Tuesday, February 9, 2010

Botswana versus USA

The U.S. financial system was clever in figuring out how to exploit poor Americans, but it was unable to figure out how to serve them well. In Botswana, one of the more successful countries in Africa, I have seen how banks reach out to poor villages to provide basic financial services to people whose incomes are but a fraction of those of even the poorest Americans. (Botswana’s average per capita income is still only $13,604.) But in poor parts of America, individuals turn to check-cashing services to cash their checks, paying a fee as high as 20 percent of the value of the checks. It is a major industry-- another way that the poor are exploited.

That is from page 178 of Stiglitz’s new book Freefall: America, Free Markets, and the Sinking of the World Economy. It is fascinating book about the financial crisis, the role of the government, and the need for a “New Capitalism”.

In the innovative economy of the twenty-first century, government may need to take a more central role-- in providing the basic research on which the whole edifice rests; in shaping the direction of research, for instance, through grants and prizes to incentivize research directed at national needs; and in achieving a better balance in the intellectual property regime so that society can get more of the benefits of the incentives that it can provide without the associated costs, including that of monopolization. (pp.206)

There is an interesting discussion about the role of government and how it has been crucial in saving the economy and the private sector at times of crisis. He argues that one of the key roles of the government is to write the rules and provide the referees. “The rules are the laws that govern the market economy. The referees include the regulators and the judges who help enforce and interpret the laws. The old rules, whether they worked well in the past, are not the right rules for the twenty-first century.” More on next blog post!