RSA LECTURES AT THE EDINBURGH INTERNATIONAL BOOK FESTIVAL 2006 Nations Unlimited Manifesto Challenge: Advancing Global Citizenship

Speaker: Joseph E. Stiglitz

Chaired by:

Diane Coyle, Enlightenment Economics

Date: Venue:

27 August 2006 Edinburgh International Book Festival, Charlotte Square Gardens, Edinburgh

NB This is an unedited transcript of the event. Whilst every effort is made to ensure accuracy there may be phonetic or other errors depending on inevitable variations in recording quality. Please do contact us to point out any errors, which we will endeavour to correct. To reproduce any part of this transcript in any form please contact RSA Lectures Office at lectures@rsa.org.uk or +44(0)20 7451 6868

The views expressed are not necessarily those of the RSA or its Trustees. www.theRSA.org

Paul Crake: Good evening. I am Paul Crake, programme director of the RSA, and it is my pleasure to welcome you to the third in the series of RSA lectures at this year’s Edinburgh International Book Festival, with our special guest speaker tonight Professor Joseph Stiglitz. The series started with Professor Frances Fukuyama, continued with Professor Felipe Fernandez-Armesto and comes to a crescendo this evening with the Nobel Prize winner Joseph Stiglitz. Our chair tonight is another distinguished economist and also a member of the RSA’s council, Diane Coyle. Please join me in formally welcoming both our speaker Professor Stiglitz and Diane Coyle. [Applause.] Diane Coyle: I welcome you all. It is always a great pleasure for an economist like me who is used to being boring to see such a large and enthusiastic audience for a talk about economics, so welcome. That is a testament, of course, to the achievements of Joseph Stiglitz, who is widely known for his writing on globalisation and his advocacy for poor people in poor and rich countries alike. If you read his Nobel Prize winning autobiography, you will realise that that is a reflection of a lifelong engagement and advocacy. This evening, he is here to talk about his new book, which I am sure he will hold up so that you can go and buy a copy afterwards. There will be some time for questions afterwards. I ask you to welcome Professor Joseph Stiglitz. [Applause.] Joseph Stiglitz: It is a real pleasure to be here. I can’t really say that it’s a pleasure to see all of you; because of the lights, I can’t see any of you, but it’s a pleasure to be here to talk about my new book. To begin, maybe I should say a word about how I came to write the book. As many of you know, I have been engaged in discussions about globalisation and complaining about the IMF, so much so that many of you may have thought that I was anti-globalisation, which is actually 2

not the case. My concern is with the way in which globalisation has been managed. My wife said to me, “You have complained long enough. What would you do about it?” So I felt challenged to think not only about what was wrong but about what could be done about it. A wealth of ideas was already out there, and thinking about the problems lead to further ideas. It is not that any of them would solve the problems of globalisation, but I do think that, if the ideas were implemented—simple ideas, some big, some small—they would make globalisation work, or at least work a lot better than it has been working. Let me begin by spending a few minutes talking about what I think is wrong with the way in which globalisation has been working—some might say the symptoms. Fifteen or so years ago, when the topic of globalisation first came to the fore, its advocates thought that it would make everybody better off, so they were really quite surprised when, in Seattle, in December 1999, at what was supposed to be the beginning of a new round of trade talks, there were these massive protests. A lot of economists said, “Really, the problem isn’t one of economics. The problem is one of psychiatry. Why is it that people are better off but aren’t happier? Why don’t they know that they are better off?” But, in fact, as economists looked at the issues more carefully, they realised that an awful lot of people were being made worse off, partly because of globalisation. Consider, for instance, the last round of trade agreements, which was completed in 1994. The result was that the poorest countries of the world, including those in sub-Saharan Africa, were made worse off because the agreement was so unfair. The advanced industrial countries kept their subsidies and their tariffs, whose rates are four times higher against the developing world than they are against the other developed countries. In fact, the tariffs themselves do so much more damage to the developing countries, multiple of the foreign aid that the advanced industrial countries give.

