Believe all the optimistic economic recovery forecasts if you will, but, according to Nobel laureate Joseph Stiglitz, the thrill ride has just begun. Excerpts from his interview with The Nation editor-in-chief Suthichai Yoon, the first in a two-part series:
Professor, you always sound quite pessimistic about recovery of the American economy. Why so?
Well, I'm optimistic that the worst is over. We had this complete credit contraction but that part is over. Question is whether we will be quickly on a robust road. I'm pessimistic about that. Even if banks keep recapitalised, they will have learned their lessons, so they won't be lending so recklessly. And so the debt-based US growth model is over, at least for a while. And that means that we will have a shortfall.
More savings are only good for the long run. But then we have to ask what's going to make up for the reduction in consumption. And investment won't do it because investment won't come in if consumption is weak. Export can't do it if the global economy if weak. Government is filling the gap for a while but we had too big a deficit, and many people say we can't continue on the basis of deficit spending like that.
So, when you look at all categories, there's no basis for a robust recovery until the rest of the world gets going and until we can do some restructuring at home.
Do you think the Asian and American economies can be decoupled?
Growth in the past in Asia was heavily dependent on exports to the US. But it's more decoupled now. Asia can rely on itself for increase in demand. You can't rely on the American market. You have no choice. You have huge domestic potential, large population base, people saving very heavily, and large demand for investment. You have all the ingredients for a strong aggregate demand. You have a reservoir of savings that can help finance that demand. So, yes, it's very clear that you now have a diversified production base, not just producing textiles. So why not? Every reason for Asian growth to feed on itself.
Do we need to do anything more to be really independent?
All the economies in East Asia were export-oriented, even China's, or especially China's. You are export-oriented to America. If you become more oriented to regional growth, that will take some changes of structure.
The goods you produce may not be the same goods as the ones for the American market. With necessary changes, it can happen relatively quickly.
China and India - are they competitors, rivals, or are they friends?
I think that right now they have a high degree of complementarity. China has been into more manufacturing, while India outsourcing and hi-tech. So, right now they are going on two different bases. But in the future there will be more overlaps. India does want to begin doing more manufacturing and China wants to do more of the outsourcing. But I think it is quite similar (between Europe and America). They have developed in the same areas with different competencies. Take automobiles. Europe has developed hi-tech automobiles - Mercedes or BMW- while America's gone for more big cars.
That's an example of what we call product differentiation and the large market in Asia can provide that kind of differentiation. So in my mind I see that as an increasing richness of the economies.
Asean, China, India - can they form a triangle that could really make Asia less dependent on America and Europe?
Yes. Very much so. Now they have been developing the knowledge-base that will be able to provide some innovations and dynamic properties that will enable them to close the gap.
How about Thailand and its chances of recovery?
Well, I have been coming to Thailand now for 40-42 years and I've seen marvellous changes. The bouncing back from the previous crisis was very impressive. I think that it will probably recover robustly. Obviously, part of this will depend on (what happens globally).
Is it still a V-shaped situation?
Nobody is talking about V. Most people think it will be some version of a W, which means whenever we recover, it will get worse again. That's most likely and the debate right now is whether the next down-leg occurs in 2010 or 2011. Very few people are seeing a robust recovery by America.
The news is overall not good but it isn't a surprise. You see, they say the stock market does well. Well, yes, but that's used for gambling. You've got a real indicator and that is consumers' spending, which is just as previously predicted- weak. And even the positive news is negative. For instance, profits are up, but why are profits up? Because companies are doing a better job at cost-cutting. What does that mean? They're firing workers. So, profits are up because they fire workers.
And the enthusiasm that the increase in the number of unemployed is only a quarter million ... in normal time that would have been a disaster. Things are so bad that when people are losing a quarter million jobs, we think things are good.
So when we look at it things are better than they were, the worst, but unless growth is 3 per cent, unemployment will jump. All the standard forecasts are seeing unemployment increasing to well-over 10 per cent.
Now it's 9.3 per cent. But those numbers may not be good measures. Sometimes unemployment rates go down because people get so discouraged they don't even look for jobs. We have good measures that include those who get discouraged from working or working part-time because they can't find a job. That brings it to over 15 per cent. So one in six people can't get a job, or full-time work.
So, how can we see a recovery when employment goes up?
Exactly, the administration is saying recession is over and what they mean is the growth has become positive. For most citizens, they don't feel it, because what they mean is: can I get a job and am I getting paid well?
And if the employment is going up, wages are going to be stagnant and insecurity is going to be high. Here in America if you lose your jobs you lose your health insurance. So, if you lose your job, you lose your home and you lose your health insurance, that's a disaster.
Most Americans live in this state of precariousness of not knowing whether tomorrow they will get a pink slip meaning they are fired. And with that everything's over.
How much confidence do you have in President Obama?
Stiglitz: Well, I have confidence in his heart. He's been subjected to enormous political forces. Unfortunately, the financial market, which brought on this crisis, has played a disproportionate role in designing the strategy for dealing with this crisis. The special interests are dominating financial policy and are now dominating the healthcare insurance.
Are his advisers to blame?
Decision was made early on that we needed to get somebody with the confidence of the financial market. But the problem was the financial market had done so badly it didn't [have] the confidence of the rest of America. So [when] you've got somebody who's got the confidence of the financial market, you almost by nature [have] lost public confidence.
What did they do with the bail-out money? They used it to pay bonuses. They used it to pay out dividends. They didn't use it to lend.
So why didn't Obama take the appropriate action when he knew in his heart that he was spending his taxpayers' money to bail out the rich, the Wall Street people?
Just speculating here. I think that at the time, he thought if he could get the financial market fixed, the economy will be fixed and if the economy is fixed, all will be forgiven even if it was unfair. If you fix the financial market, you will fix the economy and you will get away with murder.
To me it is very clear that the financial market is only part of the problem. So even fixing it still leaves underlying problems. Illness in the financial market runs deeper than much of the financial market cares to admit. To me, throwing money at the financial market will lead not to lending but to the exact kind of behaviour that we had seen.
What would you have advised the president if you could?
I would have said simply "Play by the rules of capitalism". The rules say if a bank owes more money than it can pay, go to bankruptcy. The more you have the shareholders pay, the less you have to make the taxpayers pay. If you let the shareholders off the hook then you have more problems than you can answer.
Ten years ago you [Thai people] know best about this. This is what the IMF and US treasury told you to do. And Thailand and Indonesia did that.
So this is double standard?
Very clearly double standard.
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