SEMINAR ON ECONOMIC DEVELOPMENT AND SOCIAL

EQUITY

IBSA DIALOGUE

RIO DE JANEIRO

AUGUST 2005

AN AGENDA OF NORTH-SOUTH COOPERATION

Keynote address

Joseph E. Stiglitz

Columbia University andInitiative for Policy Dialogue

OUTLINE

• SHARING INFORMATION– WHAT HAS WORKED AND NOT WORKED

• FORMULATING COMMONALITIES OF DEVELOPMENT STRATEGY– THE POST WASHINGTON CONSENSUS

CONSENSUS

• PRIORITIZING COMMON GLOBAL AGENDA– TRUE DEVELOPMENT ROUND– REFORMING THE GLOBAL FINANCIAL SYSTEM– A GLOBAL ENVIRONMENTAL AGENDA

• THE RAINFOREST COALITION

THE FAILURE OF THE WASHINGTON CONSENSUS

• DID NOT SUCCEED IN PRODUCING GROWTH

• AND WHAT GROWTH DID OCCUR WAS NOT EQUITABLY SHARED

• TRICKLE DOWN ECONOMICS DOES NOT WORK

• NOT SURPRISING—EQUITY NOT EVEN MENTIONED

IMPORTANCE OF EQUITY

• END IN ITSELF– GDP BAD MEASURE OF SUCCESS

• GDP INCREASE EVEN AS COUNTRY GETS POORER– LATIN AMERICAN DEBT

– RESOURCE DEPLETION, ENVIRONMENTAL DEGRADATION

– BETTER TO FOCUS ON NNP

– EVEN BETTER TO TAKE ACCOUNT OF LIABILITIES

– CAN HAVE RICH COUNTRIES WITH POOR PEOPLE

• BETTER TO FOCUS ON MEDIAN INCOME

IMPORTANCE OF EQUITY

EQUITY PROMOTES GROWTH

• BETTER USE OF HUMAN RESOURCES

• SOCIAL AND POLITICAL SUSTAINABILITY

MARKET FAILURES

• EVEN UNDER BEST OF CIRCUMSTANCES, NO REASON TO BELIEVE MARKETS CONSISTENT WITH SOCIAL JUSTICE

• MODERN THEORIES EMPHASIZE THAT EQUITY AND EFFICIENCY CANNOT BE SEPARATED– AGENCY THEORY– ONE OF ARGUMENTS FOR LAND REFORM