What is so remarkable about some of the agricultural subsidies is not only the magnitudes but how few people in the advanced industrial countries have had such influence on the outcomes. For instance, one of the big issues in the round that recently came to a halt and is probably at the end—the so-called development round—is the fact that 25,000 American cotton farmers divide three to four billion dollars among themselves. The result is that the price of cotton is lowered, which pushes 10 million subsistence cotton farmers living in semi-arid parts of Africa into further poverty. As I said, what is so remarkable is not only that that does so much damage but that that small number of cotton farmers was able to put an enormous amount of influence on the American government—enough to make it impossible for it to make a deal in this important area. Most of you have probably heard the story about the European cows that receive somewhere between $2 and $2.40 a day. That figure resonates because the World Bank measure of poverty is $2 a day. Some 40 per cent of people in the developing world live on less than $2 a day, so it is better to be a cow in Europe than a person in the developing world. Those are just a few of the peculiarities. If somebody from Mars was looking at the global financial system, they would look at that in a very strange way. Money should go from the rich countries to the poor, but in fact, in the last several years, the money has been flowing the other way around. The richest country in the world has been borrowing 2 to 3 billion dollars from other countries of the world, which are obviously poorer than it is, and at the same time it has been lecturing them on their having to live within their own budget restraints. While money should be flowing from the rich to the poor, risk should flow from the poor to the rich. The rich are more able to bear the enormous risk of interest rate and exchange rate volatility, but in spite of the 3

ability of financial markets such as Wall Street to slice and dice risk, the poor have to bear the disproportionate burden of these risks and the consequences are enormous. The increase in interest rates at the beginning of the 1980s led to a global financial crisis that led to the lost decade in Latin America. I could go on, but I think it is fairly clear that there are some very peculiar things about the way in which globalisation has been managed— not only peculiar things, but things that have made it particularly hard for the developing countries. There have been more than 100 crises in the past 30 years in spite of the fact that we are supposed to know more about how to manage an economy. It is more unusual for a country not to have had a crisis than for it to have had a crisis, and while we talk about the problems of the burden of debt on the poorest countries, the fact is that it is not just one or two countries. It is not a result of profligacy. It is obviously a systemic problem. Given all these complaints that I have, I want to make it very clear that, in some parts, globalisation has had some very positive effects. Globalisation of knowledge has led to an increase in lifespan; globalisation of global civil society has led to important treaties such as the mines agreement and important actions such as debt relief; and, even in the area of economics, the most successful developing countries— those in East Asia—have grown as a result both of the opening of export markets and of the globalisation of technology. The growth of the countries of East Asia and even of India is a change of historic proportions. The migration into the global economy of 2.5 billion people who have previously been marginalised is having effects not only on the lives of the people in those countries but on the whole global economy. A recent book by Thomas Friedman argues that, in fact, the world is flat. Most of you probably remember from your schooldays that the world is not flat, and that is actually true. Thomas Friedman is wrong—the world is not

flat. However, there has been a change in the global landscape and, as I just said, the change is of historic proportions. In many ways, not only is the world not flat, but it is becoming less flat. There is an increasing divide between the rich and the poor. The new technologies that have made such a big difference are technologies that require resources and education, and the fact that there is such a divide between the rich and the poor means that those who have access to technology are going to do very well. That is why countries such as China are doing very well but those that do not have the resources, such as countries in Africa, are doing very poorly. The new rules are also contributing to making the world less flat, and finally, perhaps for the first time that the world has seen, we have some global monopolies in areas such as that occupied by Microsoft, where competition has become monopolised on a global scale. I’ve given a brief sketch of some of the problems, successes and challenges that face the global economy. Let me spend the next few minutes trying to describe my diagnosis of why things have gone so wrong in so many instances while they have gone well in a few. I think that there are three underlying problems. First, economic globalisation has outpaced political globalisation and the globalisation of mindsets. Economic integration has made us more interdependent and greater interdependence means that we have to act together more—we have to act more collectively and co-operatively. Unfortunately, the institutions and the mindsets that would enable us to act in that way, particularly the democratic institutions, are not there. Some 150 years ago, when similar processes were going on, when the nation state was being formed and the market economy was developed, we learned how to temper capitalism. In the beginnings of capitalism 150 years ago, a lot of individuals were actually worse off. Studies of what it was like to live in British cities at that time suggest that living standards were 4

