Via Mark Thoma, Joseph Stiglitz makes lots of claims. Here is one of them:
For a quarter-century, there has
been a contest among developing countries, and the losers are clear:
countries that pursued neo-liberal policies not only lost the growth
sweepstakes; when they did grow, the benefits accrued
disproportionately to those at the top.
He does not name the countries. Is Chile supposed to be a loser? Or does he have the more corrupt Latin American states in mind? How about Ireland or for that matter the economic policies of Mrs. Thatcher? Was it a mistake for so many states to drop communism? How many African nations — the real losers — have adopted neo-liberal policies? Do Singapore and Hong Kong count?
Presumably China counts as a winner and of course it has a relatively strong state. Oddly some of the communists saw capitalism as building the economic superstructure for socialism and then communism. In reality the nominally socialist and communist government of China built the public sector superstructure to support a later capitalism.
Here’s another claim Stiglitz makes:
One senior Chinese official was
quoted as saying that the problem was that the US government should
have done more to help low-income Americans with their housing. I
agree.
In my view, while the private sector is largely to blame for what happened, the U.S. government has, over the years, done far too much to encourage the housing sector. I guess Stiglitz thinks it should have done even more.
I find the content of his essay difficult to understand, on a number of levels.
Chile would be mid table at best since 1970 if it was in the Far East. Slightly behind Thailand I think. The rest of Latin America has been dire and, as a generalisation, far more well behaved according to Washington Consensus rules. Singapore is pretty much socialist. This is a point made with names by Dani Rodrik and others so not really out on a limb.
Communist and neo-liberal is not an exhaustive list of economic policies so there is little reason to think that Stiglitz is suggesting anyone should have remained communist.
It also seems odd to compare “the housing sector”, at least as helped by the government, with housing for the poor.
He may however have missed a trick by failing to point out that since 1970, just about the best development trick you can pull has been joining the EU. Give it your battered old fascist and communist dictatorships and in 10 years they look good as new.
bunbury, please support your conclusions. For one thing, just because Temasek and GIC own parts of many companies does not make Singapore a socialist country. Socialist economies aren’t exactly havens for free trade or complex financial systems (such as Singapore’s).
So the same “Washington Consensus” that told Argentina to peg the peso to the dollar also told it to continue making massive cash transfusions (essentially graft/buying votes) to the provinces/their governors, thus running a deficit, right?
Oh, and what about matching up the U.S. against the Far East since 1970? Or France, for that matter. How extensively have you traveled around Latin America and talked to businesspeople (and ordinary citizens there)? I have done this in Chile (as well as some other countries) and in my opinion its institutions are much, much more capable of promoting growth in the long run compared to its peers (yes, even many of the “Asian tigers”). It has taken few shortcuts thus far and at present doesn’t have a screaming-high growth rate, but I am very bullish on Chile for 30 years down the road.
Great to see American liberals using their fame to spread good ideas to countries that need it, like Egypt.
This article is misguided on so many levels that one wonders why we even bother. This guy has a Nobel prize?
I’m not sure Chile is shinning example of successes of free markets. Despite having liberalized its economy over 30 years ago, and benefiting significantly from substantial mineral resources, particularly copper, its per capita GDP is still slightly below Eastern Europe average. Also having one of the highest income inequalities in the world is nothing to be proud of.
New Zealand is a good example, Ireland is an even better one. Also, Chile is the richest country in Latin America. Argentina is an example of a country making almost every possible mistake at one point or another, and paying the price for doing so.
I’m not the one raising vague and tangential points so don’t know why the fact checking is directed this way. The short answer is go play with GapMinder for a bit.
I don’t think anything I’ve said is controversial. Chile is the best case scenario when it comes to neo-liberal development and it would still look like a laggard if it were in the Far East. It’s on a par with the Philipines and behind Thailand, let alone South Korea.
As for Singapore, I don’t know what your checklist is but it has a very comprehensive welfare state, highly interventionist industrial and social policy and extensive state or quasi state ownership. It even has a minister for procreation. Democracy is special.
