Stiglitz remedy for global crisis
By Rupa Damodaran
NOBEL laureate of economics Professor Joseph E. Stiglitz, who has set about the mammoth task to reform the global financial system, wants the international community to get together and create a special emergency facility to address the current global crisis.
"This will not be the last of crises, so we need to work towards fundamental reforms but in the short run, we need emergency measures which need to involve all the existing institutions.
"We also have to work in temporary arrangements which can be brought into play very quickly and help address the current crisis," he said in an interview with Business Times.
Stiglitz, who chairs a UN task force known as the Commission of Experts on Reforms of the International Monetary and Financial System, is also calling for a new international credit facility, through which the World Bank and the International Monetary Fund can extend some funds.
"We have to ensure that the concern of developing countries be better articulated and reflected within the mechanism by which these funds are provided."
On the IMF, he said there have been improvements to the way it has been creating some facility for providing funds during the crisis minus its traditional conditionality which had affected East Asia during the previous crisis in 1998.
"While the governance in the IMF has serious flaws, the good news is that it is trying to improve matters. But the bad news is that the magnitude and speed of the reforms is too slow to be relevant to the current crisis.
"I would prefer for these problems to be addressed by a comprehensive international institution rather than a small selective group. This is a global problem and it needs global participation in the solution and not 7, 8, 13 or 20 countries."
Stiglitz, who was in Kuala Lumpur for the Bank Negara High Level Conference held in conjunction with its 50th anniversary, said preliminary findings of the task force will be disclosed at the UN end-March.
Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz and UN Department of Economic and Social Affairs' assistant secretary-general for economic development Jomo Kwame Sundaram are the two Malaysians appointed to the committee.
Stiglitz, a former chief economist at the World Bank, believes that the downturn is getting worse and the effects beginning to spread.
Unlike the 1998 financial crisis where exports enabled Asian countries to get out of the crisis quickly, it would be more difficult this time around as almost all countries are facing an economic downturn.
In the case of the US, exports are more likely to diminish with trading partners going into recession.
With declining consumption, investment and exports, the only offsetting factor is government expenditure, But the general consensus in the US is that even with the stimulus, public expenditure will not be able to make up for the shortfall in the other three categories.
In the case of Asia, Stiglitz pointed out the region's strength, which can be drawn from countries like China with its huge reserves and its resolve to stimulate consumption and investment over the recent years.
"If China maintains a reasonable degree of health, it could have enormous benefits to all countries in Asia. On the other hand, China and the growth of the others in region depends on exports ... that will make the challenge in Asia greater."
In the case of Malaysia, prevailing good regulatory framework has helped it to be well equipped to address the crisis.
To boost domestic consumption further, he drew references to macro economic principles of increasing consumption, exports, government expenditure and investment.
"One of the advantages of countries with large reserves in Asia is that you can do investments which can prepare for long-term economic growth, provided the downturn does not last too long. There is also an advantage of being small. You can borrow for your own domestic needs without disturbing global financial markets, unlike the US," he said.
In the case of US, its borrowing needs are huge that if it goes about trying to solve its needs with a deficit expected to be 10 per cent of GDP next year, it will have a significant impact on the global financial market.