going down. That is evidenced in studies of health by the heights that people grew to. People were getting shorter and their health conditions were worse. However, the democracies in the western countries led us to learn how to temper capitalism so that more people could gain from the benefits that the market could bring. Unfortunately, globalisation is providing more challenges to the nation state at the same time that it is undermining the ability of the nation state to address the problems. The second underlying problem is to do with the end of the cold war. Since the end of the war, there had been strong competition between Russia and the communist system and the west. For all the disadvantages of the cold war, one of its advantages was that the west paid a great deal of attention to the well-being of the developing world. It competed, not necessarily for the hearts and minds but at least for the interest of their political leaders. With the end of the cold war, the advanced industrial countries faced new opportunities. They could try to design a global economic system that was more reflective of their values. They no longer had to give support to people like Pinochet in Chile. They could try to design an economic system that was a fair form of globalisation, or, freed from the threat of competition, they could try to shape a global economic system that reflected their own economic interests. I was in the White House in those critical years, beginning in 1993, and it was very clear, unfortunately, what choices were being made. It was clear that America’s international economic policy was almost totally driven by concern for its own economy. There was very little concern for principles of global fairness or global social justice. The third underlying problem arises from the Pollyanna-ish view of globalisation with which I began my remarks this evening—the view that globalisation would inevitably lead to everybody being better off. If we think about last spring, when the young French students and workers

protested on the streets, they were concerned because they were told that they had to accept globalisation but they were puzzled by how lower wages and less job protections would make them better off. Sometimes, they were told, “Well, just be patient. In the long run, eventually, you will be better off.” Keynes, Britain’s great economist, was fond of saying that in the long run we are all dead. Actually, economic theory had long predicted some of these consequences. My own teacher Paul Samuelson wrote a paper more than half a century ago describing what economic integration and full liberalisation would mean. His set of assumptions was not actually very descriptive of the global economy, but since then it has provided an increasingly accurate description of the world economy. Full integration means, of course, that workers everywhere in the world with the same skill would get the same wage. That means, for instance, that unskilled workers in the United States, the UK, France, China and India would all get the same wage. That is what full economic integration would mean. Economic theory has shown that, even if we are still far from that state of full economic integration, the process of integration will result in strong forces in that direction. We already see that going on. In the United States, real wages for the bottom quintile of workers have fallen by 20 to 30 per cent during the past three decades. It is not just that they are stagnant. The real wages have gone down. Some of those workers have made up for that by working longer hours, but there is no doubt that their standards of living are falling. This, in a period in which average incomes have increased by perhaps 50 per cent. In the past five years, things are even worse. Although GDP has been increasing, even the median household income in the United States is lower than it was five years ago, so all the gains that have occurred in the past five years have gone to the people at the very top. Economic theory says that globalisation results 5

in the economy being better off but also in the unskilled workers at the bottom being worse off. The fact that the economy as a whole is better off means that the winners can compensate the losers, but it doesn’t predict that they will. In the United States, and increasingly elsewhere in the world, not only has that not been happening but things have actually been getting worse. Safety nets have been eroded, income tax systems have become less progressive, and public services have been eroded, so the economic forces that have led to the people at the bottom being worse off have been compounded by the political forces, sometimes in the name of globalisation, when people say, “Globalisation forces us to do this.” However, there is another way. The Scandinavian countries have shown that one can live with globalisation. One can make sure that the benefits of globalisation are more widely shared. The result is that, although the tax rates in those countries are among the highest in the world, the countries have continued to grow in ways that are as rapid as anywhere else in the world and those in the middle and the bottom have shared in those gains. I now come to, in a way, the hardest part of my talk. Most of my book goes from these broad discussions of the underlying problems of globalisation into a large number of very specific areas such as global financial markets, intellectual property, trade, debt, the environment, natural resources and global warming. Obviously, I don’t have time in the next 10 minutes to go through all of those, so I thought I would begin with one and, if I have time, go on to a second. Maybe some of the others will come up in the question period. I want to leave at least 20 minutes for discussion at the end. Let me begin by talking about intellectual property. Everybody agrees that intellectual property rights are important, particularly people like me who live off intellectual property. I would not be enthusiastic if— well,

