Global Economic Environment: Prospects for developing Countries

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Global Economic EnvironmentProspects for
developing Countries

• Joseph E. Stiglitz
• Columbia University and the Initiative for Policy
  Dialogue (IPD)
• UN
• December 6, 2007

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It is the best of timesit is the worst of times

• Last few years have been good for developing
  countries as a whole
• Growth at around 7 near record, and closing gap
  with developed countries
• African growth for past decade averaged 5.4
• Even resource poor countries have done well,
  averaging 4 over past decade
• 6.1 growth for 2007
• Up from 5.7 in 2006
• Five countries with 7 or more growth from
  1998-2006

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Other regions have also done well

• Latin America and the Caribbean
• 5 predicted growth for 2007
• Slightly down from 5.5 in 2006
• But stronger than 4.6 for 2005
• And much stronger than ten year 1995-2004. which
  averaged a mere 2.6
• East Asia (outside of Japan) remarkable 8.4 in
  2007 (some forecasts put 2007 growth at 8.9)
• Led by China, 11.3
• South Asia around 7.5 2007
• Led by India, with 8.5 growth

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But not everyone is doing well

• Growing inequality within most countries
• Implying reductions in poverty slower than one
  might have expected
• And some countries not doing very well
• 13 African countries, with 25 of population,
  grew less than 3 from 1998-2006
• And another 25 countries, with almost 50 of
  Africas population, grew between 3 and 5

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Developing Countries Facing Major Challenges in
2008

• Increasing food prices
• Growing global demand
• High energy price, and integration of global
  energy and food markets, through bio-fuels
• Global warming
• Impending water problems
• Double edgedfood producers better off, food
  importers, urban

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2008 worries

• Global financial instability
• Long predicted, as result of global imbalances
• Inadequate American regulation, bad lending
  practices, misguided macro-economic policies
  major determinant of global imbalances
• With America borrowing 850 billion in 2006, even
  if China completely eliminated its 2006
  multilateral trade surplus, and even if that
  translated dollar for dollar into smaller U.S.
  trade deficit, American trade deficit would have
  been huge
• Money flowing wrong wayfrom poor countries to
  rich
• Long standing worry about a disorderly working
  out of imbalances

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America has exported its problems abroad

• Securitization of bad mortgages plus
  globalization has meant that problems in
  Americas financial system have had global
  consequences
• Credit squeeze
• Higher risk premium
• Affecting financial markets even in countries
  that had not bought bad mortgages

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Slower growth in 2008

• Americas consumption driven growth not
  sustainable
• Zero savings rate for last couple of years
• Driven in part by housing bubble
• And financed by toxic mortgages
• Often hidden in complex securities
• Lack of transparency
• Bad regulation
• Game is up
• Falling housing prices mean households will want
  to save more
• Drying up of mortgage markets means that even if
  they wanted to continue consumption binge they
  cant
• ResultAmerica is likely to return to more
  normal savings rate (4 to 6)
• Speed of return will determine length and
  duration of slowdown
• This, in turn, will depend in part on adequacy of
  policy responses

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Developing Countries will be hurt

• Important because America is still largest
  economy in the world
• Developing countries will be hurt by slower
  growth
• Could lead to weakening commodity prices,
  undermining growth in commodity price exporters
• Developing countries also hurt by higher risk
  premiums

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Current Problems Come on Top of Some Longstanding
problems

• Unfair trade regime
• Stalled Development Round talks
• Prospects of restarting dimming
• Caused by refusal of U.S. and EU to live up to
  promises made in Doha
• For some countries, damage from agricultural
  subsides greater than foreign aid received
• Development round, as currently constituted, does
  not deserve the name
• Implying that damage to developing countries
  limited
• There is a broad agenda that could lead to a
  meaningful development round
• Non-reciprocal agreements needed, like EBA, not
  EBP (everything but what you produce)
• Principles of Extended market access

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The Real DangerBilateral Trade Agreements

• Undermining the multilateral system
• Even more unfair than bilateral trade agreement
• Not really free trade agreementsthey are managed
  trade agreements, and mostly managed to the
  disadvantage of developing countries