Stubydoo, NZ didn’t have a lower GDP than Argentina in 1980. NZ did a bit better but wasn’t really a developing economy.
Estonia. It isn’t even a very unequal country (Gini index of .34, according to Wikipedia).
It describes how Mrs Thatcher’s policies reversed _decades_ of relentless British economic decline in a developed (the first developed) economy. This strikes me as an amazing, inspiring, unprecedented story – so why is nobody interested in it?
Probably because of the association with the non-economic aspects of conservatism. That’s why I can’t easily get past my dislike of Reagan. And to an American like me, Thatcher=Reagan.
Depends on your units I guess. In PPP terms, according to your source, they’ve roughly kept track growthwise and NZ started well ahead:
http://www.imf.org/external/pubs/ft/weo/2008/01/weodata/weorept.aspx?pr.x=43&pr.y=9&sy=1980&ey=2013&scsm=1&ssd=1&sort=country&ds=.&br=1&c=213%2C196&s=NGDPDPC%2CPPPPC&grp=0&a=
It’s still missing the point.
The Far Eastern countries were and often are terrible in Washington consensus terms but have lapped the better behaved countries in Latin America. China has not been a model of Washington consensus rectitude and now look at it. Sure it’s a special case but so are Ireland and New Zealand.
If you put up a league table of economic growth over the last 25 years the top would be dominated by dirigiste East Asian countries, more liberal Latin America would be mid table and African countries would be propping things up. In terms of levels the far east has leapt from the bottom of the table to banging on the door of the G7.
So, there’s a prescription. Some very poor countries didn’t take it with diverse results, mostly good in Asia, mostly bad in Africa. Some not so rich countries did take it (they did other stuff too but the doctor didn’t say much about that) and got results that range from mediocre to terrible. Pointing out the Mrs. Thatcher might also have taken the medicine doesn’t really detract from the point that what is supposed to be the medicine for lack of growth is no better than placebo. We don’t know what the Asian economies did right in any transferable way. Lots of stuff they did can go badly wrong.
I maintain the currently the most reliable route to rapid development is trying to join the EU.
Eastern Europe benefits from being right next to Western Europe. If it’s neighbours had been in better shape, Chile’s GDP per capital would probably be significantly higher.
a good title , non original, Experts talk
or The philosopher king in his ivory tower
Tushar, where does it suggest that Stiglitz is corrupt and incompetent telephone companies? And no, neo-liberalism is not the same thing as Nokia or RMC and Stiglitz does not appear to be against them.
The major point in the article is the your phone is more likely to be Korean than Chilean despite the best endeavours of neo-liberalism. The mnor one is that the dot com and housing bubbles are efficient in pretty obscure ways if they are efficient at all. Neither point seems arguable even if they do leave Tyler nonplussed.
But for every South Korea there is at least one Peronist Argentina. Can the proponents of more interventionist development strategies tell ex-ante which is which? I wonder to what level were the East Asian economies spared from public choice concerns thanks to benevolent dictatorships.
Case in point: Venezuela (besides the whole “friends with the US” part). Epic development fail since the 1970s, whatever small political will was for Washington Consensus reforms lasted about a couple of weeks…
As others have pointed out, one of the problems with Stiglitz’s claims is that “neo-liberal” is not very well defined. And as long as we don’t have a clear definition, claims that Singapore is “socialist” seem at least semi-plausible. One way of measuring the “neo-liberalness” of a country might be to look at the Economic Freedom Index. I’ve seen more specific policy indices (such as openness to trade, amount of bureaucratic redtape, etc.) but since the Economic Freedom Index is widely used, we can just look at the list of top 10 countries:
Hong Kong
Singapore
Ireland
Australia
United States
New Zealand
Canada
Chile
Switzerland
United Kingdom
Also of interest is that Mauritius and Bahrain are numbers 18 and 19 respectively and these are also often cited as models of successful economies that are relatively free-market.
Can you be more specific about what “basic market principles” are and how they differ from “fundamental free-market principles”?
