Friday, September 5, 2008

Stiglitz (in Paraguay) is right, Friedman is wrong!

Here (the title of the article is catchy: Stiglitz is Right, Friedman is Wrong) is an interesting stuff about Stiglitz's visit to Paraguay and his policy prescriptions to the new formed government. He clearly sees a new role of the government in spurring economic growth and offers views far from the dictates of the Washington Consensus.

This is an interesting article. Most of the time I am very much convinced by Stiglitz's ideas. I love his books and papers!

...It must have been alarming for certain members of the audience to hear Stiglitz gloriously debunk, one by one, the conservative positions which development authorities and international institutions formerly embraced to bolster their positions and to which local elite groups and much of the media still cling. With great authority and occasional cheek, Stiglitz enumerated the flaws and misconceptions that have characterized the past decade of broken development thinking. He openly declared that bilateral free-trade agreements almost inevitably favor the U.S. and offer few advantages for poorer, agricultural economies such as Paraguay’s; that ‘trickle-down’ economics does not work and has never worked; that land reform was the basis of successful development experiences in East Asia; that privatization is not an automatic or necessarily the best answer to the woes of publicly-owned enterprises; that U.S. monetary policy, rather than Latin American industrial policy, was to blame for the region’s ‘lost decade’ in the 1980s; and that public investment forms the basis for private dynamism in developing countries as much as it does in developed countries like the U.S. Stiglitz summarized his position by pointing toward the current U.S. mortgage crisis, stating that markets alone produce neither efficient nor socially desirable outcomes. Instead, he insisted that dogmatic faith in markets provokes periodic crises that erase the gains achieved through growth and which hit the poor the hardest.

...After several decades during which free-market fundamentalism dominated development theory and policy, Stiglitz’s visit to Paraguay and the content of his advice demonstrated an important political and ideological shift. Aside from his positive influence on a younger generation of economists at the international lending agencies, Stiglitz is one of a number of economists whose ideas appear to be forming the foundation for a ‘post-Washington Consensus’ mentality. Stiglitz received his Ph.D. in economics from the Massachusetts Institute of Technology and, after his departure from there, continued to steep himself in an intellectual tradition with altogether different implications for the proper role of government in the economy than was the provenance offered by the Chicago School. The scholar went on to win the Nobel Prize in economics in 2001 for his work showing that markets fail to produce efficient outcomes whenever economic actors do not act on perfect information. This is a condition that is nearly universally true and that invites, if not requires, a wide set of government interventions into the market and an aggressive regulation of the private sector aimed at enhancing efficiency. Consequently, Stiglitz argues that the reason that Adam Smith’s “invisible hand” seems so invisible is because it is often not there to guide self-interested behavior in the direction of socially beneficial outcomes. Moreover, addressing his audience of elite Paraguayans, Stiglitz argued that, even with proper regulation, markets do not necessarily produce socially equitable outcomes and cannot alone effectively address entrenched inequalities in developing countries such as Paraguay. He thus opened wide the door toward social policy and redistributive spending that earlier development thinking had closed off as unnecessary, if not distortive, or at least counterproductive and vulgar.

...scholars like Stiglitz clearly see a much larger role for government in bringing about positive economic development and social justice than any leading development institution envisioned a decade ago.

See this one as well: Stiglitz goes to Paraguay: Move over Chicago, A Cambridge boy's in town