Dispatches from China: Governments play legitimate roles in world economy

I was recently asked to help prepare questions for Joseph Stiglitz, Economics Nobel Laureate, by a friend at Xinhua News, China’s version of Reuters/AP. Two issues came to mind: First, what is the right balance between regulation and markets, societal needs and individual interests? And second, is the global economy a zero sum game? And a follow up question: What is needed to stabilize it? The answers to both questions ended up being the basis for two main articles. The following are excerpts from those articles.

Finding a balance between government regulation and market forces is key to improving a country’s economy, but there is not just one way to achieve this, said Stiglitz.

“We now recognize that especially after the crisis, unregulated markets cannot work. We need both government and markets,” said Stiglitz, Nobel Laureate in Economic Sciences and professor with Columbia University.

He made the remarks at the 16th World Congress of the International Economic Association (IEA) held at Tsinghua University – where world renowned economists gathered for the five-day congress.

There is no single Third Way and different policies are needed depending on the circumstances of a country, he said.

As one of his most important contributions, Stiglitz defined the economic philosophy of the “Third Way.” It postulates the important, but limited, role of government. Unfettered markets often do not work well, but government agencies cannot always correct the limitations of the market.

“So, at some stages, you may need a larger role for government,” he said, adding that a larger government role might be needed in countries with urban congestion and environmental problems.

In the earlier stages of development when governments should promote innovation and research in universities, greater government intervention is needed. So the role of government may be different in China than in the United States, he said.

The global balance has changed dramatically especially since the global financial crisis, Stiglitz said.

He said that the ideas of China’s policymakers are much different from their counterparts in the United States, because they recognize the need for more regulation and a more active government.

The International Economic Association is the association of national economic associations. The united theme of the congress is “Approaches to the Evolving World Economy.”

“In spite of China’s amazing performances in the economy, I still do not think that there is already a shaped model of China,” said Wu Jinglian, a well-known economist with the Development Research Center under China’s State Council, or cabinet.

“China is still at the stage of transition,” Wu said.

Sharing similar ideas with Wu on this point, Stiglitz said “it is a moment of transition now.”

China seems to be following its own way through this turmoil and it could well be an example of Stiglitz’s ‘Third Way’.

Stiglitz, the 2001 recipient of the Nobel Prize in Economics, said that the global financial system is in critical need of reform, as its instability bodes problems for both “rich” and “poor.”

The recent global financial crisis is related to the global financial system in general, as the system does not self-correct or self-stabilize, according to Stiglitz. A new system that can serve the whole world is needed, Stiglitz said.

Persistent economic crises have emerged since a period of economic liberalization began in the 1980s, Stiglitz said. These crises are also linked to the failures of the global financial system, according to Stiglitz.

Before the current crisis, the United States was unable to manage its inflow of capital, Stiglitz said. This led to financial problems in the United States that quickly spread around the world, leading to the global financial crisis, Stiglitz said.

Inflation that is caused by excessive capital inflow can quickly become worse if a country’s self-correcting mechanisms fail to work, he said.

“If you just focus on nationalities, you cannot be self-regulated. This kind of valuation focuses on individual units, but not the whole system,” he said.

It is Stiglitz’s belief that the current global financial system tips the balance in favor of richer countries, with hundreds of billions of dollars going from underdeveloped countries to developed ones.

“Rich countries borrow money from poor countries at very low rates,” Stiglitz said.

Despite the fact that the global market is so heavily integrated, the United States tends to worry about its own economy exclusively, he said.

“In fact, where the money should go is the economy in the growth, not the United States, but China, India and other emerging markets such as Brazil,” he said.

“The current system does not work well and we need reforms,” he said.

He called for a reformed global reserve system that will enhance global stability, strengthen global growth and be more equitable.

“The current system, where a single currency dominates as a reserve, is an anachronism in the twenty-first century,” Stiglitz said.

He said that China’s RMB should be a part of any global composite reserve currency, such as the special drawing rights (SDR).

“China has been both more pragmatic and balanced. Given China’s increasing role in the global economy, it’s time for China’s voice to be more strongly heard,” he said. “China brings a different view to the table of global debate.”

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