actually, I wouldn’t mind so much, but my publisher would not be enthusiastic if… I should tell a story. About 20 years ago I got a letter from a Chinese publisher who wanted me to write a foreword to a pirated edition of my book. [Laughter.] I was so pleased that they were willing to read my book in China that I said, “Of course.” When my publisher found out, he said, “No, no, you can’t do that.” Today, China is actually very good on the intellectual property rights issue. The issue isn’t whether intellectual properties are important. There is a whole host of issues on the design of intellectual property. One of the so-called advances in the Uruguay agreement that was signed in 1994 was the inclusion of intellectual property. I think that that was a major mistake. Most trade economists think that it was a major mistake. It was an attempt to impose on all the countries of the world, including the poorest countries of the world, the same intellectual property regime that works—or does not work very well—in the United States and in Europe. When they signed the agreement of the Uruguay round on 15 April 1994, they were in effect signing the death warrant of thousands of people in developing countries in Africa and elsewhere because it meant that individuals in those countries would no longer have access to life-saving medicines, to which they had previously had access. Interestingly, I was on the Council of Economic Advisors at the time when that agreement was being discussed, and both the Council of Economic Advisors and the Office of Science and Technology Policy opposed the trade-related intellectual property—or TRIPS— agreement. It has nothing to do with trade. It is about intellectual property, but they had to call it trade related to put it in the trade agreement. We thought that it was bad for American science and for world science, and we also thought it was bad because it would have the effect of denying people access to life-saving medicines. The drug companies argue that they 6

need some way of getting returns in order to produce drugs that will be of benefit to the developing countries, but the drug companies spend far more on advertising and marketing than on research. They spend far more money on research on lifestyle drugs for growing hair and other things that I won’t talk about here than they spend on life-saving medicines. They spend almost no money at all on life-saving drugs that affect the developing countries, such as those for malaria and the forms of AIDS that are more prevalent in developing countries. The developing countries have had to pay very high prices that they cannot afford. A typical year’s drug treatment for somebody with AIDS costs about $300 for generic medicines, or even less now, but it costs $10,000 if they have to pay the American prices. The American drug companies’ view is that they have to pay the full amount, but, of course, no one who lives on $500 a year is going to pay that. A few governments can pay a little bit for a few people, but that means that they have less money to spend on the other diseases that plague these countries. In this example, there is an alternative that would work far better than the current system, which clearly isn’t working because it does not provide incentives for companies to provide drugs for the poor countries, for an obvious reason. Poor people don’t have money to buy drugs, so the drug companies aren’t interested in producing the drugs. Therefore intellectual property will have absolutely no effect. The alternative is to create a medical prize fund. Interestingly, the sponsor of this evening’s event, the RSA, has an initiative on intellectual property going on. I was talking to the people from the RSA about that earlier. Two hundred years ago, people talked about this very issue and about the use of prizes, as opposed to intellectual property, to provide incentives for innovation, because the patent system impedes the usage of innovation. Knowledge is a public good, yet the patent system privatises that public good and makes it more difficult for

people to use it. The system doesn’t provide the incentives and, in some areas, there is increasing concern that it actually impedes innovation. There are areas called patent thickets, which is a problem that goes way back. In the early part of the last century, the Wright brothers and Curtiss both got patents on the aeroplane and no-one could develop an aeroplane because they didn’t know who they had to pay off. As their lawyers fought it out—even then they had lawyers—nothing happened to the wonderful idea of an aeroplane. (At least, it seemed wonderful at the time). It was not until World War One occurred that the government said, “The development of an aeroplane is too important to let you lawyers in intellectual property stop it. We need the aeroplane for the war.” So they took the intellectual property away and created a patent pool. They said, “We will give compensation relative to the importance of the contribution of each inventor.” The medical prize fund is really a very simple idea, It says, “We will give a prize, and a larger prize for a more important discovery.” For metoo drugs, which is where a lot of the research goes today, people will get a little prize because usually there are differing side-effects, but a discovery such as a cure for malaria or a vaccine for AIDS would get a very big prize. That would direct research efforts into areas that are more important, so more research would go into life-saving drugs than into lifestyle drugs and more research would go into drugs that affected billions of people than into drugs that affected relatively few. In some ways, the idea has been around for a very long time, but it is an idea, I think, whose time has come. Let me talk about one other set of ideas, which is to do with global volatility. There has been an enormous amount of global volatility. We saw it very strikingly in the East Asia crisis in 1997 and the global financial crisis in 1998 but we tend to forget about it when we aren’t facing a crisis. It’s been a couple of years since 7

