ECONOMIC SECURITY FOR LESS DEVELOPED

COUNTRIES: Implications for Bangladesh

Joseph Stiglitz

Dhaka

13 August 2003

MULTIPLE ASPECTS OF SECURITY

• SECURITY FOR MACRO ECONOMY

• SECURITY FOR FIRMS

• SECURITY FOR INDIVIDUALS – INCOME SECURITY– FOOD SECURITY– HEALTH SECURITY– PHYSICAL SECURITY– OLD AGE SECURITY

IMPORTANCE OF SECURITY

• WORLD BANK STUDY IDENTIFIED LACK OF SECURITY ONE OF WORSE ASPECTS OF POVERTY

CHANGING NATURE OF INSECURITY

• ENORMOUS GLOBAL VOLATILITY– 100 CRISES IN LAST 30 YEARS

• WIDESPREAD CIVIL STRIFE– ONE OF MAJOR SCOURGES IN AFRICA

• GLOBAL PANDEMICS– AIDS

INSECURITY EVEN PROBLEM IN DEVELOPED COUNTRIES

• JOB SECURITY

• HEALTH INSURANCE

• LACK OF CONFIDENCE IN PENSION SYSTEMS

SOME GOOD NEWS

• FEWER FAMINES– ROLE OF MEDIA, DEMOCRACY

INSECURITY

• IMPOSES HUGE COSTS– DIRECT LOSS OF WELFARE– LOSS OF WELFARE IN ATTEMPTS TO AMELIORATE

INSECURITY

• LIMITED ABILITY OF PRIVATE MARKETS TO ADDRESS MANY ASPECTS OF INSECURITY– LIMITED SCOPE FOR PRIVATE INSURANCE, LARGE

MARKET FAILURES– IMPORTANCE OF SOCIAL INSURANCE

• BUT INCREASINGLY AWARE OF LIMITATIONS OF SOCIAL INSURANCE

• IMPORTANT TO ADDRESS SOURCES OF INSECURITY DIRECTLY

ANALYZING SECURITY

• INDENTIFYING RISKS

• REDUCING RISKS

• AMERLIORATING CONSEQUENCES

EXPLAINING CRISES:

• Economic

• Political

• Other

• DISTINGUISH BETWEEN INTERNAL DISTURBANCES AND EXTERNAL

ECONOMIC SOURCES OF INSECURITY/INSTABILITY

• INTERNAL– Banking failures

• Sweden, Finland, Norway

• EXTERNAL– Exchange rate volatility– Interest rate volatility

• Latin America 1980s

– Commodity price volatility• Oil price shocks

POLITICAL SOURCES OF INSTABILITY

• INTERNAL

CHANGES IN GOVERNMENT

CIVIL STRIFE• EXTERNAL

– WARS– CHANGES IN INTERNATIONAL RULES

• END OF MULTIFIBER AGREEMENT

OTHER SOURCES OF INSECURITY/INSTABILITY

• INTERNAL– Famines– Natural disasters

• EXTERNAL– Change in technology

MULTIPLE SOURCES OF INSTABILITY

• KOREA– WEAK BANKS– CAPITAL MARKET LIBERALIZATION– CHANGE IN SENTIMENT TOWARDS

EMERGING MARKETS, ESPECIALLY IN EAST ASIA

– DOWNTURNS IN NEIGHBORING COUNTRIES

– REDUCED DEMAND FOR CHIPS

CONSEQUENCES EXACERBATED BY

• LACK OF TRANSPARENCY

• IMF MACRO-ECONOMIC POLICIES

INDONESIA

• WEAK BANKS• CAPITAL MARKET LIBERALIZATION• CHANGE IN SENTIMENT TOWARDS

EMERGING MARKETS, ESPECIALLY IN EAST ASIA

• DOWNTURNS IN NEIGHBORING COUNTRIES– FACTORS SIMILAR TO THOSE IN KOREA

• EL NINO—CROP FAILURES

CONSEQUENCES EXACERBATED BY

• LACK OF TRANSPARENCY

• IMF MACRO-ECONOMIC POLICIES

• IMF POLICIES TOWARDS FINANCIAL INSTITUTIONS– CLOSING DOWN BANKS– LACK OF FORBEARANCE

STRATEGIES FOR REDUCING RISK

• DIVERSIFICATION

• REDUCING EXPOSURE

DIVERSIFICATION

– PRODUCT DIVERSIFICATION– MARKET DIVERSIFICATION– KOREA:

• SHIFTING TOWARDS CHINA, AWAY FROM AMERICA• LESS DEPENDENCE ON CHIPS

– ROLE FOR GOVERNMENT• INDUSTRIAL POLICIES• NEED TO BE BETTER DESIGNED, LESS CORRUPT THAN

INDUSTRIAL POLICIES OF PAST

REDUCING EXPOSURE

• RESTRICTING SPECULATIVE CAPITAL MOVEMENTS• STRONG SUPERVISION OF BANKING SYSTEM

– ENFORCING CREDIT CONTRACTS– LIMITING SPECULATIVE REAL ESTATE SPECULATION

• LIMITING INDEBTEDNESS, ESPECIALLY FOREIGN INDEBTEDNESS, AND MANAGING COMPOSITION OF DEBT– REDUCES EXPOSURE TO INTEREST RATE VOLATILITY– REDUCES EXPOSURE TO EXCHANGE RATE VOLATILITY

LIMITING DEBT

• MEANS BALANCING EXPENDITURES WITH TAX REVENUES OVER THE BUSINESS CYCLE

• DEVELOPING RAINY DAY FUND IN GOOD YEARS

• TO BE DRAWN UPON IN BAD

ENHANCING CAPACITY TO ADAPT TO CHANGE

• EDUCATION

• FLEXIBLE INSTITUTIONS

MACROSTABILITY

• SHOCKS TO ECONOMY ARE INEVITABLE

• NEED TO USE COUNTERCYCLICAL MONETARY AND FISCAL POLICIES

• AND NOT TO EMPLOY PRO-CYCLICAL FINANCIAL REGULATORY POLICIES

MOST LDCS ENGAGE IN PROCYCLICAL POLICIES

• WHY: NOT LACK OF UNDERSTANDING OF ECONOMICS

• FORCED TO BY IMF• DEPENDENCE OF COUNTRIES ON IMF• LACK OF OUTSIDE FUNDS TO USE AS BASIS

OF COUNTERCYCLICAL FISCAL POLICIES• CAPITAL MARKET LIBERALIZATION LEADS

TO PROCYCLICAL PRIVATE LENDING

OBVIOUS IMPLICATIONS

• AVOID CONDITIONS THAT REQUIRE TURNING TO IMF

• MANAGE CAPITAL MARKETS TO EXTENT POSSIBLE– EVEN IMF NOW RECOGNIZES THAT FULL

CML INCREASES RISK WITHOUT INCREASING GROWTH

• CYCLICALLY ADJUSTED CAPITAL REQUIREMENTS

AMERLIORATING CONSEQUENCES

• SAFETY NETS

• BUT EVEN IN DEVELOPED COUNTRIES, SAFETY NETS FOR RURAL SECTOR, UNINCORPORATED BUSINESSES WEAK

• MAKES RESPONSIBILITY FOR GOOD MACRO MANAGEMENT EVEN GREATER

IMPORTANT NOT TO FORGET OTHER ASPECTS OF SECURITY• HEALTH SECURITY

– AIDS– SAFE WATER

• PHYSICAL SECURITY

• HUMAN RIGHTS

RESPONDING TO NATURAL DISASTERS

• BANGLADESH HAS FACED SEVERE CHALLENGE

• IMPRESSIVE IN ITS RESPONSE

• BUT NEW CHALLENGES REQUIRE NEW STRATEGIES– SAFE WATER– AIDS

RESPONDING TO RISKS IN LDCS

• RISKS ARE GREATER

• CAPACITY TO COPE WITH RISKS LESS

• ALL THE MORE IMPORTANT TO HAVE A STRATEGY FOR DEALING WITH RISKS