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Economy

by Interview conducted by Jacques Coubard and Sébastien Ganet.

« The Free Market Does Not Work » Joseph E. Stiglitz

Translated Tuesday 5 December 2006

The North American Nobel Prize in Economics Joseph Stiglitz has given us an interview in English during his stay in Paris. In his new book (1), Joseph Stiglitz calls for new regulations of the market.

Huma: 
Why a new book on globalization? Have there been changes since your last book on this topic?

Joseph Stiglitz:
Yes, there have been changes that make it necessary to write a new book.
There are changes in our understanding of globalization and in the actual global landscape. For instance, the most dramatic change in the global landscape is that five years ago it would have been difficult to imagine a world in which India and China would have played such a big role. 2.4 billion people have become more integrated into the global economy. This has an enormous impact on everyone, both on developed and on other less developed countries. The understanding of globalization has also changed a lot since my first book. For instance I talk about capital market liberalization; how the flow of destabilizing market capital did not lead to more growth, but to more instability. Even the IMF now recognizes the validity of the study of 2003, confirming what I said. It hasn’t changed its policy, but at least there is a very big change in perspective. The very big recognition in 2001 in November in Doha was the need to recognize that the previous rounds of trade were unfair to developing countries. There needed to be a development round. But since then the development rounds have essentially failed, and so the question is where will those trade negotiations go. It is very big very big issue; we know it’s not working well, it’s not fair; but what will happen!

Huma: 
You were also talking of the market of capital...

Joseph Stiglitz:
Another new issue is that in 1998 , we had a global financial crisis and at the time, everybody said the problem was the developing countries, the weaknesses of their financial institutions. We continue to have a lot of global financial instability and today the debate is about global imbalances and the US, China, Europe. It is not the developing countries, but we are beginning to look at the global economic system. I argue that the analysis is still incorrect, that we are not looking at a the fundamental problems, that we are still looking at the symptoms: the huge trade deficits, the flow of money going from poor countries to rich countries, that is the wrong way; the fact that we are talking of debt forgiveness, but not about why do so many countries wind up with more debt that they can pay.

Huma: 
These problems are so huge that they seem hard to deal with?

Joseph Stiglitz:
The spirit of the book is essentially that there are reforms, changes that are attainable, that are not utopian, and that would make a very big difference. There are small changes that would have big consequences, and bigger changes that would have even bigger consequences. But that if we don’t make these changes, globalization will change anyway. The real question is whether you are going to lurch from one patch-up to another, from one crisis to another or whether we would like to look more systematically at where you go wrong, not just look at the symptoms, but rather at the underlying structures, and try to deal with them. In fact, when you look only at the symptoms, you can make the underlying problems worse. The basis of my optimism is that there had been a lot of changes, some of which moved in the right direction. The agreement to have a Doha round on development now is one of these.

Huma: 
The negotiations take place mainly between States and international organisations like the IMF. How can citizens participate in the decision making process?

Joseph Stiglitz:
Well, if you look at the most important changes, they have to do with the role the citizens played. The debt relief in 1995 was inadequate. In 2000 the Jubilee Movement succeeded in obtaining much more debt relief. In 2005, Blair put it at the top of the agenda, and there was much more debt relief. All that was motivated by strong citizen activism of the Jubilee 2000 Movement. The change in the trade regime was motivated by the Seattle protest movement. It was not the negotiators, it is the Seattle protesters that said « Something is wrong here ». And the governments said, we cannot have another round of trade negotiations as unfair as the last one or we will be thrown out of office.
The citizens have succeeded, I think, in redefining globalization. It is still not perfect, but the citizens are becoming more active. Let’s take another issue that I talk about in the book. It is access to life-saving medicines, the access to generic medicines. It has to do with intellectual property provisions of the Uruguay round. When that was being discussed, in 1993, I was in the Council of Economic Advisors. The Council of Economic Advisors and the Office of Scientific Technology Policy in the White House both opposed it. We said it was bad for American Science, it was bad for global science, it was bad for developing countries. It would have a negative effect on access to medicine. But civil society did not pick up the issue. It was a debate between the drug companies and the stockholders who said that we need more intellectual protection. It was not a debate, and inside the White House, we had no support from civil society. And without that support from the outside, it was all on one side. Today it is different; Today there are large numbers of citizens, active groups of protesters, even in the States. One of my students is leading such a group. There are active groups calling attention to the situation and to the consequences, working with the developing countries. In Geneva at the International Convention on intellectual property it was agreed that we need to have a development oriented intellectual property regime, just like we have a development oriented trade regime. So I think that development participation has made all the difference, especially in the period of globalization. Before, the only people who were involved were the multinational corporations who knew where their interest lay. For ordinary citizens, it was too far away. Now they begin to realize it affects everybody in the world.

