public sector, private sector: new national and international frontiers paris, october, 2003

PUBLIC SECTOR, PRIVATE SECTOR: NEW NATIONAL

AND INTERNATIONAL FRONTIERS

PARIS, OCTOBER, 2003

GLOBAL PUBLIC GOODS AND GLOBAL FINANCE:

DOES GLOBAL GOVERNANCE ENSURE THAT THE GLOBAL

PUBLIC INTEREST IS SERVED?

Joseph E. StiglitzColumbia University

GLOBAL PUBLIC GOODS

PURE PUBLIC GOODS: • NON-RIVALROUS CONSUMPTION—

CONSUMPTION BY ONE PERSON DOES NOT DETRACT FROM CONSUMPTION OF OTHERS– Knowledge—when I tell you something, I know it, and

you know it– National defense

• NON-EXCLUDABILITY—DIFFICULTY OF EXCLUDING OTHERS FROM ENJOYING BENEFIT

TYPES OF PUBLIC GOODS

LOCAL PUBLIC GOODS: BENEFITS ENJOYED ONLY BY THOSE IN LOCALITY

• A local clean river• A local fire departmentNATIONAL PUBLIC GOODS:

TRADITIONAL FOCUS OF ANALYSISGLOBAL PUBLIC GOODS: BENEFITS

ENJOYED BY EVERYONE ON GLOBAL

MARKET FAILURE

• MARKETS FAIL TO PROVIDE AN ADEQUATE SUPPLY OF PUBLIC GOODS

• “FREE RIDER PROBLEM”—EVERYBODY HOPES OTHERS WILL PROVIDE

INTERNATIONAL EXTERNALITIES

EXTERNALITIES: ACTIONS BY ONE PARTY WHICH HAVE AN EFFECT ON OTHERS– POSITIVE: FOR WHICH THEY ARE NOT

COMPENSATED• R & D

– NEGATIVE: FOR WHICH THEY DO NOT PAY COMPENSATION

• POLLUTION

INTERNATIONAL EXTERNALITIES

• EXTERNALITIES THE EFFECTS OF WHICH ARE POTENTIALLY GLOBAL IN REACH

• (IN CONTRAST TO LOCAL EXTERNALITIES, THE EFFECTS OF WHICH ARE FELT ONLY IN A SINGLE LOCALITY)

MARKET FAILURE

• MARKETS PRODUCE TOO LITTLE OF GOODS WITH POSITIVE EXTERNALITIES

• MARKETS BY THEMSELVES PRODUCE TOO MUCH OF GOODS WITH NEGATIVE EXTERNALITIES

GOVERNMENT AND MARKET FAILURES

• WHENEVER THERE IS A MARKET FAILURE—PUBLIC GOODS OR EXTERNALTITIES—THERE IS A POTENTIAL ROLE FOR GOVERNMENT

• GOVERNMENT ACTIONS CAN TAKE ON A VARIETY OF FORMS– TAXES AND FINES– REGULATIONS– GOVERNMENT EXPENDITURES

EXAMPLES OF GLOBAL PUBLIC GOODS/EXTERNALITIES

• INTERNATIONAL SECURITY

• GLOBAL ENVIRONMENT

• GLOBAL HEALTH

• KNOWLEDGE

• INTERNATIONAL ASSISTANCE

• THE GLOBAL ECONOMY– STABILITY– STANDARDS

INCREASING NEED FOR COLLECTIVE ACTION

• INCREASING GLOBALIZATION—THE CLOSER INTEGRATION OF THE COUNTRIES OF THE WORLD AS A RESULT OF THE LOWERING OF TRANSPORTATION AND COMMUNICATION COSTS AND THE REDUCTION IN MAN-MADE BARRIERS

INCREASING NEED FOR COLLECTIVE ACTION

• WITH GLOBALIZATION, GREATER INTERDEPENDENCE

• WITH GREATER INDEPENDENCE, GREATER NEED FOR “COLLECTIVE ACTION” – Greater role for global externalities– Greater role for global public goods

COLLECTIVE ACTION REQUIRES MECHANISM FOR DECISION

MAKING

GLOBAL GOVERNANCE WITHOUT GLOBAL GOVERNMENT

• INTERNATIONAL TREATIES

• INTERNATIONAL INSTITUTIONS– IMF– WTO– WORLD BANK

INTERNATIONAL INSTITUTIONS

• BUT THEY ARE FLAWED

• Undemocratic, non-transparent

• Smokestack structure—WTO run by trade ministers, IMF by Finance

• Provides ample opportunity for special interests to prevail

• FAILURES NOT A SURPRISE

KEY PROBLEMS

• FAILURE TO ADDRESS CRITICAL GLOBAL MARKET FAILURES

• ATTEMPT TO USE INTERNATIONAL ARENA TO ACHIEVE OBJECTIVES THAT HAVE LITTLE TO DO WITH CORRECTING GLOBAL MARKET FAILURES– BUT RATHER ARE AN ATTEMPT TO ACHIEVE IN

