Joseph Stiglitz:
As recently as 1902, Western troops were down in Venezuela and at that point the foreign minister of Argentina made a speech about how inappropriate it was for foreign troops to come down to Latin America to force the
payment of debt. We've gone beyond debtor prisons for private debtors. We've gone beyond the use of military power for sovereign debts. But we really haven't gone to the next stage of having
a bankruptcy proceeding.
Jamie Rubin:
Now top officials of the IMF have begun to talk about a bankruptcy mechanism for the international community. And do you favor that and how do you think we could create it?
Joseph Stiglitz:
Yeah, I strongly favor the idea. I think the IMF is misguided if it thinks that, it, as one of the central creditors, can play a central role in the bankruptcy proceeding .I mean none of us in the United States would view a bankruptcy proceeding in which the creditor was the judge and the jury.
Jamie Rubin:
No, but they would have a way of trying to get access to their debt, I would hope.
Joseph Stiglitz:
Yes, they're part of the process, but we need an independent process and they can't play the pivotal role in that process.
Jamie Rubin:
So, in your view, the current international financial system that created the IMF, that created the World Bank, where you used to work, is simply inadequate to the task of dealing with these depressions in Argentina where the issue might in fact be bankruptcy.
Joseph Stiglitz:
Yeah. We need new institutions to deal with these problems. There's another point that we talk about Chapter 11, which was an expedited way of resolving bankruptcies for corporations. But there's actually another provision of U.S. bankruptcy called Chapter 9 that deals with the bankruptcies of localities and public bodies that cannot pay their obligations. And there there's an important provision that we recognized that communities, localities have responsibilities to their citizens. So a country like Argentina has not only formal debt, but it also has obligations to its pensioners, a
whole set of other obligations that have to be brought in. So that's why it can't be a standard bankruptcy proceeding and it can't be a proceeding in which only the foreign creditors have a say.
Jamie Rubin:
So you're saying in our laws in Western countries, the United States, there are ways of dealing with what happens if a locality, a city, a state goes bankrupt, and you're saying we should have a similar mechanism for the world. Is that correct?
Joseph Stiglitz:
That's right.
Jamie Rubin:
How would you see that mechanism being created? Who would put it together?
Joseph Stiglitz:
Well, I think that one of the things that we are increasingly recognizing is that globalization has brought us - which is the integration of countries and peoples of the world - has increased our interdependence. As we become more
interdependent, we have to find ways of handling common problems, of collection action where we have common problems. Sovereign bankruptcy, bankruptcy of a country is one of the common problems. And it was a problem we didn't deal with or we didn't deal with very adequately in
the past. Now that we're recognizing this need, we need to create a new institution. This will take a while. It's not going to happen overnight, but we are making steps forward. We have an international criminal court that we are begin...
Jamie Rubin:
The World Trade Organization.
Joseph Stiglitz:
... the World Trade Organization and we are piece by piece beginning to try to address each of the common problems that we face in our globalized
world.
Jamie Rubin:
You've said that the International Monetary Fund has pushed a particular type of capitalism on Argentina and other countries. Could you give us a specific example of the way in which they've pushed this American-style capitalism?
Joseph Stiglitz:
Well, it's even beyond American-style capitalism. For instance, they pushed policies like privatization of social security, privatization of a lot of utilities that even in the United States we don't believe in. But the big difference, say between American-style capitalism and say Swedish-style capitalism is that in the Swedish- style capitalism, there's much more focus about a social safety net, social cohesion, inclusion so that for instance, the unemployment benefits are much, much stronger than in the United States.
The real problem is that our system may work very well for us. And the Swedish system may work very well for Sweden and in fact, in terms of the new economy, ability to resist the last economic downturn, Sweden's been better than the United States.
The problem is the American-style capitalism may have been particularly suited for the problems of Latin America. We may have a weak safety
net , but it's not so terrible when you have close to full employment. But in a country like Argentina where they've had double digit unemployment since 1995 and ...
Jamie Rubin:
20 percent of the people are out of work. . .
Joseph Stiglitz:
Today, more than 20 percent, but when the . . . when the prices blew up, it was 20 percent of open unemployment and a lot more disguised employment. In that kind of context it's very hard to maintain political and social stability.
