Recovery begins at home

Nobel-winning economist Joseph Stiglitz was one of the few to predict the global financial crisis. The world is now years into recovery, but Stiglitz warns MIPIM attendees not to wait for miracles from afar.

Professor Joseph Stiglitz’s pessimistic opinion of prospects for recovery in the West is counterbalanced by a more upbeat view of both the short- and long-term outlook for Asia.

This is despite the fact that the global markets remain interlinked and the fortunes of one side of the world will still impact on those of the other. The question that Professor Stiglitz addressed in his MIPIM Asia keynote was how Asia can find paths to grow that do not depend on exports to the West.

Stiglitz told his capacity audience that Asia had learned from the crisis of the late Nineties, meaning that it faced the recent downturn with strong public finances. This was in stark contrast to the US and Western Europe. “In a sense the most important reasons for China’s particular success was the adoption of Keynesian policies,” Stiglitz said, explaining that providing strong stimulation for investment enhances the economy in the short term and provides a foundation for long-term growth.

“China is doing exactly the same thing now,” he added. “This is putting it on a foundation for a period of continued growth—and the whole world will benefit from this.” But Stiglitz pointed out that, in terms of GDP, Asia is too small to provide the stimulus that will turn the fortunes of the West.

If Asia is to continue to grow while Europe and the US stagnate, a change of economic model is required. Asia’s success has been based on export-led growth, but this will be hard to maintain where export markets are week.

The good news is that, in the last few months, there has been a greater emphasis on domestic demand.  Stiglitz said that real estate and green investment could also play a key role in maintaining growth.

Meanwhile, Stiglitz believe the US and Europe are set for a Japanese-style malaise: “A long period of very low growth.” He asserted that what is need in the West is a second round of stimulus incentives. “I get asked all the time if the US can afford another round of stimulus,” he added. “My argument is that we can’t afford not to do it. Even from the budgetary point of view, we should learn the lesson from China.”

Stiglitz said that monetary policy is likely to be ineffective for the West. He also predicted that the new enthusiasm for austerity would prolong the recovery—and “beggar-thy-neighbour” currency policies would be no help either.

“What is really needed is a growth compact,” he said. Both China and the US need to increase wages and reduce inequality. The US also needs to move away from consumption and those sectors where it has lost the advantage and concentrate on repairing its dysfunctional financial sector. China, meanwhile, should move away from exports and recycle savings in a more productive way.

Stiglitz also said that both China and the US must improve their energy efficiency and respond to the challenge of global warming. At the core of the new economic model will be the infrastructure and real-estate investment needed to “retrofit” economies, he added.

“The only source of strong growth is likely to be here in Asia,” Stiglitz concluded. “But Asia’s growth has to be based not just on more consumption. The planet will not survive if everybody attempts to imitate the profligate US consumption style.”

This article appeared in the MIPIM Asia Review 2010. Read more here.

Top image credit : Photobank gallery

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