we faced a crisis, but the good news is there will be another crisis. We just don’t know when. I think I know which countries it will affect, but I can’t say it without getting into trouble. The question is, why do these crises happen, and why are they so painful, particularly to developing countries? The second question is fairly easy to answer. The answer goes back to the fact that, as well as we think the international financial markets work, they still force the poorest countries to bear the brunt of the risk. I gave a story of Latin America, but another story is that of Moldova. I visited Moldova, which is a former Soviet Union republic, and like so many of the others its move to a market economy was not easy. Capitalism and the market economy were supposed to bring unprecedented prosperity but they brought unprecedented poverty. In the decade after the beginning of the transition to a market economy, GDP in Moldova fell by 70 per cent. At the time I went there, in 2001 and 2002, the government was spending 75 per cent of its very meagre budget—the budget had gone down as the economy had gone down— on servicing foreign debt. Ten years earlier, it had no foreign debt, so all this had happened in a short span of time, in 10 years. If you are spending all your money servicing foreign debt, you don’t have money to do anything else, and one could see the consequences. It was very hard for an economist because one could see the process of de-development. People were moving back to using horses and buggies. The roads were full of potholes. There was a very dramatic event. The daughter of one of the people in our team was hospitalised and put on oxygen, but in the middle of the night the whole country ran out of oxygen. There was just no oxygen to be found and she died. Now, we take for granted the ready availability of oxygen. We would never think about the idea that we couldn’t get oxygen because the government couldn’t afford it, but the debt burden in that case was so high that the country couldn’t afford it.

The origin of Moldova’s problems was very simple. The exchange rate was linked to the Russian rouble, and the Russian rouble devalued. It wasn’t anything that they had done, but Russia had an enormous amount of problems. The Russian rouble devalued enormously and Moldova’s debt went from a manageable level to an unmanageable level. Their debt was denominated in dollars and in Euros—at the time, in marks—and so they were forced to bear the volatility of international exchange rates. That is true of developing countries all over the world. The solution to the probably is fairly easy—we need to create markets that allow these countries to borrow more in their own currency or in baskets of related currencies. There are some efforts to do that. The Asian bond fund is moving in that direction. I don’t have time to talk about it here, but we know how to help create these markets. We just haven’t gone about doing it. The more fundamental problem is that the global financial system has an enormous amount of volatility. Some of it is caused by the global reserve system. In order to protect themselves against this volatility, countries hold more dollars. They used to hold gold, but now it is dollars. If someone came from Mars and looked at the system, they would think it very peculiar. At great cost to the environment, people dig up gold in South Africa, ship it at great cost and then bury it back in the ground. We have moved more and more away from the gold system to a dollar system, but it is equally peculiar. When countries are holding dollars, their purchasing power is not reflected in the global economy, so the system has a deflationary effect on the global economy. It is also very inequitable; in effect, when countries are holding dollars—basically they are usually holding T bills—they are lending money to the United Sates. If a firm in a poor African country borrows a hundred million dollars from an American bank and pays an interest rate of 20 to 25 per cent, prudence requires the 8