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Intellectual Property

• Should never have been included in Uruguay Round
• But bilateral trade agreements even worse
• ImportantDisparities in knowledge even more
  important than disparity in resources, and TRIPs
  makes it more difficult to close the gap
• Also makes access to life saving medicines more
  difficult
• Could have been designed to make access easy
• But intent was just the opposite
• And it succeeded
• Pressure put on countries trying to issue
  compulsory licenses
• Major potential success in Novartis decision in
  India in improving access

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A Development Oriented Intellectual Property
Regime

• Current regime is bad for global science and for
  developing countries
• Little investment in research in diseases
  affecting developing countries
• Intellectual property regime inhibiting
  innovation (demands for reform even in U.S.)
• Developing countries demanding a development
  oriented intellectual property regime
• IP too important to be left to trade ministers,
  whose agenda is driven by special interests and
  who have little understanding of key issues of
  innovation
• Issue of governance

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Investment Agreements

• Also should not have been part of trade
  agreements
• Full consequences for developing countries just
  becoming apparent
• Suits involving billions of dollars
• Adjudicated in arbitration that does not meet
  basic standards for judicial procedures
• Often not open and transparent
• Conflicting opinions, no adequate method of
  resolution
• More than just protection against expropriation
• Could have been protected through insurance
• Impede ability of governments to protect
  environment, impose other regulations, advance
  other social objectives
• Must not only be a moratorium on such agreements,
  but a roll back
• Little evidence that they have significant effect
  in promoting development
• Some evidence that they have adverse effects
• Undermine democratic processes

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Global Warming

• Matter of urgency
• Also matter of global social justice
• Developing countries have much to lose if there
  is not an agreement
• But only acceptable principle for emission rights
  is equal per capita emissions (with some
  adjustment for fact that US and other advanced
  industrial countries have already used up some of
  their share of global atmosphere
• Alternativeglobally agreed up carbon tax

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Bali Meeting

• Rainforest initiativeproviding developing
  countries with resources and incentives to
  maintain their forests
• They have been providing whole world with
  enormously valuable environmental services
  without compensation
• Greater in value that the value of the foreign
  aid they receive
• An agreed upon set of principles
• It is a global problem, that has to be addressed
  globally
• With every instrument in the tool kit
• Market based incentives
• Rising prices of carbon over time
• Regulations and standards
• Researchwith knowledge from that research freely
  available
• Another example where IPR regime may be an
  impediment in the advancement of social
  objectives
• An enforcement mechanism
• Trade sanctions

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Aid

• Many developed countries still are a long way
  from living up to their commitments
• US spends in 10 days of its ongoing wars more
  than it gives to Africa in a year
• Developing countries have demonstrated that they
  can spend money well
• Need for aid-for-trade
• Anyone who believes trade is good for growth must
  believe in aid-for-trade
• Without aid, ability to expand trade limited
• Comprehensive approach
• Corruption important
• But corruption is not the only issue
• Increasing worry about hidden conditionality in
  IDA aid allocation formula
• Inadequate measures of both need and aid
  effectiveness

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Global Financial System

• High level of instability
• With developing countries still bearing brunt of
  risk
• Some improvement in lending patterns in recent
  years
• Failing and inequitable global reserve system
• With developing countries lending US (and other
  reserve countries) trillions of dollars at low
  interest rates
• Implicit subsidy to U.S. greater than all of its
  foreign aid

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Global Governance

• Underlying many of these problems is a continuing
  problem of global governance, especially in the
  area of global economic governance
• Highlighted by problems at the World Bank
• And the way its leader is chosen
• Not a search for the most qualified person
• But essentially the pick of the U.S.
• Questions about judgment expressed at the time
• Worse fears realized
• With governance a central focus of policy
  discourse, inadequacies in governance in the
  governance of IMF and World Bank undermine their
  effectiveness

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• Some improvements in global governance, but not
  enough
• Changes in IMF have little impact on decision
  making
• New head chosen exactly in same way as past
• In spite of dissatisfaction with recent
  selections at World Bank and IMF
• Broader participation, more transparency at WTO
• But still not enough
• Consequences excessive influence of special
  interests (financial, MNCs)

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The Role of the UN

• Needs to set international economic agenda
• Balancing interests of developed and developing
  countries
• Broader perspectives on the role of markets,
  governments, and civil society
• Broader set of objectives (sustainable,
  democratic, equitable development)
• Relevant to almost every topic under discussion