Huma: 
How concretely can NGOs and ordinary citizens participate in the deliberations of organizations like the IMF or the World Bank?

Joseph Stiglitz: 
The critical issue in my mind is « How do you bring the voice of various groups to the table ». Clearly these are public bodies and in the end the government officials or their appointees have to have the responsibility. The difference between the way the IMF or the World Bank work and the American government or most other governmentswork is very clear. For instance, every time you have a bill in the national assembly or in the US Congress, it has to be published. It has to have two or three readings, so that people can make comments. There are articles in the newspapers; there are congressional hearings so that people can voice their concerns and write to their congressmen. We have a procedure that we call a ’comment period’. You post the proposed regulation and everybody can write in and say this is what they worry about. And the government has to answer. It seems to me that it is absolutely essential that we find a way to express the voice of the NGOs, and a way for the citizens to be heard at the IMF and the World Bank. In a way it is even more important at the World Bank and at the IMF than in an ordinary government. If we don’t like what a government does, we can vote against them and get rid of them. If we don’t like what the president of the World Bank does, there is nothing we can do. We can complain to the government, and the government can complain, and it is a very slow process. It is even more important to have participation there because we do not have what I call the check of the electorate.

Huma: 
In your book, you make references to businesses like Wall-Mart that finance electoral campaigns in exchange for major fiscal privileges. Confronted with the power and the corruption of Big Business, what role can ordinary citizens play?


Joseph Stiglitz:
The basic problem with the NGOs is that they are not elected, they are not representative. It does make sense to think about having on the board of companies some representations of other stakeholders, other people whose wellbeing are dependant on these companies; in some countries like Germany for instance, unions, workers have a representation and communities in which the companies work are stakeholders. The system in Germany, called co-determination, has not always worked as well as people hoped. I have an open mind about the exact way you can develop a voice. But there should be some way to develop voice systematically; This is very important.

Huma:
Investment funds become very powerful. They move fast in and out of the capital of businesses and generate a lot of instability. They seem impossible to control...

Stiglitz :
That’s sort of a different set of issues, which is something I do talk about, and many other economists have long worried about, which is that financial markets are short-term focused. It’s one of the reasons why people worry about capital market liberalization. You open up your country so capital can go in and out. Some people say it’s good, it’s a discipline. My view is that it’s a discipline from the wrong discipline area. If you want somebody to be disciplined you want his mind set to be the same as yours. You want discipline in somebody who’s worried about long term growth. Not just performing for the next twenty four hours or week or month. That is, in fact, a criticism of the capital market liberalization.

Huma :
You often refer to the euphoria of financial markets. In 2001, the so-called laws on financial security passed after the bursting out of the Internet “bubble”, such as the Sarbanes-Oxley Law in the United States, did not change much...

There are actually several parts. The simplest part is that you have to start looking at better accounting frameworks information. Argentina had capital coming in. It had a consumption boom. The money wasn’t going to finance investment, but to finance the consumption boom. The country was getting more in debt. The IMF was giving it an A+, but if you had the good information you would be giving them an F. You would realize the country was getting poorer. Part of the thing is that if you provide a better accounting, you can detect problems more easily. When they privatized, it made it look like their budget was better. In fact, they used privatization to finance the consumption boom and the country became poorer. The financial market always look at only one side, the profitability. They don’t look at the other aspects.
The first thing to do is to get better information so you can better analyze success and failure.

The second aspect is in the case of short term financial flows. Several countries have tried to stabilize them. To have a tax on inflow. China still has the restrictions. A lot of the money coming in and out is all driven by short term capital gain. A very simple way to deal with that is to have a tax on short term capital gain. You say if your capital gains are just short term, we’ll tax you very heavily. But it you’re here for a long term, that’s very different, so then we’ll tax you lightly. You use incentives. Underlying a lot of this book is the belief that incentives matter, but that, often, the incentives of the market are distorted. Therefore we have to realign incentives to make incentives directed in a way that is more socially productive. Using capital gains taxes to focus on long term capital gain [described in a short term??]. Using what I call the medical prize fund, so that people will have incentives to do innovation with important diseases like Malaria, AIDS, that involve hundred of millions of people, rather than to spend all the money on research to make hair grow better. Where it’s a question of saving a hundred million of people from Malaria, I think everybody in our society would say Malaria is more important. What does the market do? It says hair growth is more important than Malaria, because rich people and industrial countries pay for hair drug. They don’t get Malaria so they won’t pay for Malaria. So the market is not working. 