THE GLOBAL ARENA WHAT THEY COULD NOT ACHIEVE AT HOME

– PRECISELY BECAUSE THE INTERNATIONAL INSTITUTIONS ARE LESS DEMOCRATIC AND TRANSPARENT

EXAMPLE: GLOBAL FINANCIAL SYSTEM

KEY FAILURES/EXTERNALITIES

• AN ECONOMIC DOWNTURN IN ONE COUNTRY HURTS OTHERS

• CAPITAL MARKET IMPERFECTIONS MAKE IT DIFFICULT FOR COUNTRIES TO FINANCE EXPANSIONARY FISCAL POLICY

REMEDY

IMF

• CREATED TO PROVIDE FINANCE

• AND PEER PRESSURE TO ENSURE EACH COUNTRY MAINTAINS AS CLOSE TO FULL EMPLOYMENT AS POSSIBLE

STRANGE TIDES OF HISTORY

• IMF TYPICALLY ONLY PROVIDES MONEY WHEN COUNTRY AGREES TO CONTRACTIONARY POLICY

• BEGGAR-THY-SELF POLICIES EVEN WORSE THAN BEGGAR-THY-NEIGHBOR POLICIES

• LED TO DISASTROUS CONSEQUENCES IN EAST ASIA AND ELSEWHERE

EXPLANATIONS

• GOVERNANCE– US SOLE COUNTRY WITH VETO POWER– US REPRESENTED BY TREASURY– FINANCIAL MARKETS TRADITIONAL

POSITION—STRONG ANTI-KEYNESIAN PERSPECTIVES

EXPLANATIONS

– CONSISTENT WITH IDEOLOGY– CONSISTENT WITH INTERESTS

• INFLATION IS BAD FOR BOND MARKET• RECESSIONS CUT BACK IMPORTS, BUILD UP

RESERVES, NEEDED TO REPAY CREDITORS

BROADER SET OF OBJECTIVES

• IMPROVE STABILITY OF FINANCIAL SYSTEM• BUT IN FACT ARGUED FOR CAPITAL

MARKET LIBERALIZATION– EVIDENCE THAT IT LEAD TO INSTABILITY– AND DID NOT LEAD TO INCREASED GROWTH

• RESULT—HIGH LEVEL OF INSTABILITY– HUNDRED COUNTRIES WITH CRISES IN LAST

THIRTY YEARS

GOING BEYOND THE MANDATE

• WHY DID THE IMF PUSH CAPITAL MARKET LIBERALIZATION?

• WASN’T NECESSARY TO MAKE “INTERNATIONAL ORDER WORK”– NOT LIKE A “STANDARD” THAT HAD TO BE

AGREED UPON– IF IT WAS GOOD FOR COUNTRY, COUNTRY HAD

AN INCENTIVE TO ADOPT IT– IF ANYTHING, CAPITAL MARKET

LIBERLALIZATION RESULTS IN A NEGATIVE EXTERNALITY ON OTHERS FROM RESULTING INSTABILITY (CONTAGION)

CML

• TRIED TO ACHIEVE INTERNTIONALLY WHAT COULDN’T BE ACHIEVED AT HOME (OTHER FORMS OF INVESTMENT GUARANTEES)

• TRIED TO ACHIEVE AT WTO WHAT COULD NOT ACHIEVE IN IMF

• BASED ON SPECIAL INTERESTS RATHER THAN GLOBAL INTERESTS

OTHER MARKET FAILURES

• POOR COUNTRIES ARE FORCED TO BEAR RISK OF EXCHANGE RATE AND INTEREST RATE VOLATILITY

• WHILE IN WELL PERFORMING MARKETS, RISK WOULD BE TRANSFERRED FROM THOSE WHO ARE LESS ABLE TO THOSE WHO ARE MORE ABLE TO BEAR RISK

FUNDAMENTAL PROBLEM: GLOBAL RESERVE SYSTEM

• PROMOTES INSTABILITY

• INEQUITABLE

INSTABILITY

• SUM OF TRADE DEFICITS EQUALS SUM OF TRADE SURPLUSES

• MEANS THAT IF SOME COUNTRIES ALWAYS RUN SURPLUSES (CHINA, JAPAN), REST OF WORLD RUNS DEFICITS

• DEFICITS LIKE HOT POTATO—IF ONE COUNTRY ELIMINATES DEFICIT, SHOWS UP SOMEWHERE ELSE

• THAT COUNTRY THEN HAS A CRISIS

INSTABILITY

• US ACTS AS A COUNTRY OF “DEFICIT OF LAST RESORT”

