August 8th, 2002
The Empty ATM
Interview: Joseph Stiglitz

August 8, 2002: Former World Bank Chief Economist Joseph Stiglitz discusses the Argentine crisis with host Jamie Rubin.

Jamie Rubin: Joseph Stiglitz, welcome to WIDE ANGLE.

Joseph Stiglitz: Nice to be here.

Jamie Rubin: We’ve just seen a powerful film showing what amounts to a great depression in Argentina. Could you tell us a little bit about what the impact in your view this crisis in Argentina and broadly in Latin America will have on the United States, on Americans?

Joseph Stiglitz: Well, it’s having an enormous impact in Latin America and throughout the developing world. If this is what happens to the A+ student, the student who followed the advice of the IMF, the United States. If this is what happens, then many countries around the world ought to say we want no part of it. We’ve been pushing, and I think quite rightly, a philosophy based on democracy and markets, and in the long run, democracy and markets are the only way these countries are going to be able to grow and bring the kinds of prosperity and the kinds of freedoms that we have . . .

Jamie Rubin: That people want.

Joseph Stiglitz: That people want. But the question is the way you go from here to there. There are many different forms of capitalism. Swedish capitalism is different from German capitalism is different from American capitalism. And the problem is that we pushed a particularly narrow view of capitalism and democracy, and one which has really not worked in Latin America; not worked in the sense that growth in the last decade has been just over half of what it was in the ’50s, ’60s and ’70s; not worked in the sense that many people at the bottom of income distribution have actually seen their incomes fall; not worked in the sense that there is an unprecedented level of instability, crises in Brazil, Argentina, the Andes, recessions, depressions, and as a result of that, there’s a frustration, despair.

Jamie Rubin: Is this analogous to the Great Depression here in the United States, what’s going on there?

Joseph Stiglitz: Well, in fact, in terms of the numbers, it’s probably a faster fall, a deeper fall than the Great Depression. Now you saw some of the … what it was doing, to the people, in terms of their ability to earn income. The social unrest is worse than the Great Depression. Some of the violence. I see numbers like, one policeman in Buenos Aires killed a day, for a long period of time. It is real social unrest.

Jamie Rubin: Help us to understand the impact of this crisis in Argentina on the United States, and on American foreign policy in Latin America. What message do you think the Argentinian crisis is sending?

Joseph Stiglitz: There are several messages. In the 1990s, the United States, and the international economic institution sent a message that, if you only followed our advice, had market reforms, American style democracy, all these would bring new growth, widely shared — a new era. Argentina was held up as the A+ student. And now, people around the continent are saying “If this is what happens to the A+ student, we don’t want anything of it.” There’s a decade now of economic reform. The statistics are coming out, and the statistics are confirming what people’s impressions are. Growth in the ’90s is just over half of what it was in the ’50s, ’60s, and ’70s. And the benefits of that growth have gone disproportionately to the upper 30 percent, the upper ten percent. People at the bottom, many of the people at the bottom, the bottom ten, the bottom 30 percent are actually worse off.

Jamie Rubin: And the rich are getting richer and the poor are getting poorer?

Joseph Stiglitz: And, on average, growth is worse than it was in the ’50s, ’60s and ’70s.

Jamie Rubin:Let’s look at the hemisphere a little bit. The president of the United States said that he wants to make Latin America a hemisphere of liberty in an age of prosperity. That was his goal stated in the early months of his administration. What’s happening across the hemisphere in terms of the perception about democracy and the free market?

Joseph Stiglitz:I think the perception is one that America, rather than standing for these high-minded principles, stands for hypocrisy. After talking about free markets, what did the United States do? It passed a huge agricultural bill, increasing subsidies to agriculture, enormously. Remember in a country like Argentina, the basis of their economy is agriculture. If they can’t export to the United States, if they have to compete against hugely subsidized agricultural commodities, it hurts them.

So, what they see the United States standing for is, while they’re telling other countries “Open up your markets, cut out your subsidies,” the United States is increasing its subsidies. And then, in the area of protection, the United States put forward these tariffs on steel. They said we needed a safeguard. But if the United States, the richest country in the world, a country with a good safety net, a country with — even in the midst of a recession — very little unemployment — under seven percent — if it says it needs safeguard, what do you think the people in Latin America, people in Argentina say? They have unemployment exceeding 20 percent. They have no adequate safety net. Some countries have no safety net. So when they lose their jobs, to subsidized American goods, because of the protection that the United States has put, they really suffer. And so again, it’s another example of this hypocrisy.

