A straight talking maverick, and a globally reknowned economist, Professor Joseph Stiglitz tells Paul Strohm how Asia got crisis management right. Nobel Prize-winning economist Professor Joseph Stiglitz, this year’s MIPIM Asia keynote speaker, has a reputation for calling things as he sees them. With a string of successful and widely read publications to his name and a 57-page CV packed with high-powered, high-profile appointments, honours and articles, he takes a no-holdsbarred approach to analysis of economic policy and abroad.
He has a strong background in Asia. Formerly vice-president and chief economist at the World Bank, he has been part of that agency’s many missions around the region. While his view of Asia is overwhelmingly positive, he does have warnings for the future.
Stiglitz says that he believes Asian economies inspire confidence because of their impressive long-term performance. He adds that now we have another reason for believing that Asian countries will withstand the further rigours of the world economy. “They have managed their way through the global economic crisis better than any other region. What makes this so astounding is that this crisis was reflected in a crash of trade that was actually deeper than the Great Depression. These countries’ growth strategies had been export-dependent and one might have expected them to have had the most difficulty.”
Stiglitz is quite clear about the reasons for this success: “China and several of the other countries instituted very strong Keynesian macro-economic policies, to stimulate their economies. These were well designed, thoughtful.” And he cites another reason:
“Many of the smaller economies benefited from China’s success. Clearly they were doing the right thing, but China was doing the very right thing.” This growth trickled down throughout the region. And many lessons were learned from the Asian crisis of the late 1990s. “If you talk to Chinese banking regulators, for instance, they are certainly very aware of the mistakes made — including those in China.” Stiglitz says that the crisis made them much more conscious of the need for corporate governance and of the hazards of inadequate regulation of financial markets.
It is easy to assume that China was able to impose more stringent measures because of its totalitarian regime. But Stiglitz says this was by no means a prerequisite and points to Australia as evidence.
“Australia is a very strong democracy and was one advanced industrialised country that did have a good stimulus package that was well designed and the right size. It had the shortest downturn and quickest rebound, and is doing very well. It also benefited from the fast recovery in China. But if you look at the policies implemented, they were absolutely first rate.”
There was one principal difference with the Australians, according to Stiglitz: “They had a political leader who understood the issues and they began, like China, in a very good fiscal position. The US — because of the war and because of the tax cuts that were beyond the country’s ability to afford them — began the crisis in a very bad fiscal position, and with a president [George W Bush] who was just not up to understanding what was going on.
“The interesting thing is that policies followed by the US in its own crisis were markedly different from the policies that they foisted on East Asian countries during their crisis, and that disparity is obviously a source of concern and a source of hypocrisy and double standards.”
He says that while the US and the International Monetary Fund demanded that interest rates rise in East Asia during the 1990s crisis, the US brought rates down to zero during the latest upheaval. And while the IMF and US Treasury once demanded expenditure cutbacks in East Asia, the US has now used stimulus policies. Even in the case of the banks, in the 1990s the US demanded that Indonesia shut down 16 banks, which led to a panic that exacerbated Indonesia’s crisis, “whereas [this time the US] bailed out the big banks.”
Stiglitz contends that neither the US approach to its own banks in the last few years nor the approach to Indonesia in the 1990s was correct.
“My view is that you don’t just let a financial market or a banking system collapse ... that will kill an economy. Neither do you bail out the shareholders and the bondholders. You have to have accountability. In the case of East Asia, we destroyed financial markets and caused economies to go into deep recession — or depression in the case of Indonesia — and in the other case we abandoned any sense of accountability at a great price to the taxpayer.”
While most Asian countries have handled the latest crisis well, Stiglitz warns that they must remain nimble on their feet.
He believes growth in the US and Europe is likely to be anaemic for a number of years, making an exportdependent model of growth less likely to succeed. China will have to find an alternative basis for growth. “What succeeded in the last year or two was a well-designed stimulus package.” This focused on creating infrastructure such as the high-speed rail system which will dramatically change China’s economic geography. But, he points out: “You can only build one railroad system.”
Greening the economy is a possible alternative source of growth and China’s urbanisation is another — homes in urban centres will be required for tens of millions of people. Stiglitz says: “A successful economy has to have a very large and important real estate sector, but one has to be wary of real estate bubbles because they have been a major a source of volatility in the global economy.” Stiglitz does not believe these are inevitable: “One can have a successful, stable real estate sector.”
Some foreign investment in China’s real estate market is driven by investors’ desire to take advantage of an expected appreciation in the currency. Stiglitz says this could contribute to real estate bubbles and a boom-bust pattern, and he urges that foreign exchange gains be taxed to avoid this. “You might say it is too easy parking money in real estate while you are waiting for a capital gain.”
