Jan 06, 2016 (LBO) – The work of renowned economist Joseph Stiglitz, a guest speaker at the Sri Lanka Economic Forum this week, could help focus attention on several issues simmering in the island’s political and economic discourse.
The problem of deregulated markets, growing income inequality in neo-liberal economies, and IMF intransigence in the face of alternatives are chief among them.
This focus would be most welcome.
Stiglitz, who shared the Nobel Prize for economics in 2001, spearheaded a report to the UN General Assembly in 2009 highlighting how reforms in recent decades exposed countries to greater instability in the aftermath of the US financial crisis.
These reforms which weakened social protection may have led to a disproportionate impact on the poor, as the crisis spread across the world.
Although economic outcomes in Sri Lanka are largely due to successive governments failing to improve fiscal and public sector performance, it is worth paying attention to incidental factors and those who offer singular policy advice.
After all, those who have specific advice have a duty to get it right. Noticeably, in an age of theoretical pluralism, singular prescriptions are now increasingly out of place.
These ideas are echoed in the Stiglitz report which calls for competitive pluralism, encouraging the creation of a marketplace of ideas.
Stiglitz, who authored several books such as Globalization and its Discontents, has explained circumstances in which markets do not work well, and how selective government intervention can improve their performance.
This is the problem of asymmetric information and market failure.
“Part of the reason for inadequate financial regulation was an inadequate appreciation of the limits of the market mechanism—the prevalence of what economists call ‘market failures.’”
“While such failures arise in many markets, they are particularly important in financial markets and can have disproportionately large consequences as they spill over into ‘real’ economic activity,” the Stiglitz report said.
This is a recurrent debate.
Should government be streamlined to the point where there is no social protection and market intervention, or is this a philosophy with sub-optimal outcomes.
The argument for blanket deregulation pops up in Sri Lankan media often, and elsewhere in the world.
His position is clear.
“At the global level, some international institutions continue to recommend policies, such as financial sector deregulation and capital market liberalization, that are now recognized as having contributed to the creation and rapid diffusion of the crisis.”
“The fact that existing global institutions did little to prevent the crisis, and then delayed developing adequate responses to the crisis, suggests important institutional problems that the international community needs to address.”
The US financial crisis brought to the surface broader flaws in the understanding of the functioning of markets. There was a widespread belief that unfettered markets are, on their own, quickly self-correcting and efficient.
“While much of the support for globalization and the changes in economic policy (e.g. in deregulation) over the past quarter century may have been driven by particular interests, it was also premised on economic doctrines whose theoretical foundations and empirical bases were, at best, questionable.”
“Regrettably, in responding to the crisis, many governments have undertaken non-transparent actions and relied heavily on central banks, with only limited democratic accountability. Some central banks with only limited direct accountability have introduced measures—without parliamentary or congressional approval—in support of financial institutions that have exposed taxpayers to massive risks.”
And so the debate continues.
Stiglitz helped create a new branch of economics, “The Economics of Information,” exploring the consequences of information asymmetries and pioneering such pivotal concepts as adverse selection and moral hazard, which have become standard tools of policy analysts.
He was a member of the US Council of Economic Advisers from 1993-95, during the Clinton administration, and was chief economist and senior vice-president of the World Bank from 1997-2000.
In 2008 he was asked by the French President Nicolas Sarkozy to chair the Commission on the Measurement of Economic Performance and Social Progress, which released its report in September 2009 (published as Mismeasuring Our Lives).
In 2009 he was appointed as chair of the Commission of Experts on Reform of the International Financial and Monetary System to the UN General Assembly, which released its report in September 2009 (published as The Stiglitz Report).
Since the crisis, he has played an important role in the creation of the Institute for New Economic Thinking, which seeks to reform the discipline so it is better equipped to find solutions for the challenges of the 21st century.
In terms of his potential contribution to Sri Lanka, the island’s challenges are more specific and boils down to public sector performance.
Sri Lanka’s troubles, in that sense, are neither a matter of fiscal policy nor monetary policy. It is a matter of lack of innovative and efficient public sector management.
Nevertheless, the gap between deregulated markets and trickle down growth is a significant challenge, and deserves extended debate. Let’s hope the two-day Sri Lanka Economic Forum, with a focus on “inclusive and sustainable development” indeed stays on point.
(– Chamath Ariyadasa is the News Editor for Lanka Business Online. He has a masters degree in the social sciences and was a former bureau chief for Dow Jones Newswires in Sri Lanka –)