Let me give you a third. In our recession of 2001, both the Democrats and the Republicans in the United States said, “We need a fiscal stimulus. We need to stimulate our economy.” There was a disagreement about . . .

Jamie Rubin: “We need to spend money.”

Joseph Stiglitz: “We need to spend money, cut back taxes, do something – there’s a federal government responsibility, to help strengthen the economy.” And whether there’s a disagreement about the best way of doing it, that it was the responsibility of government there was absolutely no doubt. Yet in Argentina, and other countries in Latin America, the IMF, which basically reflects the view of the United States, because we, the United States, have the veto power. The only country with the veto power. The IMF went into Argentina and said, “You have to cut back your expenditures.” In two years, they cut back expenditures on things other than interest by ten percent. It only made the recession deeper.

Jamie Rubin: You’ve compared this to the days when doctors used to bleed patients, and then when it wasn’t working, they’d bleed them some more. Is that really your view of what the International Monetary Fund, the IMF, has been doing?

Joseph Stiglitz:Well, it has this characteristic of blaming the victim. They did it in East Asia, they’re doing it in Argentina. When the medicine doesn’t work — and everybody knew that contractionary fiscal policies, cutting back on expenditures, in the midst of a recession is the wrong medicine — when it didn’t work, when it made things worse, when they said, “Oh, the problem is they didn’t follow our advice enough. . .” They said the problem was corrupt government, the problem was this, the problem was that. The problem was that the underlying economic system, the fixed exchange rate, the privatization of social security, a whole set of policies that had been put in place over preceding years was misguided. And made the failure . . .

Jamie Rubin: And these are the policies that the International Monetary Fund had urged on the Argentinian government. Let’s talk about their view of this problem. The president of Argentina has said their biggest problem is the ignorance in the United States about what makes Argentina tick. There are many here in this country who think Argentina’s biggest problem is the Argentinian politicians, who cannot agree on a scheme, cannot work between the states and the federal government, and implement a successful economic plan, and they’re blaming the outsider.

Joseph Stiglitz:I think that’s wrong. What happened was a little bit analogous to what happened in the United States, back in … in the beginning of the Reagan era. You know, I don’t know if you remember, when Reagan cut back expenditures enormously, expenditures on social programs, and, the people at the ground level, the people in the states and localities, knew that the system couldn’t handle that level of cutback. And so what you did was, while the federal government was cutting back, there were some increases, at the state and local level.

Jamie Rubin: You think the same has been happening in Argentina …

Joseph Stiglitz:And the same thing has been happening in Argentina. There was this ten percent cutback in expenditures, in two years. You know, in the Clinton administration, there was great pride about how we put the fiscal house in order. It was only slowing down the increase in expenditures. There weren’t real decreases. This is an enormous political achievement. But it pushed the problems of education, and health down to the local level. They did increase, but only a little bit, a limited amount. The overall deficit of the federal government, even at the end, was only three percent. And if you had put aside the privatization of the social security system, it was zero.

Jamie Rubin:Let’s talk a little bit about the percentages of blame for this terrible situation. Are you seriously suggesting that most of the blame for Argentina’s ills, economic ills, the failure to export goods, the failure to have confidence in their banks, is the fault of outsiders or do you think there is a shared responsibility?

Joseph Stiglitz:Oh, there’s clearly a shared responsibility. But, let me make it clear. I think it would have been almost impossible for anybody to have made the system of fixed exchange rates work, in an environment in which they’re linked to the United States, and the United States, for a variety of reasons, had an over-valued currency.

Jamie Rubin: So they were linking their currency to making it equal to the dollar.

Joseph Stiglitz:That’s right. And when the dollar went up, relative to the euro, and where their neighbor, Brazil’s currency went way down, they were put in a position where their currency was vastly over-valued, they couldn’t sell their goods.

Joseph Stiglitz

Jamie Rubin: So they couldn’t export their products.

