Stiglitz: FTAs advantageous to US

The Edge Daily (Malaysia) | 30-08-2007

Stiglitz: FTAs advantageous to US

by Maryann Tan & Yong Yen Nie

KUALA LUMPUR: Nobel laureate and former World Bank chief economist Joseph Stiglitz believes that no country should enter into free trade agreements with the US, as none of the developing countries has benefited greatly from them.

Stiglitz, who is currently in town as a guest speaker for Khazanah Nasional Bhd’s Global Lectures, called free trade agreements “advantaged agreements in essence” and “a disaster for developing countries and the global trading system”.

“Countries do not need free trade agreements. People will come and invest in your country if you provide good infrastructure and human resources.

“The good news is, the tariffs now are so low, that they no longer serve as an impediment to trade. They are not going to make any difference to the friendly business atmosphere, which Malaysia has,” he said in an interview with The Edge Financial Daily.

The sharp critic of US trade policies also applauded Malaysia for making the right move by rejecting aid from the International Monetary Fund (IMF) during the 1997 Asian financial crisis, but added that the country should improve the quality of its universities towards riding the next phase of development.

Citing IMF’s incompetence in handling the Asian financial crisis a decade ago, Stiglitz said Indonesia had to suffer the consequences which resulted in the slow recovery of the country and affected its ability to take advantage of the opportunities to rebound, through the Sept 11 terrorist attacks as well as China’s and India’s emergence as the new economic giants.

Below are the excerpts of the interview:

Q: The world by now is familiar with your criticisms of IMF-prescribed remedies for the Asian Financial Crisis. Countries like Thailand and Indonesia took the IMF route, unlike Malaysia. Although restructuring was painful, the economies of these countries have been doing well ever since. Do you see any irreversible damage in these economies that adopted IMF policies?

A: Firstly, they were very slow to recover. They were just getting back to where they were a decade ago. So, in a way, you can see that they have lost almost a decade, say, eight years. (However), Malaysia caught up very quickly to where it was.

The major thing is, its (Indonesia’s) economy today is much poorer than it has been had they not gone into the crisis. That meant, of course, they were not as able to take advantage of some of the new changing global landscape that was going on.

There were two very big changes in the global economy in the last 10 years. Firstly, the emergence of China and India (in which they) developed new trading patterns to reflect the changing global economic landscape. Countries like Korea also recovered very quickly, due to change in their trade relations, which has much more to do with China than the United States.

The second thing was Sept 11. It had a very big effect on the global economy in several ways. Much of the money in the Middle East decided they didn’t feel comfortable staying in the United States (and) Singapore was able to take advantage of that money coming in.

People in the Middle East ... Malaysia took advantage because they (Middle-Eastern investors) wanted a place where they can do tourism, business, finance. There are many opportunities that the changing economic structure that Sept 11 brought about that Indonesia was slower in taking advantage of.

Q: Largely because of?

A: They were still trying to recover from the crisis. So, the bottom line was, their growth was set back a great deal, particularly when it came to poverty reduction. Indonesia’s (number of) poor people went up, and they were always behind Malaysia.

Today, for instance, if you measure the number of the poor in the country using the two-dollar-per-day standard that the World Bank uses, 49% of the people are still in poverty. There are other standards, for example, the one-dollar-a-day standard. They made progress in that standard. They were down by 16%. But, in the broader standard, there is still a long way to go.

Q: This may be the case for Indonesia, but what about Korea? It had to resort to IMF for help, but the outcome for the country today is different.

A: Well, what IMF did in each of the countries was a little different (from each other). For Indonesia, it was probably the absolute worst. For instance, one of the things they did for Korea in March 2008 was organising the rollover of loans. (But), they never did that for Indonesia. So, in some sense, they helped other countries more than they helped Indonesia, but they were also much worse when it came to making policies for Indonesia.

One of the things that Malaysia did very well was ensuring that the banking system did not collapse. They restructured the banks, but made sure that there was a continuous flow of credit.