By ‘basic market principles’ I’m talking about market-pricing, private property, individual financial incentives – without these, an economy will not function well.
By ‘fundamental’ – I really meant ‘fundamentalist’ – or free-market ideology. Free trade, for example – that’s a concept with very little empirical evidence behind it. Extreme laissez-faire policies – little regulation, minimal social welfare, low taxes. Such policies may well help a number of individuals make a lot of money, but it’s unlikely to lead to widespread growth. Most people aren’t smart or skilled enough to really benefit from an entreprenuerial-friendly economy, and will languish in poverty without some state-directed encouragement of growth industries. Of course, the state has to be competent and honest enough to support industries that are good for the country rather than to just line the pockets of cronies. This is what the East-Asian nations are good at but Latin American economies aren’t. This might be deeply cultural, and so perhaps Chile is indeed the best we can hope for down there.
Ricardo, also the EFI is not a measure of neo liberalness, at least not as implemented as an international development policy. At best it’s like saying that the Gini index is a measure of socialism and Latin America has very high Gini indices while they are much lower in the Far East which has been far more successful.
One irritating aspect of Tyler dismissing the failure of Latin American development as being down to corruption is that reducing corruption was not an important goal of the policy.
The Washington Consensus is actually pretty well defined. The economic freedom index is not a policy measure.
Fair enough. I used the EFI because it is widely available and is a decent proxy. If you know of a “Washington Consensus” index, please do share. If there is an index that measures adherence to Washington Consensus floating around, I would be surprised if it wasn’t highly correlated to EFI.
In any case, boiling the Washington Consensus down to “policy” only is dangerously close to a straw-man. Policy changes without a non-corrupt legal system and bureaucracy and without the rule of law are words on paper. For instance, if a country has officially free trade but customs officials still demand bribes from importers, then the country is not practicing free trade regardless of what official tariffs and quotas are. No neo-liberal in 2008 would deny this and I would argue it would be pretty difficult to point to someone in 1991 who would have denied this.
bunbury, I did not categorize the source of the IQ diffentials – it does not matter if they are cultural or genetic or cosmic-ray induced; but I think it’s pretty clear they don’t result from neo-liberal vs. other economic policies. So national IQ differences are neutral to these policies, and I’d argue far better predictors of economic success.
In fact Malaysia, Thailand and to an extent Indonesia have all outperformed Latin America where domination by a European elite hasn’t been that helpful so your thesis is at best part of the story.
No, it reinforces my thesis since the IQ’s of the nations you mentioned are higher than most of Latin America. It is complicated, because in both regions you have dominant minorities (Chinese, Europeans) to different extents. Still, the pattern remains strong. Of course it’s not the whole story – but IQ has a lot more predictive power than some vague notions of neo-liberal vs. some other non-communist, non-socialist regime.
China, by the way, features private property, market pricing, and individual financial incentives. This is in contrast to the way China used to be and all other socialist countries, like Cuba and the former Soviet bloc. Socialism does not and never has worked.
In the 19th century both jews and the chinese coming to the US were thought to be close to sub-normal.
Except that their actual economic performance in succeeding generations proved this (assuming this was actually a mainstream view) to be incorrect. No such evidence exists to refute this thesis regarding Latin American immigrants – their performance into 2nd and later generations continues to be sub-par. I’m not sure about South-east Asian immigrants.
The policy implications? Basic free-market policies are essential to success, as China has demonstrated. Fundamentalist free-market policies – not so much.
And bunbury – Singapore is basically socialist? Someone has better tell Creative Technology’s founder and stockholders that they don’t really own the company! I think you might be confusing social welfare with socialism.
The most inane bit of the essay is where he implies that building too many homes drove up house prices. It is hard to believe that Stiglitz has ever taken a course in Economics, let alone that he is allowed to teach it.
Perhaps he has been in New York for too long: he should come here to Estonia to see the free market at work.
How are IQ and growth related to longevity?
I didn’t say anything about longevity (I don’t think).