Joseph Stiglitz: They couldn’t export their products. Their economic situation looked dismal. Anybody looking at the situation said this can’t continue. Seeing that, people began taking their money out of the country. And, the reforms that had been done before made it easy for people to take their money out of the country. And as they took money out of the country, it became a self-fulfilling prophecy. Their debt GDP ratio, the ratio of how much they owe to the size of the economy, was actually very moderate. It was actually less than the United States.

Jamie Rubin: They weren’t really in major deficit

Joseph Stiglitz: They were not in major deficit. But, even with that moderate debt, if interest rates soar, if interest rates go to ten, 15, 20, 25 percent, then even a country with a moderate level of indebtedness is going to find itself in problems. But it became a self- fulfilling prophecy. But the ultimate source of the problem was the exchange rate mechanism,

Jamie Rubin: Which was Argentina’s decision.

Joseph Stiglitz: It was Argentina’s decision, with the encouragement of the IMF that makes sense when it was put in, in the beginning of the ’90s. They had had hyper-inflation. Very high increase in prices. This was a way of bringing down inflation, and it worked, in bringing down inflation. But people … that’s not the only thing that makes an economy work. You have to create jobs, you have to create employment, and by 1995, they were facing double digit unemployment. They survived what’s called the Tequila crisis, the Mexico crisis, but they learned the wrong lesson from that. They said, the fact that they survived that crisis meant they could survive any crisis. They should have put them on warning.

Jamie Rubin:Let’s talk about the Bush administration’s current policy. The treasury secretary, Paul O’Neill, is in Latin America this week. He’ll be meeting with people in Argentina, and Brazil. What do you think his message should be, and how do you think they will be reacting to the policies of the U.S. Treasury Department in Latin America?

Joseph Stiglitz:Well, I wish the policy were going to be a good neighbor policy, saying “Look, Argentina, you are in trouble. How can we get your economy started? It’s not lending you money that you pay back what we lent you, last year, or two years ago, that we shouldn’t have lent, because it was a bad loan.” What they should say is “The way we can restart your economy is the way we helped Mexico restart in 1995”. How do we do that? We bought their goods. You buy goods, you create jobs.

Jamie Rubin: We should open our markets.

Joseph Stiglitz: We should open up our markets. And that would be a real gesture of a good neighbor.

Jamie Rubin: So what’s an example of that? Argentinian beef? Having no tariffs on that?

Joseph Stiglitz: Exactly. It’s very good beef, by the way. So American consumers would actually benefit from it. Argentinian wheat. Let’s open up our markets. Mexico has done a deal with Argentina, to try to buy some of the Argentinian cars. So, some of the neighbors, like Mexico, are stretching out to try to help their neighbor. It would be great if the strongest country, the strongest economically, and one that preaches free markets, actually practiced what it preaches, and open up our markets.

Jamie Rubin:How easy would it be for the president and the secretary of the treasury to implement such a decision, to open up American markets on a sort of one-time basis, for a fixed period of time, for Argentinian products? Is that easy to do? Does it need congressional approval? Could it be done easily?

Joseph Stiglitz:It probably could. It probably would need congressional approval. But the fact is that I think Americans are very concerned about what is going on south of the border. We have a big interest in having political stability. And I think Americans are generous. And that we recognize that this is in a time of emergency, an appropriate response.

Jamie Rubin:Well, let’s talk a little bit about the comments of the secretary of the treasury about Brazil, and about Argentina that have roiled some of the politicians there. In the case of Argentina, he suggested that American plumbers were somehow going to pay back Argentinian debts. And in the case of Brazil, he just recently said he doesn’t think we should send them any more loans, unless we can be sure it’s going not going off to Swiss bank accounts. How effective are these comments? Are these blunders? Is there logic behind these comments? What’s your view?

Joseph Stiglitz:I think they are diplomatic blunders, at the very least. I think what Argentina and Brazil need are statements of confidence, not unwarranted criticism. They’re factually wrong. The fact is that IMF loans are almost always repaid. So, the real irony is that the IMF dictates polices to these countries. The U.S. is the only country with a veto power at the IMF, basically dictates policies to the IMF. So you have the U.S. directing economic policies in these countries. But the taxpayers actually pay back the loans. So it’s almost like taxation without representation. And they have to pay back the loans, they bear the cost, but they have very little say in the economic policies.

