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Global Economic Environment:

Prospects for developing

Joseph E. Stiglitz
Columbia University and the nitiative for Policy
Dialogue (PD)
December 6, 2007
t is the best of times.it 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
ther 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 ndia, with 8.5% growth
But not everyone is doing well
Growing inequality within most countries
mplying 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
Africa's population, grew between 3% and 5%
Developing Countries Facing Major
Challenges in 2008
ncreasing food prices
Growing global demand
High energy price, and integration of global
energy and food markets, through bio-fuels
Global warming
mpending water problems
Double edgedfood producers better off,
food importers, urban
2008 worries
Global financial instability
Long predicted, as result of global imbalances
nadequate 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 fIowing wrong way-from poor countries to rich
Long standing worry about a disorderly working out of
America has exported its problems
Securitization of bad mortgages plus
globalization has meant that problems in
America's financial system have had
global consequences
Credit squeeze
Higher risk premium
Affecting financial markets even in countries
that had not bought bad mortgages
Slower growth in 2008
America's consumption driven growth not sustainable
Zero savings rate for last couple of years
Driven in part by housing bubble
And financed by "toxic mortgages
ften 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 can't
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
Developing Countries will be hurt
mportant because America is still largest
economy in the world
eveIoping countries wiII be hurt by
sIower growth
CouId Iead to weakening commodity
prices, undermining growth in commodity
price exporters
eveIoping countries aIso hurt by higher
risk premiums
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
mplying 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
The Real DangerBilateral Trade
Undermining the multilateral system
Even more unfair than bilateral trade
Not really free trade agreementsthey are
managed trade agreements, and mostly
managed to the disadvantage of
developing countries
ntellectual Property
Should never have been included in Uruguay Round
But bilateral trade agreements even worse
mportantDisparities in knowledge even more
important than disparity in resources, and TRPs 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 ndia in improving
A Development riented
ntellectual Property Regime
Current regime is bad for global science and for
developing countries
Little investment in research in diseases affecting
developing countries
ntellectual property regime inhibiting innovation
(demands for reform even in U.S.)
Developing countries demanding a development
oriented intellectual property regime
P 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
ssue of governance
nvestment 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
ften not open and transparent
Conflicting opinions, no adequate method of resolution
More than just protection against expropriation
Could have been protected through insurance
mpede 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
Some evidence that they have adverse effects
Undermine democratic processes
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
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
t 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 PR regime may be an impediment in the advancement of
social objectives
An enforcement mechanism
Trade sanctions
Many developed countries still are a long way from living up to their
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-
Without aid, ability to expand trade limited
Comprehensive approach
Corruption important
But corruption is not the only issue
ncreasing worry about hidden conditionality in DA aid allocation
nadequate measures of both need and aid effectiveness
Global Financial System
High level of instability
With developing countries still bearing brunt of
Some improvement in lending patterns in recent
Failing and inequitable global reserve system
With developing countries lending US (and other
reserve countries) trillions of dollars at low interest
mplicit subsidy to U.S. greater than all of its foreign
Global Governance
Underlying many of these problems is a
continuing problem of global governance,
especially in the area of global economic
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 MF
and World Bank undermine their effectiveness
Some improvements in global governance, but
not enough
Changes in MF have little impact on decision making
New head chosen exactly in same way as past
n spite of dissatisfaction with recent selections at World
Bank and MF
Broader participation, more transparency at WT
But still not enough
Consequences: excessive influence of special
interests (financial, MNC's)
The Role of the UN
Needs to set international economic
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