What the IMF did for Indonesian banking system was worse than you could ever imagine. Because what they did was shut down 16 banks, and then said: “We are going to shut down 16 more banks, but we are not going to tell you which ones.”

So, they induced a run on the banks. So if someone were trying to kill the banking system, you could not have done a better job than what IMF was trying to do. If you tried to kill an economy, you could not have done worse than what the IMF did.

Q: And the [best] example was Indonesia’s case?

A: Yes. During December 1997, I was in KL for a meeting with all finance ministers and central bank governors from Southeast Asia, Korea and other countries in the region, and G10.

And I said, reflecting the view of the World Bank, that if they (IMF) keep up the tight monitor of fiscal policies, and their misguided economic policies for Indonesia, within six months, we forecast there will be political turmoil in the country.

We were off, but only by two weeks. In May 1998, the riots (in Indonesia) broke out, but no one could have imagined that in the midst of recession (and) depression, where unemployment was soaring, the IMF recommended that they eliminate their subsidies for cooking oil.

And they said: “Don’t worry about it, people are so happy.” Because they smiled, but people didn’t understand that smiling doesn’t mean that you are happy.

Q: Why do you think that there is this discriminatory treatment between Indonesia and South Korea, for instance?

A: The major reason was incompetence. I don’t think that it was any conspiracy involved. It was sheer incompetence. Secondly, I think that the economic problems were different in each of the situations, and their abilities to deal with them (the problems) differed.

Thirdly, the political and economic strength of the countries differed. Remember the problems created because of Suharto in Indonesia? He gave the IMF greater opportunity to push their own policies, whereas in Malaysia, which is the other extreme, they had no luck at all. Nobody paid any attention to them. There was greater resistance because people here understood much more deeply the problems caused.

When I talked to the government officials of different countries, it was very clear that the people here, (though) not everybody, but some of the people here really understood what needed to be done. That’s why the World Bank, (during the time I was chief economist), was very supportive of those capital controls. I supported them because I thought it was the right policy.

In other countries where people did not have the depth of understanding (of what ought to be the right policies), it was easier for IMF to push (for) their bad policies.

Q: IMF also set some rules that required countries to comply with certain regulations imposed by them. There was this debate about these countries losing their sovereignty, especially over their assets and resources. Now that most of the economies have paid back their debts, does IMF’s dominance over these assets still linger?

A: It lingers on in a couple of ways. In South Korea, they were told by the IMF: “Sell your assets to foreigners (because) they know how to manage them better. But the foreigners obviously didn’t know anything about the country.

All they did was hold on to the asset for a couple of years, until the economy recovered, and then they sold it back. They bought it at a very low price, and then they sold it back at a very high price. The result of it was that it actually gave the American financiers literally billions of dollars.

So, it was a foreign aid programme for rich Americans and people in other Western countries, but it didn’t help the country. They actually became worse than before, because the IMF never advised them about taxes.

For instance, in South Korea, the American firm bought some of their assets, and one of them was actually incorporated in Malaysia, I think. When they made a profit of a billion dollars, no money was paid to the Korean government. So, it was a tax-free profit.

They (IMF) really gave bad advice. This has become a very political issue in Korea, because they said: “You didn’t help us restructure, you didn’t give us advice when you were supposed to be professionals. You knew about tax evasion, and you were supposed to be experts. Did you make a mistake, or were you working for the Western companies?”

Q: But it’s all done now, isn’t it?

A: There’s nothing they can do about it, but there is a lingering resentment among many people in the country. There was theft in a way, of billions of dollars worth of assets, sponsored by the IMF. In terms of national sovereignty, the issue is now resolved and people are calmer now, but the issue of advising people to transfer their money to foreign companies was the source of resentment.

Q: Coming back to Malaysia, it is a country whereby development has largely been guided by the hand of government. Despite the many success stories behind it, we seem to lack creativity, entrepreneurial spirit and intellectual property. What then, should a middle-income country like ours, do to make the next development leap?