Jamie Rubin:You’ve taken some very strong views about the effect of these loans, and the motivation of these loans. Some say that the International Monetary Fund, the IMF, is really supporting banks, and the American bankers who made these loans. But I’m sure that people who work at the IMF don’t view it that way. What is the best case you could make for why the IMF has approached the problem the way they have?

Joseph Stiglitz:Well, let me first try to describe why I feel so strongly. As an example is what happened in Indonesia. In Indonesia, there were billions of dollars to bail out the foreign banks, to strengthen the currency that would allow Western bankers to get repaid at favorable terms. But when it came to few millions, for maintaining subsidies for food and fuel, for the very poorest in the country, the IMF said there’s no money. And their policies led to an economic downturn, that converted the downturn into recession and to a depression, at the end. Magnitude.

Jamie Rubin:So they cared about the bankers rather than the people of these countries. Now obviously an IMF official doesn’t think that’s what they did. What is your best case, for how they go to sleep at night, after having made these decisions?

Joseph Stiglitz:Well, they view it as absolutely necessary to restore confidence. That’s the word they use all the time. Confidence in the country. If you get confidence in the country, then everything else follows. So, if you got confidence, then, an exchange rate stabilized, then people wouldn’t pull their money out of the banks, and that would allow the economy to get restarted. What that misses, for instance, is the fact that the fundamental problem, in Argentina, for instance, was this over-valued exchange rate, mismanagement of privatization. Confidence is not going to start selling goods for them with their over-valued exchange rate.

Jamie Rubin:But investment might help them to produce the goods that they can sell. And the IMF economists would say that they’re trying to create a climate in which businesses from abroad will invest in Argentina, help them to rebuild their plants, and sell goods that can be sold on the open market, and without that climate, foreign investment will not come into Argentina. And that is important. Do you agree with that?

Joseph Stiglitz:I agree. They make one simple mistake. An economy, in which you have 15,-20 percent unemployment. When national income is falling, incomes are falling. Poverty is increasing. It is not going to be an environment in which businesses are going to want to invest. No matter how stable the exchange rate. Anybody looking at what is going on, is going to say this is a situation which is ripe for social and political turmoil.

Jamie Rubin: So that’s more of a long term goal, rather than a short-term goal, in this crisis. Is that your view?

Joseph Stiglitz: My view is that it is absolutely important to create a good business climate.

Jamie Rubin: Over the long term.

Joseph Stiglitz:Over the long term. And to do what you can in the short term. But pushing an economy into a recession or depression is creating a bad business climate. So my view is that they actually are going counter to what they are saying that they want to do. I think that if you restore an economy’s strength very quickly, which is what Malaysia did, and East Asia, or what Korea did . . . Once you start restoring an economy to a level of prosperity, then investors say, “Well, this is a place I want to invest.”

Jamie Rubin: But Korea followed the IMF prescription.

Joseph Stiglitz: No, it didn’t.

Jamie Rubin: Kim Dai Jung said that he wanted to put on these, austerity measures to respond to the IMF’s requests.

Joseph Stiglitz:Very quickly they did two things. One, they had a rollover, a forced rollover of loans. Which was like a bankruptcy, a stand-still provision, which is the kind of thing the IMF had resisted everywhere else. Secondly, rather than shutting down the banks, as the IMF had insisted in Indonesia and Thailand, what they did is they recapitalized the banks. The government recapitalizing said, “OK, we’re nationalizing the banks. That’s what we need to do now. And, in two, three, four years, we’ll reprivatize them.” And now Korea is in the process of reprivatizing them. So it really went very much against the IMF philosophy. A third example is the IMF said the government should take a hands-off policy on restructuring. Which is what it said in, say, Thailand. Basically nothing happened. In Korea and in Malaysia, they took a very strong view and said, “We have some problems here. We’re going to need restructuring. If we don’t do it quickly, the economy’s going to suffer.”

Jamie Rubin: Just a couple of years ago, Washington looked to Latin America as a great success story. The continent had gone democratic, that nearly all the countries had adopted the free market philosophy that we pushed. Do you think we’ve lost all those gains we put in place over the last 20 years?