government to increase its reserves because the American bank might demand the money back and they have to have the dollars ready in case that happens. So, dollar reserves go up by a hundred million dollars, but what does that mean? They are holding a hundred million dollars of US Treasury bills; they are lending the United States a hundred million. So the country is borrowing a hundred million from an American bank and lending the American government a hundred million. On the hundred million that it’s borrowing, it’s paying 20 to 25 per cent. On the 100 million that it’s lending to the United States, it’s getting 1 per cent or 2 per cent. Today, it is getting 5 per cent, but it is a bad deal. You don’t have to be an economist to figure out that, if you borrow at one rate and lend at a much lower rate, you are losing money. In effect, the developing countries are shipping enormous amounts of money to the United States—more money than they get in foreign aid from the United States. For the United States, this might seem to be a great system because its Treasury is able to borrow more cheaply than it would otherwise be able to, but for the global economic system it is a disaster. It is a system that has within it the route of its own destruction, in a sense. The number of dollars in reserves has being going up steadily over time because people need more reserves, given the instability in the economy. If they hold more reserves, the indebtedness of the US goes up and, as that happens, confidence in the dollar erodes. The whole process leads to greater global financial instability. The system is already fraying. Simple banks around the world are increasingly moving out of the dollar. Again, there is an alternative—one that Keynes talked about some 75 years ago— in the creation of a global greenbacks. There is already a version of that within the global financial system, but we need to create global greenbacks or SDRs on an annual basis using a global currency as the basis of reserves. That would have several advantages. It would

eliminate the inequity; it would enhance stability; and it would offset the downward pressure on global aggregate demand that the current system creates by burying money in the ground every year. Again, this is a simple reform that could be adopted and it which would contribute to making globalisation work much better. To conclude, globalisation will change. That is not the issue. It is very clear that the current system, with all the anomalies and problems that I described, will not continue for long. The issue is not whether we will change. The issue is whether there will be a crisis and whether we will respond to it in the typical way in which we respond to a crisis—by focusing on some shortrun patch. That will lead to another crisis and we will muddle along in the way that we did in the crisis of 1997 and 1998, leaving the fundamentals unchanged. The issue is whether we will take that approach or whether we should approach it perhaps in the spirit of the Scottish enlightenment—the notion of rational analysis and pragmatic discussion of what is wrong and how to fix it. My book is offered up in the hope that the world will take the latter course—that it will reform globalisation to make it work, or at least work better, in ways that will enable globalisation to live up to its potential of enhancing the well-being of everybody in the world. Thank you. [Applause.] Diane Coyle: Thank you for that. I’m sure that you’ve convinced the audience here. We now have time for questions. I will take two or three questions at a time and then let Professor Stiglitz respond. Questions from the audience. 1. You talked about reform, which is fine. It is obvious that reform is needed, but I am not clear about who is actually going to drive the reforming. Is it the WTO, the IMF or the World Bank? I don’t 9

see what mechanisms are in place, or perhaps we need new institutions to drive and organise the reforms of which you speak. 2. I was going to ask exactly the same thing. You said that, in globalisation, there is a gap between the economics and the politics. If the WTO, the IMF, the World Bank and the UN were reactions to the 1930s and the 1940s, what would an organisation for the 21st century be like? Who will be the leaders who will drive the change? 3. I think that part of your thesis is that democracy of some form is necessary as amelioration of the excesses of capitalism. How do you view the position in China and the economic power that is being wielded in a country where democracy is questionable? Joseph Stiglitz: Those are all good questions, and they are related in many ways. I think that the driving force for change will come first from civil society, from a demand from citizens that something is wrong and something is going to change. I find the difference between the UK and the United States very interesting. A large number of British politicians have become very sensitive to the issue of unfair trade, but that is not true of the United States. I talked to the largest allparty parliamentary group in the UK and it is concerned about issues of development. Again, that is not true in the United Sates. I asked them, “Why?” I talked both to the Conservatives and to Labour and they say that it is because of a key voting group. A lot of people are concerned about the issue. We saw that with debt relief in the Jubilee 2000. People were responding. That group might not be 80 per cent of the people, but it is a small vocal group—or hopefully a larger vocal group—that is articulating its concerns. That is basically why I wrote the book—to try and strengthen the voice of those who are taking those positions. The good news is that, at least over the past decade, a remarkably large number of political leaders in western governments have also been very concerned about the issues. I think that

