Global Risks and Opportunities - PowerPoint Presentation

Slide1

 Global Risks and Opportunities

International Financial CrisisThe Aftermath

Joseph E.

Stiglitz

Trinidad and Tobago

September 9, 2011Slide2

The big questions

Where are we now, four years after the breaking of the bubble, and almost three years after the collapse of Lehman Brothers?How did we get here?What are the choices we have?

What are the choices that are likely to be made—and what will they imply?

What does all of this imply for emerging markets and developing countries, including the Caribbean?Slide3

A divided world

Global growth reasonably good—for 2011, projected to be about 4.4%Slightly lower than 2010

But much better than 2009, when it shrank .5%

Continuing weakness in US and Europe

Europe 2011 projected to be only around 1.6%

But large differences within Europe—Germany 2.5%

Strong growth in emerging markets, especially Asia

China projected to grow at slightly less than 10%

Though government is trying to cool economy

Developing Asia projected to grow at 8.4%

Sub-Saharan Africa projected to grow at 5.5%Slide4

Prospects for US and Europe: A Japanese-style malaise

Continuing weaknesses in Europe and the U.S.

Some chances of a much deeper downturn (double-dip)

Growth too slow to create enough jobs to bring down unemployment

Official US unemployment rate 9%

Teen unemployment 23%

African-American teen unemployment 40%

Still, almost 1 out of 6 of those who would like a job can’t get one

Jobs deficit almost 25 million

More than 40% of the jobless are long-term unemployedSlide5

Fundamental problem

Lack of aggregate demandBefore crisis, US economy (and much of the world) was fueled by unsustainable housing bubble

Savings rate plummeted to zero

Bubble hid underlying problem

Structural transformation—

successes in increasing manufacturing productivity meant fewer jobs

Changing global comparative advantage

Growing inequality

Those whose incomes were stagnant and declining told to continue consuming

Not sustainable

Reserve build-up in emerging markets

Precautionary savings

Export led growthSlide6

Why prospects of US recovery are so dim

Breaking of bubble left in its wake a legacy of excess capacity in real estate and debt—exacerbating fundamental problemsSolving financial crisis by itself would not resolve underlying problemsBut we have not fully addressed problems in financial sector

Continuing problems of lack of transparency

Continuing problems of excess risk taking

Continuing problems of undercapitalization

Problems of too-big-to fail worsened

Haven’t fixed problems in housing market

Prices continue to fall, foreclosures continue at rapid rate

Haven’t done anything to address underlying economic problems

Again, in some areas, they have become worse

Countries with large reserves did better—incentive to build up reserves further

High unemployment is contributing to increasing inequalitySlide7

Why prospects of US recovery are so dim

Consumption likely to remain weak, given overhang of debt, high unemployment, weak wages

And it would be bad for long-run prospects if US returned to profligate consumption pattern

Investment

likely to remain weak, given excess capacity, overhang from excess investment in real estate during boom years

Small businesses cannot get access to credit

Source of job creation

Banking system—especially the part engaged in lending—remains weak

Most borrowing is collateral based; collateral real estate; real estate prices down markedly

Exports

uncertain, given weaknesses in global economy

US lost capacity for exporting in many industriesSlide8

Weak prospects for US

Government, rather than offsetting weaknesses in private sector, is exacerbating them

End of stimulus implies fiscal contraction

Stimulus worked, but was too small and not well designed

Administration underestimated depth and duration of downturn

Thought that the underlying problem was

just

a banking crisis; repair the banks and the economy will be repaired

Even if banks were working perfectly, economy would be weak

Exacerbated by declines in state revenues

States have balanced budget frameworks

Responses of states—cutting expenditures rather than raising taxes—bad for short-run stability

Problems exacerbated by federal aid cutbacksSlide9

What US needs – and what it is likely to get

Needed: large second round of stimulus

Aimed at high return investments (in education, infrastructure, technology)

Stimulating the economy today

And providing basis for long-term growth

Helping address some of US long term problems

Aid to states, to prevent further cutbacks (total government employment now less than in 2008)

Can the U.

S. afford stimulus?

Can’t afford not to

Long-term fiscal position will be improved if government spends on investments

“Balanced budget” multiplier also large

But Congress unlikely to agree to large increases in revenuesSlide10

What US needs – and what it is likely to get

Actually getting:Two-year extension of Bush tax cuts

Likely to stimulate economy only a little

But will probably increase deficit substantially: low bang for buck

One-year extension of payroll tax

Will have some positive effect

But what happens January?

