Monday, April 21, 2003

A cheap clown

Nobel Prize winner Joe Stiglitz spoke in Chicago today about what was wrong with the main two instruments of economic globalization, the IMF and World Bank. Perhaps because his audience was not made up of academics, his speech was shallow and filled with cheap shots, and he grinned impishly at every one. Clearly he loved the attention.

Here were his substantive points:
1) Protectionism in the US is bad. This is clearly true and an example of how special interest groups can hijack public policy to their own benefit. Many people see this as a limitation to the political process, but Stiglitz feels that the world would be better served by more government not less, all the while decrying how narrowly political import policy has become.

2) Intellectual Property regulation has gone too far. Again, no arguments here, but he used drug patents and AIDS as an example. Drug patents are clearly required to motivate medical research, and the reason pharmas don't offer them cheap in poor third world countries is because they need to price discriminate and maintain high prices in the US to pay for all the research. The issues around letting Botswana reimport from South Africa go to the very heart of this, but instead of treating the topic like an honest adult, he called it "murder" by the pharmaceutical industry.

3) Third world capital markets are destabilizing. I used to work in a hedge fund, and in my experience this is 100% true because the markets for exotic financial instruments, which includes everything out of third world countries, is very thin and therefore weird and volatile. The price you pay for excluding this volatility is higher cost of capital and less investment, but it may be worth it.

4) Monetary policy in the US does not take Latin America into account. True, but this is also the least worst alternative. I cannot see how the US refusing to lend to Latin America helps either of them out, and they both have alternatives. This type of interest rate risk is very real, but all the solutions I have heard to date are worse than the problem.

5) Fiscal policy is a mess. This is true, and if he had suggestions on how to improve it I'd love to hear them.

6) Privatizing social security costs the government money. Stiglitz says that since a government can't count private contributions to social security as an inflow, it makes government deficits look worse. In his next breath, the condemned Enron accounting, which specialized in counting inflows while hiding liabilities, exactly what government social security accounts do (to make them look better).

Cheap. Clownish.

The last question was on what the policy should be for Iraqi reconstruction. He said that Iraq needs to develop markets and institutions that are close fits with local needs, and therefore require lots of local input. He also said that debt forgiveness would be critical to any rebuilding and the US would reverse its usual position on that but be blocked by France and Russia, the two biggest creditors.


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