Economic and Political Agenda for Developing Countries

Joseph E. Stiglitz

Quito

July, 2006

The Agenda:

• Sustainable, equitable, and democratic development– More than an increase in GDP– GDP may increase but

• Living standards may go down, with deterioration in health, quality of life, environment, enhanced insecurity

• Income of average citizen may go down• Poverty may increase• Increases in GDP may not be sustainable

– Based on degredation of environment, depletin of natural resources– Based on foreign borrowing– Based on sale of national assets abroad

• Democratic participation may weaken– As local institutions are undermined– Policies are dictated by outsiders

Old view

• Developing countries are just like developed countries except they lack resources– Focus on transferring capital– Focus on improving efficiency of markets

• Efficiency and equity issues can be separated– Economics just concerned with efficiency– Foundations of Washington consensus policies

Changes in economic strategy and perspectives

• Developing countries differ from developed not just in a gap in resources but a gap in knowledge– Emphasis on reducing knowledge gap– Implications for education and technology policy

• Market failures/limitations of markets pervasive in all countries, but especially in developing countries– Need to strengthen markets and government, find

appropriate balance– Failures of corporate governance, competition– Reinventing government initiatives

Need for comprehensive approach to development

• Development is a transformation of society—must be comprehensive

• Trade liberalization may lead to job destruction, people moving from low productivity jobs into unemployment, unless new jobs, enterprises are created– Requires access to credit

• Education is important– But will only lead to unrest if there are no jobs

• What are key impediments to growth or causes of poverty may differ from country to country or period to period

Four pillars

• Resources/markets• Government• Communities• People

– Key to success– But also “objective” of development—enhancing

individuals capacities

W.C. focused only on resources/markets

Risk is that other pillars may even be undermined

Each issue can be re-examined from the new perspectives

• Avoiding the resource curse– Resource curse has both political and economic

causes– State run resource companies have been among the

most successful (Malaysia), especially in ensuring country maximizes benefits of resources

• But they have also been among the biggest failures– Privatization agenda not based on a solid grounding

of economic theory, and ambiguous evidence• U.K. privatization of social security will reduce retiree benefits

by 40%• U.K. railroad privatization has been a disaster• But state run enterprises are often a major problem

Second example: trade• Trade liberalization has not, on average, led to faster growth

– But has been associated with growing inequaloity– Again, ideology, bad statistical studies have argued otherwise

• Successful countries in East Asia were based on export led growth (access to international markets and technology)

• Key issue is how to seize new opportunities, manage the challenges posed by imports

• But bilateral trade agreements may not offer new opportunities of much value, and are often unfair (agricultural subsidies, continued use of non-tariff barriers.) – Mexico’s growth in first decade of NAFTA was slower than in many

previous decades, poverty increased (unfair competition with U.S. subsidized corn)

– Based on “dream” that agreement will automatically bring investment– NAFTA shows that the dream may not be realized.

What is required is

• Not just a Washington consensus plus

• Or a second generation of reforms– Addressing problems that were given short

shrift previously

• Though both of these are steps in the right direction

• But a new approach that touches on every aspect of the economy and society