Dose of austerity

Weakening the economy further—overwhelming evidence that austerity is wrong medicine, deficit reduction will

not

restore confidence in economy

Budget compromise entailed only small dose of austeritySlide11

Monetary Policy will continue to be ineffective

Played an important role in creating crisisBut much less effective in helping economy get out of crisisLow interest rates have not workedLow interest rates are not likely to work—even with commitment to keep them low

Excess capacity

SME lending still restricted—haven’t fully fixed banking sector

Large firms flush with money—credit is not the problem

Low interest rates contributing to jobless recovery

Inducing firms to substitute low cost capital for laborSlide12

QE II did not workMoney goes where returns are highest—emerging markets, not US

It goes where it’s not needed, not where it is neededConsequence of global capital marketsMay contribute to increase in commodity prices (inflation)Responses of emerging markets contributing to fragmentation of global capital markets

May have had slight benefit in competitive devaluation

And in temporary increase in equity pricesSlide13

Europe is equally frail

Some countries in particularly bad fiscal positionBut even those that are not (such as UK) are engaging in austerity

We were all Keynesians, but for a moment

Austerity will slow growth markedly

Uncertainty in euro area

Took away interest rate and exchange rate mechanisms for adjustment, put nothing in place

Problem

is not a

surprise—predicted at the onsetSlide14

From bank bailouts to sovereign bailouts

Bank bailouts meant socializing losses (Ireland)Bad economics, bad politics

Hard to ask ordinary citizens to bear consequences for mistakes of private bankers—when they walked off with so much money

Even without

bailouts, though,

crisis caused by financial sector has weakened fiscal positions

But with the potential of future bailouts, bank balance sheets and governments are intertwined

Future bank losses likely to be borne by public

Including those arising from real estate (Ireland) or sovereignsSlide15

The end of the euro?

Bailout measures only temporary palliative—haven’t changed basic economics

Political issue: will they be able to create more permanent

institutions?

(“solidarity fund for stabilization”)

Or will they be even willing to roll over the

debt?

Austerity measures imposed on Greece will depress economy, unlikely to produce hoped for improvement in public finances

Fire sale

privatizations and further cutbacks are likely to be politically unacceptable

But will further assistance without still more measures be acceptable to the rest of Europe?

Without real assistance, default is inevitable

But default (restructuring) may not be enough—will need to devalue

Argentina showed that there is life after default and devaluationSlide16

The end of the euro?

I believe European leaders are committed to preserving euroBut strong opposition from voters in many countries for assistance to Greece and other countriesProcess of reaching and implementing agreements very slowToo slow for changing market realitiesJuly agreement was a good one

Recognized principle of private sector involvement, importance of growth, need for assistance, interdependence of Europe

But there have been significant problems in implementation

Finish demand for collateral

Slovak refusal to bring to parliament

And even before implementation, events have shown not enough money

Uncertainty will cast pallor over Europe and global economy

Break up would have significant effects on global economy, banks

Already contributing to credit tightening, banking problemsSlide17

So what does this mean for emerging economies?Slide18

Big questions for emerging economies

Can emerging economies have sustainable growth even in the presence of weakness in the West?  Answer:  Yes, on the strength of the growth of domestic demand.

Is there a risk of the emerging markets overheating—and then crashing?

Answer:

Yes, but China, at least, is acting to limit that risk.Slide19

Lessons from Asia: a changing global economic landscape

Unprecedented growth in AsiaRapid convergence

China already 2

nd

largest economy

On the way to being largest economy

Already largest source of savings

“Correcting” a two-century-long aberration

Economic model markedly different from American-style capitalism (especially in East Asia)

Larger role for government

More government controls

Especially in financial marketsSlide20

Asian economic model has workedNot only to promote unprecedented growth

But also for stabilityAvoided the excesses of the USAnd even to manage the instability foisted on them Slide21

After the crisis

Recognized that excessive deregulation was responsible for the crisisAnd financial and capital market liberalization may have contributed to the rapid spread of crisis around the worldCountries that had maintained regulations (including on cross-border capital flows) fared better

But US Treasury does not seem to have fully learned the lesson Slide22

A new global economic order:1. New Governance

Rules governing global economic system have largely been written by advanced industrial countries, for advanced industrial countries—or for special interests within those countries

Based on “free market” ideology

But justified in terms of “economic principles”

Similarly, for international institutions governing globalization

Marked by flawed governanceSlide23

A new global economic order:2. New Balance of economic power

Rapid growth in emerging markets, continued slow growth in advanced industrial countriesHigh savings in emerging marketsWhy should they rely on the flawed financial markets of advanced industrial countries to manage their finances?