A: Actually, we may have underestimated the amount of entrepreneurial spirit in Malaysia. But, there are several things that one needs to do (to address mediocrity). Firstly, would-be entrepreneurs should be given easy access to small and medium-sized enterprises financing, and in a way, some of the new technologies that Malaysia is very strong for, like IT, should be made easier for small enterprises to start.

In some ways, new technologies facilitate the creation of new enterprises and Malaysia has been very good at developing the infrastructure and education that make this possible.

The second thing, which is important for the next phase of development, is improving the quality of universities. What draws some of the bright people abroad, is not so much because of the money, but the opportunities to do research and to teach.
It’s the intellectual climate, and you need strong universities to do that.

Countries that are going to be in the next phase of development have seen this as a major point of discussion. For instance, China has their 11th five-year plan. They talk about an independent and innovative system. They want to have 10 global, first-grade universities. Obviously, Malaysia is smaller and not on the same scale, but many of the top universities in the United States are in small parts of the country. Singapore is trying to strengthen their universities as well.

Q: An effective way to eradicate poverty is by the government redistributing income. However, is this sustainable in the long run? Once the government has achieved its target, how does it keep the people out of poverty, without creating a culture of perpetual dependence?

A: The most important long-run strategy, is try to improve the before-tax profit distribution income. It can reduce poverty by reducing the number of people with low wages, or you can subsidise the income of people with low wages. So, most importantly, you reduce the number of people with low wages. How do you do that? You improve education and create job opportunities for people at the bottom.

Next, you try to study where the source of poverty is. For instance, in the United States, what we discovered about the people living in poverty is that, they also have health problems. But, we have a very bad health system.

If you have a health problem and your income is low, you lose your job, you can’t afford a doctor, you health gets worse, it’s just a vicious cycle. So, if you asked me about how to reduce poverty in America, one of the things that I would say is to improve the health system. That’s one of the main defects in our system.

Another aspect about poor people is that, they often have an episode where something happens. If you don’t have a good safety net, they get into a downward, vicious spiral. They cannot afford a car, so they cannot go to work. The number of jobs available to them is very limited.

They often have a very weak support system, so if their children get sick, they miss a day of work. You need to provide a good support system for their children as well. You need to try to analyse the sources of poverty and intervene structurally. Most of the people do not want dependency, but they get caught in this vicious, downward spiral.

Q: What about free trade agreements (FTAs)? We are concerned about being less attractive to foreign direct investment, and now we seem to be moving along the path of signing bilateral agreements with other countries, especially the United States. What are your views of bilateral agreements between developed countries and developing countries? Are we better off without them?

A: Overall, bilateral agreements have been a disaster, for the developing countries and for the global trading system. The global trading system is based on principle of non-discrimination, which is called the most favourite nation principle. These FTAs are creating a world in which there are two groups - the first consist of “my friends who can get in free” and the other, consist of countries that have to pay tariffs. So, it is a disaster.

Secondly, bargaining between the United States and developing countries is not bargaining. Especially under the Bush (administration), it has been a take-it-or-leave-it situation. The provisions, the way I see them, have not benefited most of the countries in significant ways. In fact, these countries lost a great deal, especially access to intellectual property.

They have more difficulty accessing to knowledge and particularly, generic medicine. So, there are thousands of people dying in developing countries because of the trade agreements with the United States. They don’t want to talk about it that way, but that is what is happening.

Q: Should we walk away from these agreements?

A: Yes. The good news is, the tariffs now are so low, that they no longer serve as an impediment to trade. If you have good infrastructure and educated people, they will come to Malaysia (to invest). The tariff of 3%-5% is not going to make any difference to the friendly business atmosphere, which Malaysia has.

Q: So, that means FTAs are not about trading goods?

A: It’s not about trading goods; it’s about losing sovereignty. And it’s about helping American drug companies. It’s about America pushing for a particular agenda. It has not benefited any country. In fact, the free trade agreement with Mexico was the strongest, but the gap between Mexico and the United States increased in the first decade.

They are not free trade agreements. They are not about free trade, but they are advantaged trade agreements. And they managed to advantage the United States at the cost of the developing countries.

source: The Edge