they are genuinely so—you know, you always worry about whether they are just putting on a face because they think that it is pleasing the voters, for whom the issue is important. Obviously, politicians want to be responsive to the concerns, but it is also the case that there are a number of politicians in Britain, Canada and other countries around the world who are genuinely concerned. I think that they welcome pressure that will get them to move more in that direction. That is to say, they would like to do more. The politics of international economics is such that, in the past, the only people who were very informed about international economic issues were the multinational corporations, so their voice gets heard very clearly. I saw that strongly when I was in the cabinet. They were there— AIG—and they were calling up on the phone all the time, but the voices of all the other people were not heard. That is why we see such a difference in the policies. For instance, the Clinton administration was pushing for greater access to health inside the United States, but internationally, the Uruguay round denied access to medicine. How could that happen? Well, who was active internationally? The United States wasn’t paying any attention to the voters abroad but it was paying attention to the pharmaceutical companies that were calling up all the time and it responded to that. If we can get more civil society groups calling up on the other side—that did happen in 1999 when the AIDS activists got involved—that changes the dynamic completely. I think that there have to be changes in international institutions. Some of those changes are going on already. It is the case that these institutions are undemocratic or imperfectly democratic, but they do listen. In my earlier book I talked a lot about the consequences of capital market liberalisation and capital going in and out overnight, which can lead to instability but not to economic growth. In 1997, the IMF called for a change to its charter to allow it to force countries all over 10

the world to change their policies. However, it hadn’t done any research to show that that was going to be good for growth. We knew that it was bad for stability. As a result of an enormous amount of discussion and pressure, finally, in 2003, it came out with a study. It finally decided that it ought to look at the evidence and it came out with the same result as I did, that the proposal would lead to more instability and not to more economic growth. That helped to change, although not overnight, the policies that it pursues. The WTO has become much more transparent than it was 20 years ago, so the institutions themselves are changing in ways that will make some of these changes that I describe come about. That will happen slowly, but if there was more pressure they would come about faster. At the last meeting, the head of the IMF called for a change in voting rights because he recognised that the allocation of voting rights undermined the legitimacy of the IMF. The United States was not very interested. As you may know, the G1 still has the veto power, but when the pressure has got to the point where even the head of the IMF is saying that there ought to be change, I think that there will eventually be change. Hopefully there will be a change of administration in Washington to a less unilateralist one [Applause.] Diane Coyle: A controversial statement. Joseph Stiglitz: I hope that there will be a less unilateralist policy and people with more sensitivity, and there will then be an opening for those changes. I want to talk a little about China. China is not a democracy, but no government that does not want to impose itself by force of arms can ignore the issue of legitimacy. In other words, it may not get elected by votes, but even though it was not elected through the electoral process, the fact that it was not elected puts on it a greater obligation, in a way, to be sensitive to some of the things that are going on. That is one of the reasons why, in China’s eleventh

five-year plan, which it announced last March, it switched the emphasis to the rural sector. For the past three years, the Premier has been talking about the importance of social harmony. What is he talking about? The fact is that, as in the advanced industrial countries, a lot of people are being left behind. He said, “We won’t be able to survive unless we do something about the people who are being left behind.” Even though he is not being tempered by democracy, he is being tempered by reality, and there was an active debate in China. A group of pro-market people, just like they do in the west, said that trickle-down economics will work. Let the economy grow and eventually everybody will benefit. There was a strong debate between the two schools of thought— trickle-down economics with its focus on growth and the other school of thought, which said, “No, we can’t do that. We have to focus on growth, but we also have to worry about the bottom.” The latter school won the debate, at least for this round. These are on-going debates and there will be other rounds, but right now the social harmony school has won the day. Questions from the audience 4. I thank Professor Stiglitz for an informative talk. I am South African in origin, freedom fighting. We got our freedom but we just found that it was an illusion. The same vested interests were still running the country and they were getting away with things that the Apartheid regime would not have got away with, such as privatising water and natural resources. I am an international development consultant with one of the major global consultant corporations, which actually take up a lot of the aid money, I am not too happy about that. It is all an illusion. Where did we go wrong? It seems that economics is a weird science. You talked about the Scottish radical enlightenment, but we do not have Adam Smith economics. What we have is woody economics. I attended two G8s as an observer, and I really wanted to kill myself after the WTO in Hong Kong. On a positive note— Edinburgh is quite important in this—the Make 11