Closing the knowledge gap

With many even becoming a source of innovation

Growth enhances fiscal resources, giving government more room to promote growth with equity

US wastes large amounts on defense, costly wars

Leaving less room for growth enhancing investment

Most Americans worse off than they were a decade agoSlide24

A new global economic order:3. New Ideas

The end of market fundamentalism?Key lesson: need a balanced view of role of government and market, civil societyNot just size of each, but what each does and how they interact

Many models of market economy, some perform better than others

Scandinavian model has performed better than others

On a broad range of indicators

Key has been a larger role of government, more social cohesion, low levels of inequality

Markets on their own also do not “solve” other problems

Role of government in education, technology, infrastructure, social protection and promoting environmentSlide25

Some implications for the Caribbean and Trinidad and Tobago

Close ties with US economy will have adverse effect on growthTourism likely to remain weakExcept high-end tourismPersistence of /increase of inequalityBut the price of oil is likely to remain high

Strong demand in China, other emerging markets likely to offset weaknesses in advanced developing countries

But large increase in supply of gas in US likely to moderate gas prices Slide26

Latin America increasingly reorienting itself toward Asia

May be able to sustain growthFor Caribbean (and others) obvious implicationsDiversificationReorientationSlide27

Some implications for financial markets

Equities (except for banks) may do better than one might expect, given weaknesses in economyLow interest ratesLow wagesCost-cutting measuresBut these responses are likely to contribute to ongoing weaknesses in economySlide28

But high degree of uncertainty—episodic “mini-crises” (e.g. associated with Europe’s problems) –will ensure high volatility, overall “flight to safety”

With some risk that one of these mini-crises becomes a real crisisWith center of crisis in Europe, euro may weaken, hurting US exports, weakening US economy furtherConsiderable uncertainty about US financial systems exposure to Europe

One of consequences of lack of transparency of financial systemSlide29

Concluding RemarksThe policies that have been pursued by the US and some countries in Europe failed to enhanced the well-being of most their citizens and were not sustainableSlide30

Measuring successGDP is not a good measure of success

Objective of economic policies should be sustainable, equitable, democratic developmentTrickle down economics doesn’t work: most Americans are worse off today than they were a decade agoLower real incomes

More insecurity

Lower quality of life

Need to look at how benefits of growth are being sharedSlide31

Sustainability

Many dimensions: economic, political, social, and environmental sustainabilityUS economic policies before the crisis were not economically sustainable—true for many other countries around the worldCurrent patterns of growth are not environmentally sustainableThe planet will not survive if everyone aspires to America’s profligate lifestyle

For the world, increasing sustainable investments is key to addressing the world’s short-run and long-run problems

Could help US and Europe emerge from the malaise into which they seem to be sliding

Countries that adapt to the new reality sooner are more likely to prosperSlide32

Managing Resources

Resource wealth has to be carefully managedCountries like Chile that did so have weathered storm betterMaximizing value obtained

Using new global competition to extract the maximum rents

Making sure that resources are well used

Transparency is key

Macroeconomic management

High level of volatility

Risks of exchange rate appreciation (Dutch disease)

Many countries have failed

Low growth, high inequality

But some have succeeded

If wealth below ground is not reinvested above ground, country is poorerSlide33

Final Remarks US, Europe, and the world are not likely to take the policy actions that would ensure greater stability going forward—or even a quick recovery for US and Europe

Smaller trade-dependent countries around the world have to adapt to this unfortunate turn of eventsSlide34

This makes it all the more imperative that they design policies to buffer themselves against this volatility and which promote growth, even when there is limited scope for expansion of exports to traditional markets

Monetary and exchange policiesFiscal policiesIndustrial policiesEducation and infrastructure

Social protection

In doing so, they can achieve equitable and inclusive, stable and sustainable growth