• SHARECROPPING ATTENUATES INCENTIVES JUST AS TAXES DO

IMPLICATIONS

IMPORTANT TO INCLUDE EQUITY CALCULUS IN EVERY ASPECT OF POLICY MAKING

• LAND REFORM• PROJECT EVALUATION• MACRO-ECONOMIC POLICY

– CANNOT DELEGATE MACRO-POLICY, INCLUDING MONETARY POLICY, TO TECHNOCRATS

– WRONG TO HAVE SINGLE MINDED FOCUS ON INFLATION

• ENORMOUS DISTRIBUTIONAL CONSEQUENCES OF UNEMPLOYMENT

DESIGN OF WELFARE, EDUCATION, GROWTH

PROGRAMS• KEY ISSUES OF SELECTION,

INCENTIVES TO PARTICIPATE– SELF-SELECTION MECHANISMS– USE OF LINKAGES

• VIRTUOUS CIRCLES—LESS INEQUALITY, HIGHER PARTICIPATION RATES IN EDUCATION

ELEMENTS OF POST WASHINGTON CONSENSUS

CONSENSUS• IMPORTANCE OF EQUITY• IMPORTANCE OF EMPLOYMENT• BALANCED ROLE OF GOVERNMENT AND MARKET

– PROMOTING AND REGULATING MARKETS– PROVIDING INSTITUTIONAL AND PHYSICAL

INFRASTRUCTURE– PROMOTING EDUCATION, INNOVATION, AND

TECHNOLOGY

COUNTRIES CAN SUFFER FROM HAVING TOO LITTLE GOVERNMENT AS WELL AS TOO MUCH

NOT SO MUCH SIZE OF GOVERNMENT, BUT WHAT IT DOES AND HOW WELL IT DOES WHAT IT DOES

TOWARDS A COMMON AGENDA:TRADE

• THE URUGUAY ROUND WAS UNBALANCED—POOREST COUNTRIES ACTUALLY WORSE OFF, AGENDA SET BY NORTH, FOR NORTH

• THE DEVELOPMENT ROUND AGENDA DOES NOT DESERVE EPITHET– NORTH HAS RENEGED ON PROMISES

WHAT IS NEEDED

• PRO-POOR– DEVELOPED COUNTRY TARIFFS AGAINST

DEVELOPING COUNTRIES FOUR TIMES HIGHER THAN AGAINST DEVELOPED

– DEVELOPING COUNTRIES WERE FORCED TO GIVE UP SUBSIDIES, DEVELOPED COUNTRIES KEPT THEIRS

• PRO-DEVELOPMENT• PRO-TRADE• FAIR TRADE AGENDA

PRO-POOR

• EXTENDING EBA INITIATIVE• AGRICULTURE

– BUT NEED TO RECOGNIZE THAT MANY DEVELOPING COUNTRIES WILL BE HURT

– PRODUCTION SUBSIDIES ALMOST AS BAD AS EXPORT SUBSIDIES

• U.S. BAD FAITH IN DOUBLING SUBSIDIES, CLAIMING COTTON SUBSIDIES NOT TRADE DISTORTING

– OTHER SUBSIDIES CAN ALSO BE TRADE DISTORTING• INCLUDING WATER

– SHORT TRANSITION• CURRENT PROGRAM ACTUALLY HURTS SMALL FARMERS• IMMEDIATE ELIMINATION OF ALL LARGE SUBSIDIES

PRO-POOR

• LABOR INTENSIVE SERVES

• MIGRATION– MORE IMPORTANT FOR GLOBAL

EFFICIENCY THAT CAPITAL MOBILITY– IMPORTANT FOR DEVELOPING

COUNTRIES AS FDI

PRO-DEVELOPMENT

PULLING UP THE LADDER—TAKING AWAY STRATEGIES USED BY DEVELOPED COUNTRIES TO GET WHERE THEY GOT

• ASYMMETRY—DEVELOPING COUNTRIES IMPOSE NO HARM ON DEVELOPED, CONVERSE NOT TRUE

• TRIPS—IMPAIRS ACCESS TO KNOWLEDGE, HUGE DRAIN ON DEVELOPING COUNTRIES– IMPORTANT INITIATIVE BY BRAZIL AND OTHERS AT WIPO– A PRO-DEVELOPED INTELLECTUAL PROPERTY REGIME

• ESCALATING TARIFFS• OTHER ISSUES—SECRET BANK ACCOUNTS, ARMS

SALES, TAX COMPETITION

PRO-TRADE

• NON-TARIFF BARRIERS REPLACING TARIFF BARRIERS– BEING USED AS A BARRIER TO SOUTH SOUTH

TRADE• TRIPS AS A TRADE BARRIER (COMPULSORY

LICENSE)– COUNTER WITH GLOBAL COMPETITION

POLICIES– PRO-DEVELOPMENT STANDARDS– PROMOTING OPEN ACCESS

• BILATERAL TRADE AGREEMENTS– TRADE DIVERSION RATHER THAN CREATION

A COMMON AGENDA

• BARGAIN TOGETHER– RECOGNIZING DIVERGENT INTERESTS– BUT BETTER OFF IF THEY BARGAIN TOGETHER– DEMAND A TRUE DEVELOPMENT ROUND

• SOUTH-SOUTH AGREEMENTS MORE LIKELY TO YIELD BENEFITS– REJECT UNFAIR BILATERAL AGREEMENTS– ESPECIALLY THOSE BUILT ON “DREAM” OF INVESTMENT