Anyway, Stiglitz’s essay is all over the place, but what I think he’s trying to say is that there’s little evidence that nations with laissez-faire governments are more successful than those where the government takes a more active role – I think he’s claiming the latter are more successful. He assumes that the government is able to actually make good decisions. I suspect that the government’s ability to make good decisions is based in part on what kind of ruling class a country has and to what extent the general population provides sufficient native skills to take advantage of their plans. Latin America appears to be somewhat deficient in both respects compared (generally) to countries in the Far East. The fact that neo-liberal Chile is the star of Latin America also suggests this is the case.
Ziel, I suspect the Longevity will have as strong a correlation with wealth as IQ and that where there is a gap it will be a good proxy for social capital not reflected in GDP figures. I also suspect that causality runs in both directions so for example continued healh of the workforce, increased confidence and better childcare are all byproducts of increased longevity. In short I’m not clear what focussing on IQ achieves and there are others who draw less mild conclusions.
Pinning down what should count as fundamental, not fundamentalist, economic freedoms is not easy and it becomes harder when it becomes a shoppng list of conditions for aid.
Good policies don’t just need to be implemented once, they need a constituency in their favour which will protect them, understand their value and adapt them. This is a particular problem with changes that are not internally driven and don’t build such collateral.
Bunbury: an economist advocating a cut in the housing supply in the middle of a house-price bubble is like a physician advocating a cut in the supply of antiviral drugs in the middle of a flu epidemic. That is why I initially thought that Stiglitz implies that an increased supply drives prices up.
Thinking again, I can see an alternative: that Stiglitz is unaware that there has been a house-price bubble. There is nothing in his article that shows awareness of it, and much that suggests that he has a tenuous grasp of the real World.
You, on the other hand, appear to be aware that there has been a house-price bubble; so the only way I can interpret your last message is that you think that the house-price bubble was caused by an increase in the housing supply.
Banbury: so far, instead of answering my criticism of Stiglitz, what you have said is that it’s more complicated than that. I certainly agree, but that does not change the fact that Stiglitz is complaining about an increased housing supply during a house-price bubble. No matter what other factors are at play, that is just insane — as it is his saying that a collapse of house prices did not make houses any more affordable for those who could not afford them to start with.
However, it is good that now you have formulated a specific model which we can sink our teeth into:
excessive price = excessive demand signal
So far, so good, but I note that “excessive price” is just another name for a price bubble. In other words, the price bubble is at the root of the problem, and yet Stiglitz does not mention it: either he does not know it occurred, or else he does not think it important.
=> excessive supply
Now what does that “excessive” mean? for construction companies and their financers, there was certainly an excess of supply; the same for people who already owned a house and wanted to sell it. But there certainly is not an excess of supply for people who cannot yet afford a home! I just don’t understand how you can measure an “excess” of supply in this case.
Please note that the house-price bubble was much worse in places with limits to the housing supply, either because of geography (Manhattan, San Francisco), or because of zoning laws. Yet Stiglitz would have limited the housing supply even further.
=> waste + burst bubble
Burst bubble, certainly, but where is the waste? you assume that there was an excess of supply in the first place (see above).
=> crash + further damage
“Crash” is the same as “burst bubble”, and therefore a good thing. As for the further damage, once a bubble starts inflating, it is blinkered to blame the damage on those who burst it.
So basically your argument is that, instead of bursting the bubble asap, the priority should have been protecting the interests of construction companies, their investors, and rich house-owners. Pardon me, but I am not impressed.
Arthur,
Stiglitz doesn’t use the word bubble but he describes the phenomenon — he’s not ignoring it.
A bursting bubble is not a good thing. It might be better to burst it sooner rather than later but damage is still done that will not be offset elsewhere. Best might be for the bubble never to have occured at all.
I understand Stiglitz as saying that the bubble was created and allowed to persist by the market and therefore that the presumed efficiency of the market is exagerated and consequently that reliance on it as a policy tool is overdone.
Is it realistic?
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