Stiglitz' loose talk again

Brad De Long delong at econ.Berkeley.EDU
Wed Jul 1 21:41:25 PDT 1998

>World Bank top economist Joseph Stiglitz seems to be taking issue with his
>colleagues again. Last January, it was reported that he was virtually
>locked in a closet by his superiors after he was quoted in the Wall Street
>Journal criticizing the IMF's programs for East Asia. And now here he is
>saying that there's no vice, and maybe even virtue, in capital controls.
>Today's Financial Times reports (here's the lead and two grafs from the
>midsection - the story is not on their free website, but I snagged an
>e-version from their archive for a mere $2.50):
>>Delegates agree the state has a role to play in the financial: sector -
>>but what is it?: 07-01-1998
>>When Joseph Stiglitz, the World Bank's chief
>>economist, told a conference in San Salvador this week that mild
>>government restraints in the financial sector might help economic
>>growth, a contrary view was soon expressed.
>>"I don't know how you can be
>>sure that mild does not grow up and become severe," Manuel Guitian,
>>director of the International Monetary Fund' s monetary and exchange
>>affairs department, told delegates a few hours later, as he urged
>>financial market liberalisation on Latin America' s governments.
>>Mr Stiglitz pointed to a study showing no link between capital account
>>liberalisation and economic growth. "The positive benefits. . . do not
>>leap out from the data," he said.
>>Attention has focused on the controls of countries such as Chile, which
>>in effect deters short-term flows by imposing a reserve requirement. Mr
>>Stiglitz said such rules had managed to lengthen the maturity profile of
>>capital inflows without significantly reducing their total.

Of the people I talk to, about 1/3 (i) agree with Joe Stiglitz that Chile suggests that you *can* use controls on short-term flows to attain a great deal of macroeconomic stability at very little cost in terms of decreased ability to fund development by borrowing from the industrial core, about 1/3 (ii) think that the evidence from Chile is too good to be true (and that the costs *must* be large, even though hard to find), and about 1/3 (iii) think that the real problem is government: that genuine "development states" could be trusted to administer Chile-like short-term capital controls in the public interest, but that developmental states are few, potential kleptocracies many, and that the only live option is the neo-liberal one of trying to take as many levers of action as possible away from the government.

I don't think most people realize the extent to which neo-liberalism is a counsel of despair: a conclusion that sufficiently many developing-economy governments have pursued policies sufficiently destructive for development that social-democratic roles for the government that we in the industrial core take for granted are simply infeasible on the periphery.

I oscillate between (i) and (iii) myself...

Brad DeLong

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