FLOWS• NO AGREEMENT IS BETTER THAN ANOTHER

UNFAIR AGREEMENT– RECOGNIZING THAT URUGUAY ROUND WAS UNFAIR– BUT AT LEAST ESTABLISHED RUDIMENTS OF A RULE OF

LAW

GLOBAL AGENDA: FINANCE

• CURRENT REGIME PLACES BURDEN OF EXCHANGE RATE AND INTEREST RATE RISK ON DEVELOPING COUNTRIES—AT HUGE COST

• CURRENT REGIME LEADS TO HIGH LEVELS OF GLOBAL INSTABILITY—AGAIN AT HUGE COST– UNDERLYING PROBLEM GLOBAL RESERVE SYSTEM

THESE ARE ISSUES IMF SHOULD HAVE BEEN FOCUSING ON– NOT CML, WHICH INCREASED GLOBAL INSTABILITY AND

HURT DEVELOPING COUNTRY– THOUGH IT HAS FINALLY RECOGNIZED THAT CML

REPRESENTS RISK WITHOUT REWARD

GLOBAL RESERVE SYSTEM

• INEQUITABLE– RESERVES REPRESENT LOW COST

LOANS FROM DEVELOPING COUNTRY TO DEVELOPED

– HIGH OPPORTUNITY COST– COST GREATER THAN FOREIGN AID– US, RICHEST COUNTRY, LIVES BEYOND

ITS MEANS, GETS TO BE CONSUMER OF LAST RESORT

DEFLATIONARY

• BURYING LARGE AMOUNTS OF PURCHASING POWER IN GROUND DEFLATIONARY

• COMPARISON WITH GOLD STANDARD

INSTABLE

• SUM OF DEFICITS EQUAL SUM OF SURPLUSES– IF SOME COUNTRIES INSIST ON RUNNING

SURPLUSES, OTHERS MUST RUN DEFICITS– SURPLUS COUNTRIES AS MUCH PART OF

PROBLEM AS DEFICITS– DEFICITS AS HOT POTATOES

• INHERENT PROBLEM—RESERVE COUNTRY PRODUCES IOU’S, UNTIL SO MANY NO ONE WANTS TO HOLD

CHANGING GLOBAL PERSPECTIVE

• DOLLAR NO LONGER SAFE ASSET– WHAT MATTERS IS NOT JUST INFLATION– BUT EXCHANGE RATES– THOSE WHO HELD DOLLAR T BILLS HAVE LOST

• DOLLARS NO LONGER NEEDED TO GIVE CONFIDENCE TO CURRENCY

• IMPORTANT TO HAVE CUSHION• AND TO MANAGE WEALTH• IMPLYING DIVERSIFICATION• DIVERSIFICATION AWAY FROM DOLLAR

CHANGING GLOBAL PERSPECTIVE

• ASIA SOURCE OF SAVINGS• WHY SHOULD U.S. RECEIVE

SEIGNORAGE, PROFIT FROM MANAGING WEALTH?

• ASIAN COOPERATION ON RESERVE—CHANG MAI INITIATIVE

• ASIAN C0OPERATION ON FINANCIAL MARKETS—ASIAN BOND MARKET

• NEED TO BE BROADENED

GLOBAL ENVIRONMENT

• DEVELOPING COUNTRIES PROVIDE ENORMOUS ENVIRONMENTAL SERVICES TO DEVELOPED COUNTRIES, FOR WHICH THEY ARE NOT BEING COMPENSATED– BIODIVERSITY– CARBON– FAIR MARKET VALUE OF COMPENSATION ENORMOUS – COSTA RICA SHOWN THAT SUCH A SYSTEM CAN WORK,

DELIVER BENEFITS TO SMALL LANDOWNER

• MAJOR MISTAKE AT KYOTO—FAILURE TO INCLUDE AVOIDED DEFORESTATION– MAGNITUDE ENORMOUS

RAINFOREST COALITION

• SOUTH COOPERATIVE EFFORT• RECOGNIZING GLOBAL WARMING AS

A GLOBAL PROBLEM• IN WHICH THERE MUST BE SOUTH

PARTICIPATION• COULD MAKE SUBSTANTIAL

DIFFERENCE FOR GLOBAL ENVIRONMENT AND DEVELOPMENT OF AFFECTED COUNTRIES

CONCLUDING COMMENTS

• IBSA ENORMOUS OPPORTUNITY• FOR SHARING KNOWLEDGE• AND DEVELOPING COOPERATIVE

PROGRAMS• GLOBAL ECONOMIC AGENDA HAS BEEN

SET LARGELY BY NORTH, FOR NORTH• ONE OF REASONS THAT GLOBALIZATION

HAS FAILED TO YIELD PROMISED BENEFITS• IBSA CAN HELP ARTICULATE A NEW

FRAMEWORK FOR EQUITABLE GROWTH• AND A NEW GLOBAL AGENDA