China can’t pull world out of recession, Stiglitz says

Buenos Aires, Nov 25 (efe-epa).- The Chinese economy is not growing strongly enough to power a global recovery from the downturn caused by Covid-19, Nobel Prize-winning economist Joseph Stiglitz said in a video conference with officials of Argentina’s central bank.

While China was “really the basis of the global recovery” in the wake of the 2008 financial crisis and resulting Great Recession, “the data that just came out makes it very clear that China won’t be playing the same role” on this occasion, the Columbia University professor said.

“They (the Chinese) may be having the highest growth rate among any of the major countries, but it’s still a very muted growth,” Stiglitz said in an exchange recorded late last month and released Wednesday.

“There won’t be a global recovery unless most countries around the world recover, and that means it’s in the interest of all the countries to make sure that all the countries recover,” he said.

Stiglitz, who chaired the US Council of Economic Advisers under then-President Bill Clinton, noted the “particularly strong” impact of the pandemic recession on developing countries.

“There needs to be a concerted international cooperation for a global recovery,” he said. “The G20 said they would use every available instrument. They have not.”

But the former chief economist at the World Bank offered praise for the way the International Monetary Fund (IMF) has responded to the present crisis.

“The IMF has played a real leadership role, quite different from some of the roles that they’ve played in the past. I’ve been a critic of the IMF in the past, but actually, in this particular crisis, they’ve been really playing a leadership role,” Stiglitz said.

He pointed to the call by IMF Managing Director Kristalina Georgieva for the issuance of $500 billion in Special Drawing Rights (SDRs), a global monetary reserve currency created in 1969 to assure international liquidity.

Georgieva’s initiative “had global support except from two countries: India and the United States,” Stiglitz said, expressing hope that Washington’s position would change in a Joe Biden administration.

“It’s a moral issue, but it’s also in the interests of the United States,” Stiglitz said.

He said that a number of wealthy nations have expressed a willingness “to donate, lend their SDRs – which they don’t need – to developing countries and emerging markets in a trust fund.”

On the national level, he said that governments must accept responsibility to implement fiscal measures.

“Central banks don’t solve solvency problems, they solve liquidity problems,” Stiglitz said. “The burden has to lie more and more with fiscal policy” as the continuing downturn puts increasing pressure on firms and households.

He said that the US Federal Reserve and other central banks made a mistake by slashing interest rates to near zero in response to the 2008 financial meltdown and keeping rates low for years afterward.

The “decision to rely on monetary policy ironically destroyed the ability to rely on monetary policy as a long-term instrument,” Stiglitz said.

“By keeping interest rates so low, it means the price of capital does not reflect the real scarcity,” he said. “As innovators you have no incentive to save on capital. The cost of capital is zero, the cost is about labor, so a lot of innovation is directed at saving labor. We don’t want to save labor, we have too much unemployment.”

Covid-19 has shown, according to Stiglitz, that economists need to focus more on what are known in the discipline as externalities.

“Financial instability, macroeconomic externalities, inequality, the pandemic and climate change, these are really big externalities,” he said. “They need to be brought in early in any economic discussion.” EFE

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