Poverty History campaign meant that we had a civil-society G8 for the first time and I do think that there is a chance for a new enlightenment from Edinburgh—a chance to go back to what Adam Smith and David Hume said. I would like you to enlighten me. I have just come from a talk by Al Gore and he mentioned the same things, so there must be something going on out there in the ether. 5. You talked a lot about economic globalisation and made very clear the disparities between the rich and the poor within and between countries, but the other side of the coin is the erosion of the environment. Will you comment on that as a direct consequence of economic globalisation? 6. Economics seems to pride itself on pretending that it strips out ethical considerations in its analysis. I wonder whether you feel that there is something in the nature of economics as it is practised today that allows injustices around the world to build up, or do you have more sympathy with the view of people such as Carl Polanyi, that ethics needs to be incorporated at the beginning of the analysis? Diane Coyle: Professor Stiglitz, you have three minutes on whether there is a new enlightenment, whether you can solve the environmental problem and whether economics is immoral. [Laughter.] Joseph Stiglitz: Adam Smith is often misinterpreted. Obviously, he thought that there were important moral issues. He wrote a book called The Theory of Moral Sentiments and he was a moral philosopher. He was supposed to be a part of the Scottish enlightenment, which focused on rational thinking, but he became the head of a religion called the free market religion, and it is that religion that has caused so many problems. Part of that religion undermines ethics because it says that individuals’ pursuit of their self-interest leads to the social good. It says that the only sin that you can commit is not being selfish enough. If you are selfish enough and you just follow your self-interest, you will lead to the common good, but if you start to be a do-gooder, that’s when the danger sets in.

That view is not a correct analysis of economics. One of the reasons why I wrote the book is to highlight the ethical failures—such as the value-of-life issues, the IPR issues and the environmental issues. They have been undermined by the way in which globalisation has been managed but they would not be undermined by the way in which globalisation has to be managed. For example, there is a chapter on global warming. One problem with dealing with the problem of global warming is enforcement. How do you get a country—we all know which one—that is the largest polluter in the world to go along? The recent administration went so far as to deny the signs. In 1993, we tried to pass an emissions tax and replace a tax on things that are good with a tax on things that are bad. There would be higher tax rates on emissions associated with coal, because they are larger, and lower rates on energy that does not create emissions. I point out in the book that, within the current WTO framework, there is a way of forcing the United States—or certainly encouraging it—to adopt a more energyfriendly and emissions-friendly approach. The United States imposed trade sanctions against Thailand for catching shrimp in nets that were turtle-unfriendly and the WTO sustained that decision. The implication is that, even within the current WTO framework, environmental concerns trump commercial concerns. If it is important enough to impose trade sanctions that protect an endangered species of turtle, it is important enough to impose trade sanctions to preserve our whole globe, and that means our atmosphere. In the book, I describe how we could use the trade sanctions to induce the United States to go along with the global agreement to reduce emissions. If we do not do that, it gives American firms an unfair trade advantage over other firms. In effect, the fact that American firms are being allowed to pollute means that they do not bear the full cost of their production. Part of the social cost of their 12

production is the destruction of the environment. They get away with it, but producers in Europe are not allowed to get away with it. That is an unfair trade advantage. Within the framework of the WTO we have a way of addressing the problem. All that is needed—it is a big “all”, of course—is for some of the European countries to be brave enough to bring a case against the United States. That would require some civil society pressure, because I don’t think that Blair, in his cuddling up with Bush, is likely to do that in the next month. Diane Coyle: I think that you have given us our next campaign. Thank you. I’m aware that there are lots of hands going up, but I’m afraid I can’t call on anyone else because we have to finish promptly this evening. Before we do, let me tell you that Professor Stiglitz will be signing copies of his book after the event in the signing tent next door. I hope that we will continue the discussion later in the Spiegeltent, so please stay on for that, and of course the RSA will continue the discussion over the months and years ahead as well. Thank you for being for being here this evening and for being a great audience. Thanks, too, to Professor Stiglitz for a wonderful talk. [Applause.]