Jamie Rubin:
So you believe that the pushing for privatizing, selling to private companies, things like telephone networks or the social security system or pension system or otherentities in Argentina and Latin America is an example of how they pushed too far?
Joseph Stiglitz:
Well, some of these policies made perfect sense. The question is the pace, the timing and how it was done. For instance, the case of privatization of utilities, in order to assure investors that they would get a return, they linked the prices to the U.S. dollar. That
meant an economic situation in Argentina ... eroded prices were actually falling in Argentina. Actually falling. They were having deflation. It meant that more and more of their income had to go to pay utility bills.
Jamie Rubin:
Let's talk a little bit about the effect Argentina's had on the broader continent. Early on, the Bush Administration suggested that Argentina might be an isolated event, they wouldn't contaminate the financial market throughout Latin America. Do you think they were right or did they make a mistake?
Joseph Stiglitz:
Oh, they clearly made a mistake. The economic downturn in Argentina has already spilled over to Uruguay, Paraguay and, over all the continent, there are other problems. Brazil is facing a great deal of instability, the extent to which it's related to Argentina now be a debatable question, but there's absolutely no doubt that there's a high
level of instability.
Jamie Rubin:
So their hands-off approach has made it worse?
Joseph Stiglitz:
I think the problem has not been the hands-off approach, I think the problem is, it's been the wrong approach. Rather than taking an active policy of trying to open up American markets to the goods of Argentina to try to help it, to try to do like Japan offered in the case of East Asia, which was that it offered, in the countries of East Asia to make available new
trade credits to help restart the economy, the United States hasn't been that kind of a good neighbor towards Argentina or the other countries facing a problem. So in some sense it hasn't done enough, but the problem is that some of the of the things it's done, which has been pushing for more
contractionary policies, just the opposite of what we did in the United States in the year 2001, when we had an economic downturn, has been pushing, I think, the wrong economic framework.
Jamie Rubin:
Joe Stiglitz, you're a Nobel Prize-winning economist. You've had a chance to study trends and economics, you've won a Nobel Prize. What is your working hypothesis on what the lesson of the Argentina collapse is?
Joseph Stiglitz:
There are a number of lessons.
Jamie Rubin:
The biggest lesson.
Joseph Stiglitz:
Well, let me say the most important lesson I think for the developing and emerging countries is. If you borrow abroad, you put yourself at risk because international capital markets are extremely volatile, even when you do nothing wrong, there can be huge increases of interest rates because of our global financial crises as happened in '98, a change investor sentiment so that's the first warning, the first lesson. The second lesson I think is that contractionary policies, policies that we urge governments to reduce expenditures in the face of an economic downturn make those economic downturns even worse.
Joseph Stiglitz:
It's a lesson for 70 years, but somehow we have to keep relearning that lesson.
Jamie Rubin:
Let's look at the United States now. We saw people in this film go to their ATM machines and put their cards in and only sometimes the money came out. And a lot of that is to due with confidence in the banks. Do you think that we could have this kind of break down in confidence in American banking system or the American economy or have we put safeguards in place for that?
Joseph Stiglitz:
We have made enormous steps in putting safeguards in place. We have a deposit insurance scheme which is reasonably well funded. We have had strong regulations on the baking system. But we have to remember that we, too, make policy mistakes. In the Reagan era there was excessive pushing for deregulation
of the financial system, just like IMF pushed for excessive deregulation in many other countries of the world. And as a result of that, we had the S&L crisis.
Jamie Rubin:
Savings and Loan. . .
Joseph Stiglitz:
The Savings and Loan crisis which cost American tax payers several hundred billion dollars. We could afford it. Less developed countries, unfortunately, emerging markets, can't afford it. We have also recognized that our counting frameworks leave
something to be desired. And that means that a lot of people aren't sure about what is actually going on not only corporations, but also in the financial institutions. So again, there is some uncertainty. But the overall strength of our economy is so strong that we can withstand
some of these mistakes that would be devastating to a poor economy.
Jamie Rubin:
Joe Stiglitz, thank you for joining us.
Joseph Stiglitz:
Nice to be here.
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