It’s really a book saying we can use the forces of market but we have to shape the forces of the market. Without shaping them, often they work in the wrong way. The companies maximize their profits by polluting.

Huma: 
Do you like the idea of having new financial titles with new rights attached to them, favouring long term investments rather than short term profits?


Stiglitz:
Yes, actually there are several people who are trying to think about ideas of that kind.
The head of the Graming Bank has talked about trying to create a stock market of the sort you describe, not just for your private profits but also for your social profitability. Investors could put money into these funds. There’s a number of ideas aimed at trying to increase the efficiency of the social markets, and now universities and some of our business schools have programs on social entrepreneurship. There’s a foundation in Washington that gives money for new innovations on social entrepreneurship. 

Huma :
What do you think of the “Ownership Society” advocated by Bush?

Stiglitz:
Well, some of the things Bush talks about, like having more individual participating of our society by owning, are correct ideas. Unfortunately, the economic policies don’t match up. For instance, one of the things that people talk about is that it’s important to have more people possess wealth in our society. But the way to do that is that you have to have more incomes for the poor. One of the ideas we had when I was in the Clinton administration is that, (we didn’t have enough money to do it, but the idea was that) today, when upper income people save, the Government pays part of the savings because if you put money in a special saving account, your taxes are reduced. So effectively the Government is paying part of the savings. But if you’re poor, the Government isn’t paying because you have no savings. So we proposed that the Government would say to poor people just like to rich people “If you save 1000 dollars, we would put an extra 100, 200, 300 dollars into your account” providing you keep it for five years or, not to put it in and take it out. But we’re talking about real savings. 

Huma:
Is there a similar situation in the United States as a whole?

Stiglitz:
Yes, the numbers are just very, very strong. In the last five years, even the people from the middle class are worse off. So most American today are worse off than they were five years ago. People sometimes in France compare situations and ask how come the US is growing so fast. But if you have a society in which almost everybody is worse off, is this an achievement?!



Huma : You said yesterday, on the radio that the US growth only concerns people from the higher class... Do you think the US growth only concerns people from the upper class?



Stiglitz:
There’s two points I would like to talk about:

One of them is that there are economic forces today that are driving down the income of those at the bottom. It was not always that way. In the 90’s, those in the bottom saw their income increase. This is not inevitable, but it has been the case recently and we have to understand why. 

The second thing is that, the Government can undo some of this negative effects. It can give more money to the people in the bottom, who are losing. But in the last five years, the Government has made the situation of the losers worse off. So it has given more money to the winners and made the losers worse off.

Huma :
As you know, there is at this time a big debate in France on this question...


Stiglitz:
It’s not a model for any society! I believe it’s a model for disaster, because if you have a society in which most people are worse off, year after year, after year, at some point, they will be a problem. We have an expression : “You can fool some of the people some of the time, but you can’t fool all the people all the time”. You can get away with it for a few years. You can tell them to be patient and eventually you’re going to be better off, but at the bottom of the scale, you see that for thirty years the wages at the bottom have been falling. So that today, the wages at the bottom are 30% bellow what they were thirty years ago. So you used to think children would be better off than their parents, but the children of the bottom are worse off! What happened is also that in United States, we have this myth what we call Horatio Algier, a myth that everybody from anywhere can become president, wealthy, etc. The American Dream. And there are examples of that, but the statistics are against you. Bush does not come from the bottom. Truman did. There are examples, but the statistics today show that the likelihood, if you are at the bottom, is that your children will also be at the bottom. Horatio Algier is becoming less and less true. And actually less true in United States than in some European countries. 


Huma : What do you think about the problems concerning wages, that keep getting worse? 



Stiglitz: 
Now we’re bringing up what I see as a long run problem. The wages have been going down for what is now a thirty year trend, not just a one year trend. About a one year trend, you can say “well maybe we’ll be better off next year” but this is thirty years... We cannot pretend that this is just something that will go away. In addition, right now, the United States, I think, has a short term problem. United States has a short term problem and a long term problem. The short term problem is that for the last several years, the United States economy has been sustained by a very particular monetary policy: low interest rates allowing people to take money out of their houses, refinance their houses to sustain consumption. The result of that is that last year, Americans at a household level saved negatively. Not zero, but negative. They consumed more than their income. That’s not sustainable.

Huma : 
What do you think of the real estate situation?

At the national level. The household is becoming more in debt. The liability is going up but the assets aren’t going up. The Government is getting more in debt. Not because it’s investing but because it gave a tax credit to the rich and because it started a war in Iraq, which we are losing. The point is that there is an underlying fragility of the US economy, and it’s not sustainable. We don’t know whether it will unfold into an effect on prices, or in just a weak economy, or whether some mystery will arrive to save the economy.