• US ONLY COUNTRY THAT LIVES BEYOND ITS MEAN YEAR AFTER YEAR

• INCREASING INDEBTEDNESS TO FOREIGNERS

• INHERENT PROBLEM: AS DEBTS BECOME LARGE, WILL FOREIGNERS CONTINUE TO BE WILLING TO HOLD DEBT

DEFLATIONARY BIAS TO THE GLOBAL ECONOMY

• AS BILLIONS AS “BURIED IN GROUND EVERY YEAR”, RATHER THAN SPENT ON GOODS

• IN PAST, INFLATIONARY BIAS OF CENTRAL BANKS KEPT STRENGTH TO GLOBAL ECONOMY

• BUT MAY NO LONGER BE TRUE

INEQUITABLE SYSTEM

• AS US LENDS TO DEVELOPING COUNTRIES AT HIGH INTEREST RATES, AND BORROWS FROM THEM AT LOW INTEREST RATES (AS THEY HOLD US TREASURY BILLS AS RESERVES) LARGE NET TRANSFER FROM DEVELOPING COUNTRIES TO US

SIMPLE REMEDY

• GLOBAL GREENBACKS OR SDR’S• ISSUED ANNUALLY TO OFFSET

ADDITIONS TO RESERVES• TO FINANCE GLOBAL PUBLIC GOODS• INCLUDING SUPPORTING

DEVELOPMENT• VARIETY OF MECHANISMS TO

ALLOCATE FUNDS—BUT OUTSIDE OF IMF

SDR PROPOSAL

• COUNTRIES WILL ONLY HAVE PROBLEMS WHEN DEFICIT EXCEEDS SDR ALLOCATION

• WILL NOT BE INFLATIONARY—EMISSIONS ONLY OFFSETTING DEFLATIONARY BIAS

• US WOULD GAIN FROM GREATER INSTABILITY

• AND BIAS IT CREATES FOR AN EXCESSIVELY STRONG DOLLAR

SDR PROPOSAL

• BUT SHORTSIGHTEDNESS MAY RESULT IN RESISTANCE, AS US SEES LOSS OF SEIGNORAGE

• BUT REST OF WORLD COULD ‘FORCE’ US TO GO ALONG BY FORMING A CLUB, MEMBERS WHICH AGREE TO HOLD EACH OTHERS’ CURRENCY AND ISSUE SDR

FINANCING GLOBAL PUBLIC GOODS

• SDR’S COULD BE IMPORTANT SOURCE OF FUNDS

• MANAGING GLOBAL NATURAL RESOURCES– GREENHOUSE GAS EMISSIONS– SEABED, GLOBAL FISHERIES

ALTERNATIVE SOURCES OF FINANCE

• ATTACKING GLOBAL NEGATIVE EXTERNALITIES– TAX ON CROSS BORDER SHORT TERM

CAPITAL FLOWS– IS IT ADMINISTRATIVELY FEASIBLE?

• GLOBAL LOTTERY

CONCLUDING REMARKS

• GLOBALIZATION IMPLIES GREATER IMPORTANT OF GLOBAL PUBLIC GOODS

• GOOD PERFORMANCE OF GLOBAL ECONOMIC SYSTEM IMPORTANT GLOBAL PUBLIC GOOD

• BUT RULES OF GAME ARE SET BY GLOBAL INTERNATIONAL INSTITUTIONS THAT ARE UNDEMOCRATIC AND NON TRANSPARENT

CONCLUDING REMARKS

• SO SPECIAL INTERESTS OF ADVANCED INDUSTRIAL COUNTRIES PREVAIL

• RESULTING IN ORIGINAL MISSION NOT BEING PURSUED

• BROADER AGENDA OF GLOBAL STABILITY NOT BEING EFFECTIVELY ADDRESSED

• QUITE CONTRARY: – POLICIES HAVE LED TO GREATER

INSTABILITY– EXACERBATED ECONOMIC DOWNTURNS

• NEW ITEMS ADDED TO AGENDA– NOT NECESSARILY FOCUSED ON

ADDRESSING GLOBAL PUBLIC GOODS

• IMPORTANT TO FIND WAYS OF FINANCING GLOBAL PUBLIC GOODS

SDR PROPOSAL

• PROVIDES IMPORTANT SOURCE OF FINANCE

• AT THE SAME TIME CONTRIBUTES TO GLOBAL STABILITY

• AND INCREASES GLOBAL EQUITY