Nobel Award winning economist and globalisation advocate Joseph Stiglitz returned to New Zealand for the first time in 40 years last month. Generally he liked what he saw. But his view of our Reserve Bank’s interest rate policy didn’t impress him.
There were, he said, some “aspects of global economic trends that are very positive for New Zealand. The global economy is moving toward you. Being diversified (in market option terms) gives you major advantage, and as an agricultural exporter the terms of trade will be in your favour for the next few years. Oil prices will remain high for long time – that means higher food prices.”
New Zealand is, he said, going through lucky period. Our dairy industry, in particular, should be salting away its profits against the inevitable market back swing. The environment is also working in our favour. “People want to come to country like yours.”
But the best-selling author and acknowledged economic thought leader was more bearish – though diplomatically conceded he had not “fully studied” our economy – about the Reserve Bank’s insistence on using interest rates to control inflation.
“Inflation targeting in open economies facing imported inflation is foolish policy. You are targeting things you don’t control. It can even be counter-productive. As you raise interest rates you attract capital into the country, cause an asset bubble. But it restricts investment of the kind you do want – real industry investment. It does not restrict speculation from abroad,” he said.
“In an open capital market context, not only are high interest rates unlikely to be effective in addressing the sources of inflation, but they lead to rising exchange rates which are bad for exports and distort the economy. The only way the policy can work is to cause such high levels of unemployment that wages and non-traded goods start to fall. This is case where the cure is worse than the disease.”
Stiglitz believes monetary policies like New Zealand’s are based on mechanical model that does not effectively hit the kind of inflation the country is now facing. New Zealand’s approach of linking the tenure of the governor of the Reserve Bank to an inflation target of less than three percent was written at time when it seemed politically appropriate. It is legislatively enshrined and does not allow for changed economic circumstances.
“The approach is not based on economic science and there is no evidence that countries with inflation targeting grow faster or experience lower unemployment,” he added. “The approach was ideologically driven. Interest rates may succeed in getting little bit lower inflation, but it would startle me if they didn’t get that result. If the focus was to hold inflation and they didn’t even accomplish that, then what is there to recommend it?
“When inflation targeting became the fad, attempts were made to change the charter of America’s Federal Reserve to embrace it. The debate died once the option of higher inflation versus less jobs was put on the political agenda. The Fed must focus on inflation and growth – not just inflation.”
But Stiglitz is more interested in promoting effective globalisation. And despite its bad press, and despite his own reservations about many aspects of it, he is still optimistic that globalisation offers the world the best future economic options. “Globalisation offers enormous benefits but it has to be managed well. We are going through period in which we can clearly see some of the consequences of not managing it well,” he concedes.
“Globalisation has, unfortunately, been associated with particular ideologies such as market fundamentalism – the belief that left to themselves, markets solve all problems. case of ‘get the government out of the way and everything will work’. Now we are about to see the consequences of the current US administration’s acceptance of these ideologies. It’s cliché, but the chickens are coming home to roost. The world will suffer as consequence of America’s looming economic decline.”
And Stiglitz doesn’t doubt that America’s evolving recession will be serious. “It will be more severe than any since the Great Depression.
“Markets provide good incentives. But markets are also inflicted with problems like externalities, imperfect information, conflicts of interest and irrational exuberance, which tends to spill over on to innocent victims. The market has strengths and limits. Market advocates seem to be constantly blinded to the limits,” said Stiglitz. He hopes that the severity of the current downturn will teach America “a strong lesson” about the strengths and shortcomings of the market.
Global warming is, he adds, the “mother of all externalities. The survival of the planet puts very different perspective on externalities. It is not side show. It is the main show.”
According to Stiglitz, the current downturn is at the heart of the financial system, the heart of the US economy. Downturns have, since the 1930s, been about inventory cycles or over-reactions by the Federal Reserve to trends it perceives as threatening. They are therefore either bad management or policy-induced and can be adjusted over relatively short time frames.
“There has not been collapse at the heart of the US financial system ever before, and that includes the ’89 recession which followed the US Savings and Loan collapse. This recession is much more pervasive, much deeper and much more complex. And if you look at the operations of the Fed, there is clearly much more panic on their part,” he said. “And this time the US has zero household savings.” That fact will, in his opinion, make it difficult to stimulate the economy and kick-start recovery.
Stiglitz believes business leaders, particularly in America, must reshape the debate on critical issues like globalisation and global warming. The future can’t be left to politicians and bureaucrats to deliver. Politicians must respond to responsible, rather than irresponsible business – such as self-interest driven oil companies like Exxon and some major drug companies.
“Companies need to think of themselves as communities of people working together to deliver positive results. And business leaders need to understand what makes communities work. Economic incentives are important, but intrinsic rewards are also important. We need to feel good about our work and about the community in which we work and live. We also need to feel good about what our business is doing.”
Stiglitz acknowledges that massive global shift in pace, technology, economics, politics and the environment is taking place. He sees opportunities for New Zealand in this shifting dynamic. “Nimbleness makes for success in our new fast-paced, constantly changing world; the ability to change quickly,” he says. “All the studies show that the most innovative firms are the smallest. You should be capitalising on your nimbleness and your ability to innovate.
“New Zealand should look to other small economies like Finland. You also have highly educated population – though you may need to spend more on that. Distance is no longer an issue for you. Technology has changed the global topography to your advantage.”
• Joseph Stiglitz is former Clinton administration advisor and author of Globalisation and its Discontents, Making Globalisation Work and The Roaring Nineties. His latest book, co-authored with Linda J Bilmes, is The Three Trillion Dollar War: The True Cost of Iraq. He was brought to Wellington last month by the New Zealand International Arts Festival as part of NZ Post’s Writers
and Readers Week.