Huma : A sort of world equilibrium between China and the United States developped with time. China exports a lot of industrial products to the United States; and with the dollars they get, they finance the US deficit. Can this situation last?


Stiglitz :
Neither can last. Nor is it likely to last. The problem is not on China’s side but on US’ side, because it’s piling up more and more debt. As it piles up more and more debt, there is at least a risk or chance that those who hold US debt say it’s becoming riskier. If the US owes so much money, people will say "well maybe it would be tempted to permit inflation", or even if they don’t do that, if other people worry about it, they’ll take their money out and the dollar will go down. But if they start worrying about it, then it will actually happen. So, it’s not a certainty, but the likelihood of a problem is very high. There is a very big asymmetry. Some people say the US is dependent on China and China is dependent on the US. But there’s a very big difference. One way of thinking about what China is doing is called vending finance. You sell your goods, but you provide the money to buy it. So China is selling goods to United States but also financing the goods. Now, if you have the money to finance, you can finance not only for the US, but other countries, including poor people in China and investment in China. China doesn’t have to ship goods to US. China can ship goods to China. China can sell goods to the Chinese people. Why should the richest country of the world be able to consume more than its income. Other people can also consume more. In fact, China has already said that it’s going to begin to do this. In its eleventh five year plan that it announced last March, it says they will begin to shift from dependance on exports to more dependance on internal growth. "We want to reduce our savings rate by consuming more". So they’ve already announced a strategy that will change this. The problem is that United States did not announce a strategy of becoming less dependent. So China is moving toward less dependence on the system. Half of the problem has been solved, but the other half has not been...

Huma :
Will there be a sharing of the world economy between two empires; or will China impose its currency, the Yuan!

I think eventually, the Chinese currency will become more convertible. When it becomes convertible or, at least, more convertible, it will become a currency that people would want to hold in their reserves. The irony is that it will hurt the dollar. So the US is asking for something that, when it comes true, will actually hurt the dollar. What will happen is that people all over the world will say “what is the optimal portfolio?”. They’ve been holding almost all their money in dollars. In the future, they will still hold maybe more than half of their money in dollars, but they will be selling their dollars to buy Yuan. When they do that, the dollar will get weaker. So US has been asking for a policy that will be increasingly contributing to the weakness of the dollar. We have to keep a perspective on this. China’s economy today is only 15% of the US. Even in purchasing power maybe it’s 30% of the US. But it’s still much smaller and the people are still much poorer. US technology is much more advanced. So a lot of people exaggerate. The growth of China is remarkable: 9.7%. For 30 years, more people have moved out of poverty than ever before in the history of mankind. It’s a major achievement, but let’s not overestimate China. Some people say China is a giant but also a pygmy. A pygmy in the sense that it is just now beginning to develop advanced technology. What is striking about China is that it has laid out a path. So it says, in its eleventh five year plan they announced in March, “we know we are behind in innovation and we want to become independent in innovation”. They want to advance where the US has been under investing, in research and universities. The Bush administration has been anti-science. Can you believe in a world in which technology is at the core to have a president of the United States who’s so anti-science. It’s amazing! China is pro-science. That will make a difference. They’re graduating many more engineers than the United States. They’re not all of the same quality. But it is a mistake. There’s a lot of misunderstanding about China. It is not just a reservoir of unskilled labor. If you go to their factories, you see the very clever way they have combined skilled and unskilled labor. They have factories that are very advanced, that can only work with many engineers, but also factories that use their large numbers of unskilled labor. It’s this unique combination which has given them an advantage. People prefer to buy from China than from countries that have actually lower costs in production.

Huma :
What will be the problems at the heart of the next electoral campaign in the United States?

Stiglitz:
Clearly, the core of the campaign will be the issue of the incompetence of the Bush administration. The fact that it led us into a quagmire in Iraq, that it lied. Whether it lied or not, after it went in, it mismanaged. It is clear that they began by saying that they would have to win the hearts and minds. But they lost the hearts and minds. They said it would cost fifty billion dollars and it will cost conservatively over one or two trillion dollars for the US. You ask the question what you can do with one or two or trillion. It makes you cry, this waste of money. There was the mismanagement of Katrina, the corruption, the delay, Halliburton, Abramov... 
These questions are going to be, I think, at the core or the campaign.
Most Americans are worse off. You don’t have to explain that, they know that. They know that or they’re beginning to know it. They sort of felt it, but they kept being told they are better off or about to be better off. So they scratch their heads. But now, they think maybe the data are right, maybe they are worse off. Bill Gates is better off, but it doesn’t mean most of the American’s are better off!