Joseph Stiglitz:I think we clearly oversold and not only did we oversell, what we sold was not the right set of policies. We sold market economics and democracy and that was right, but we didn’t sell a broad variety of that, we didn’t sell a version that was appropriate to these countries. And we actually, in many cases ,undermined democracy because rather than presenting the countries with alternatives, explaining to them here is this form of capitalism, that form of capitalism, this form of institutions, that form of institutions, confronting them with choices that would effectively strengthen their democracies by making those choices, they were told over and over again that there was one way and now that way has not worked.

Jamie Rubin: Polls have suggested that now some two-thirds of the people in these Latin American countries that are going through this economic turmoil have turned against democracy as their preferred form of government. How troubled should we be in America? Does that have a negative impact on us?

Joseph Stiglitz:I think we should be very troubled. I mean the turmoil in our neighbors to the south inevitably will cause problems for us, if only through migration and we have an enormous amount of familial connections between Americans and people in Latin America. But I think more fundamentally, I think Americans are committed to democracy. We believe, and I think it’s true, it is the system we really believe in. And it is of concern to us when democracy fails and people perceive that democracy fails. And one of the problems is that they’ve had democracies in which they’ve not had the ability to make choices over basic economic principles, economic systems. They were pushed down their throat by the U.S. Treasury, by the IMF, and so they don’t feel like these were their policies. They were told democracy, but they were told you have to do these things. And so there’s an incongruity between the rhetoric of democracy and the actual practice.

Jamie Rubin:You’ve been critical of the way in which the International Monetary Fund has approached these bailouts in Latin America and around the world. But here we have a situation where Argentina is in this great depression, where Brazil, its neighbor, is suffering, as well. Should the IMF be helping to bail these countries out now?

Joseph Stiglitz:I think the fundamental problem in these countries is trying to get their economies started again. Money from the IMF that goes to repay money to the IMF or money to the World Bank or money to the Inter- American Development Bank to repay international creditors is not going to help restart the economy. What they need is access to markets. What they need is credit that will go into the firm’s working capital.

Jamie Rubin: So they could export their goods.

Joseph Stiglitz:So they can buy the inputs that produce the goods that they can export. So it’s not high finance that’s really important. What’s really important is markets and working capital.

Jamie Rubin:So, you would agree with the approach of the Bush Administration, where they have been reluctant to go through another exercise where the IMF gives large-scale loans to the Argentines and the Brazilians.

Joseph Stiglitz:Well, I think that it would be a good idea if they could whatever they can to restore confidence in these economies. What they’ve been doing is saying we’ll give you money in return for which you have to cut back on your expenditures, make the recession worse, make your economy worse and that will undermine confidence. The IMF was originally created over 50 years ago under the intellectual aegis of Keynes, and his idea was …

Jamie Rubin: The founder of modern economics.

Joseph Stiglitz: The founder of modern economics, and he was writing in the period of the Great Depression. He said sometimes economies, market economies, don’t work. And when they don’t work, there’s an important role for government. There’s a role for government in trying to stimulate the economy, to get the engine restarted. A word that was used was “prime the pump.” And money that goes into the economy to help prime the pump would be helpful.

Jamie Rubin:So, you are saying that the Administration should be looking at both an IMF-type approach where you are priming the pump with additional funds to help them create confidence, and trade liberalization so that they can export their goods. And in your view, is the Bush Administration doing either of those things?

Joseph Stiglitz: No. But let me emphasize. Most of the discussion on IMF loans is not made with prime the pump. Most of the money that the IMF is talking about is money would just go to repay the international creditors and in that sense would do very little to prime the pump.

Jamie Rubin: So, would you favor or oppose IMF conditional loans to Argentina?

Joseph Stiglitz:What I would prefer and favor is IMF loans to Argentina that would insist and demand on expansionary policies that would restore their economy and direct the money to provide trade credit, to provide working capital to get the economy started. But money that doesn’t do that …

Jamie Rubin: Just goes to repay old debt …

Joseph Stiglitz: That is really a side show.

Jamie Rubin: OK, so you’re not so concerned as the Bush Administration is about re-establishing confidence so that investors can return to Argentina and provide private investment as a way of priming the pump for economic growth.

