– Bypassed by globalization
– Growing poverty, despair
– In Africa—devastation of AIDS
Economic globalization
outpaced political globalization
• American unilateralism
– Evidenced earlier in response to global
warming, strategic arms, international
criminal court
Economic globalization
outpaced political globalization
• Impending breakdown of Doha round of
trade negotiations?
– Key role of agriculture for developing
countries
– Intellectual property—drugs, biopiracy
– New issues—competition, investment
Economic globalization
outpaced political globalization
• New impediments to globalization
– Iraq War did not solve problem of global
terrorism
– New visa requirements and security
precautions
– Backlash against globalization?
III. THE END OF THE WAR HAS NOT
RESOLVED TENSIONS IN THE MIDDLE
EAST AND BROUGHT TO THE FORE
CERTAIN LONG STANDING PROBLEMS
– CREDIBILITY OF POLITICAL LEADERSHIP
– PROBLEMS OF DEBT
PROBLEMS POST WAR
• Iraq Reconstruction
• Challenge: Creating a viable market
economy with
– Large debt overhang
– War destruction
– Movement from socialism to a market
economy
PROBLEMS POST WAR
• Movement from socialism to a market
economy
– Badly managed elsewhere
– Major advantage over Russia: existence of
entrepreneurial class
– Major disadvantage: lack of human capital
– Risks: American ideological approach, rapid
privatization
• Low receipts to government
• Asset stripping
• Viewed as illegitimate
PROBLEMS POST WAR
• Debt overhang
– U.S. position:
• Russia and France should foregive debts
• Earlier contracts not “legitimate,” can be
abrogated
• America has made its “contribution”: $80
Billion spent on war
• But U.S.
– opposes systematic procedure for bank
restructuring
– Elsewhere has insisted on contracts being honored
Debt overhang
– Fundamental questions raised
• Should there be an international “rule of law”—
or should such questions be decided on an ad
hoc basis?
• Odiose debts and illegitimate contracts: Are
there principles which should guide such
judgments, or should such questions be
decided on an ad hoc basis?
• Lack of clear answers contributes to market
uncertainty
NEW OPTIMISM
• Growing recognition of the importance
of, need for, international rule of law
NEW OPTIMISM
• Growing recognition of the importance
of, need for, international rule of law
NEW OPTIMISM
• Growing recognition of special
problems confronting Africa
NEW OPTIMISM
• In many emerging markets, new
popular leadership, trying to avoid
extremes of earlier generations, a
balance between government and the
market