Huma :
Have you envisaged the candidacy of Hillary Clinton ?

Stiglitz:
I would like to go back on what I said before. I think the issues I just described will be at the center of the campaign. The international issues will not rise to that level. But there is a theme that will be raised, which is the worry about the loss of jobs to China. Globalization will be one of the issues. CNN has a nightly news, Lou Dobbs, who every night talks about which factory today has moved abroad. He personalizes it. Everyday he has a long list, a blackboard of all the companies that have moved abroad. This is every night at the evening news on CNN. The issue of how to respond is going to be in the background. Unfortunately, there will be a tendency to blame China and to say China is unfair. There will be a protectionist response.



Huma : 
Will there be a new Monroe doctrine?

Stiglitz:
Neither the Democrat or Republican leadership, nor the business community is going to be happy. The leadership won’t be going in that direction, but a lot of our congressmen will be reacting to the demands of their voters, particularly in the districts which have lost factories. I think this will become an issue in the background. What the issue really should be is how to increase the efficiency of the economy, stimulate innovation. This is, in my mind, one of the real causes of the huge US deficit. It’s not just the interest citizens will have to pay. The more immediate impact is that, when you have a tight budget, when you see a huge deficit and the Bush administration keeps saying it can’t raise taxes, can’t cut military expenditures even if they are very inefficient, can’t do anything against their friend Halliburton except giving them more money...What gets cut? One of the things that often gets cut is research, because the consequences of research won’t be seen for ten years.

The Bush Agenda will leave the United States much weaker. The United States is weaker internationally because everybody hates the US. Everybody disagrees with the Bush policy. Everybody recognizes the failure of the Bush foreign policy. The consequences of the huge amount of debt and the cut-back in research when China is increasing its research, it means that US growth position will be in jeopardy.

Huma : 
What do you think of the present debate in France on the privatization of the public services, notably of energy? What do you think of the United States model? What is you opinion about the energy problem?


Stiglitz: 
Twenty years ago, I wrote a theoretical analysis on privatization where I explained that sometimes privatization works, but often it doesn’t. The reason is that some areas, especially in public utilities, are areas where there is no competition. What makes a market economy work is not just private property but competition. In the area of electricity you will always have the government, because it will always be a monopoly. Therefore, the question is what is the best way of bringing on the government monopoly. The answer can be different in different countries. The United States has deregulated and it has been a disaster in most parts of the country. Electricity prices are going up, there are black outs, brown outs, companies has gone bankrupt, the Government has had to bail out companies, Enron manipulated the energy prices. I think we would have to say it has been a disaster. You also can criticize and say it wasn’t done well. That’s true, but the other part is that it’s extremely difficult to do well. If you undertake the policy of privatization, there’s a very substantial risk, no matter what are your intentions, that it won’t be done well. That brings me to a general view. “If it’s not broken, don’t fix it” says an American expression. The likelihood that, as a result of privatization, you will have lower prices, more efficiency, higher quality and more reliability is close to zero. 



Huma :
What do you think the present situation of the public services in France?
Should we follow the United States example?


Stiglitz:
The likelihood you can do better than with your current system, in France, is almost zero. The likelihood it will do worse is very high. Anybody objectively looking at the current system in France would say "it’s the most foolish idea I ever heard". You have an efficient system that is reliable and there is no indicator that it’s about to have a problem. So why privatize? To me, the record of privatization is so bad and the record of France is so good that you have to scratch your head and ask what is the ideology behind this.

It’s even more important in France, because you have a nuclear power industry. There are serious problems. Nuclear is a very good reliable source of energy, but you have to worry about safety. You have to worry about a private company may not invest enough in safety. That’s why you will have to have a very strong government regulation. Then the question is, is it better to divide the two and have a regulator and a producer? The economic analysis is very clear that when you divide you create an asymmetry of information. It’s always difficult to do. As I say, in many countries, you have an inefficient public producer and then you have a difficult choice. Do I try to make the public producer more efficient? That’s a hard question, but it’s not the question in France.

Another example I wrote about recently which is about the privatizations of the airports. The airports have been privatized. Its been a disaster in many ways. My book is about incentives and the fact that market incentives often don’t work. That’s particularly true when you have a monopoly. So you ask the question... you are going to have to be screened when you go into the airport. Either it will be before you wait for one or two hours or after waiting for one or two hours. What is more efficient? They’re going to have to check you. The machine is there. The problem is that...
(His cellphone rings. The interview is finished.)

(1) Joseph E. Stiglitz, Un autre monde. Contre le fanatisme du marché, Paris, Fayard, 2006.


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