Joseph Stiglitz: Investors are going to wait to see whether the economy is restarted. You don’t go in general investing in the economy when you have 25 percent unemployment, when you have riots in the streets because people are starving. That’s not the kind of environment, and nothing that the IMF has proposed would do anything to alleviate what I view as the major source of lack of business confidence.

Jamie Rubin: So, in the long term, one wants to establish business confidence, but in the short term one has to get their economy moving.

Joseph Stiglitz: Exactly.

Jamie Rubin: OK.

Joseph Stiglitz: We had the same debate back in the United States in the Great Depression. There were some people who said that the only way we would restore the economy in the United States in the Great Depression was to cut back on the expenditures because we had a deficit, because the economy’s tax revenues had gone down, because we were going into a depression. There was the other view, which is the Keynesian view, which said we have to prime the pump and get the economy going. Hoover tried the first strategy and the economy sank deeper and deeper into depression, and Franklin Roosevelt was an important factor in the New Deal in starting the second strategy and it was only then that we got out of the depression …

Jamie Rubin: So, in your view, the IMF today and the leaders of Argentina today are behaving like Herbert Hoover?

Joseph Stiglitz: I think there’s too much of that kind of strain of thinking that if we only cut back expenditures more that the economy will recover. And there is very little evidence to suggest that that will work, and a lot of evidence to suggest that further cutbacks in expenditure will just feed the downward spiral of the economy.

Jamie Rubin: All right. So where do we find our Franklin Roosevelt in Argentina? The political system is very difficult. Presidents are resigning, foreign ministers are resigning, finance ministers are resigning. Is there any prospect of an FDR for this terrible tragedy?

Joseph Stiglitz:One of the strengths of Argentina is that it has enormous human capital, a very well educated labor force. There is every hope that out of these very, you know, very well educated labor force, somebody will rise. But it will only be successful if they’re put in an economic environment in which they can help the economy get out. And that will require the international community to open up their markets. Rather than just going on with the free market rhetoric, let’s actually do something, let’s actually be a good neighbor. Open up our markets to their goods. Europe open up its markets to their goods. Already one of their neighbors, Mexico, is opening up its markets, made a special arrangement with Argentina and automobiles. This kind of thing ought to be replicated and that will give hope to the people and provide a strength to a new government that will allow it to take a position of leadership that will restore confidence in their society.

Jamie Rubin:So are you of the view that the policies of the International Monetary Fund, the current administration, the previous administration, you put all that together and damage has been done to the idea of free markets and democracy in Latin America and it’s the fault of these policies rather than the fault of the governments in place?

Joseph Stiglitz:Clearly, some responsibility has to fall within the countries. Ultimately, they make the decision. They made the decision to borrow money. They made the decision to follow the advice of the IMF. But the problem is that there was a lot of bad advice, and when you’re a relatively small economy and you’re confronting the power of big international institutions, the economic power of the largest economy in the world and they say “This is the right thing, you should do this,” it’s very hard for politicians to stand up and resist that kind of pressure. And so in my mind, certainly we … and when I say we, the United States Treasury, the IMF, Western advisors, bear a high degree of culpability.

Jamie Rubin: OK. Let’s talk about some solutions. Many have suggested the problem here is that when an American company or an American individual gets deeply in debt, they can declare bankruptcy and go to Chapter 11, and that there’s no Chapter 11 for countries. Do you believe that this is a problem that can be solved?

Joseph Stiglitz: Yes, and I do believe that Chapter 11 or some bankruptcy proceeding is required. In the East Asia crisis, I strongly said that what was needed was a super Chapter 11. Rather than forcing these countries to repay the debt, much of which was corporate debt, in some cases governments wound up assuming the responsibility of corporations, so it was like nationalizing the private debts. So at the same time, they were privatizing the national liabilities. Unfortunately, at that time, there was resistance at the IMF to this kind of approach. They said, “Oh, that’s like reneging on debt contracts, credit contracts.” But bankruptcy has been part of Western capitalism, part of capitalism since its beginning. What there should be is more use of bankruptcy type mechanisms. In the 19th century, when countries couldn’t repay their debts, Germany, France sent their troops into Mexico, for instance, and forced them to repay …

Jamie Rubin: Their stuff.

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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