1. THE GLOBAL ECONOMY IN THE AFTERMATH OF THE IRAQ WAR JOSEPH STIGLITZ ISMA ANNUAL CONFERENCE MADRID 27 JUNE 2003

2. THE GLOBAL ECONOMY WAS WEAK BEFORE THE IRAQ WAR THE RUN-UP TO THE WAR WEAKENED IT FURTHER BUT THE RESOLUTION OF THE WAR DID NOT RESOLVE THE UNDERLYING WEAKNESSES THE GLOBAL ECONOMY REMAINS WEAK

3. THE RUN-UP TO THE WAR EXPOSED FURTHER WEAKNESSES IN THE GLOBAL GEO-POLITICAL SYSTEM WEAKNESSES EVIDENCED EARLIER AS ECONOMIC GLOBALIZATION HAD OUTPACED POLITICAL GLOBALIZATION

4. THE END OF THE WAR HAS NOT RESOLVED TENSIONS IN THE MIDDLE EAST AND HAS BROUGHT TO THE FORE CERTAIN LONG STANDING PROBLEMS –CREDIBILITY OF POLITICAL LEADERSHIP –PROBLEMS OF DEBT

5. I. STATE OF THE GLOBAL ECONOMY Marked change in perspective in the last five years East Asia crisis, Russian crisis, Latin American crises September 11: Concerns about terrorism, secret bank accounts Iraq War: Disruption to multilateral system, uncertainty about oil pricesMarked change in perspective in the last five years East Asia crisis, Russian crisis, Latin American crises September 11: Concerns about terrorism, secret bank accounts Iraq War: Disruption to multilateral system, uncertainty about oil prices

6. Marked change in perspective in the last five years From euphoria of New Economy to worries about global slowdown, From the Roaring 90s to the malaise of the new millennium –Bursting of dot.com bubble, broader global stock market declines –Corporate, banking, accounting scandals in U.S., elsewhere –Recession in U.S., Germany, Japan—first global recession of new era of globalization

7. I. STATE OF THE GLOBAL ECONOMY –US WENT INTO RECESSION IN MARCH 2001 –STILL A LARGE, AND GROWING, GAP BETWEEN ACTUAL PERFORMANCE AND POTENTIAL

8. PROSPECTS FOR THE U.S. ECONOMY WEAK Economic mismanagement in U.S Anemic response to corporate, accounting, banking scandals A tax cut that failed to provide adequate stimulus, Return of soaring fiscal deficits—put strong demands on global capital markets Continued growth in trade deficits

9. Economic mismanagement in U.S PRESENTS MAJOR UNCERTAINTIES –Will the world be willing to continue to finance these deficits –Potential changes in sentiments could have major effects on exchange rates Only weaknesses in Europe, elsewhere have prevented further decline in dollar –Large changes in exchange rates can be negative sum: U.S. gains on exports But weaknesses in financial markets may more than offset these gains Europe hurt doubly: stronger exchange rate, weaker American, global economy

10. I. STATE OF THE GLOBAL ECONOMY: EUROPE’S HANDS ARE TIED Stability pact limits scope for fiscal stimulus ECB has difficult task balancing different economic situations in different parts of the continent But narrow focus on inflation, problems of earlier decades, has meant that it has failed to respond to current situation, contributing to weakness in Europe

11. EUROPE’S HANDS ARE TIED Full impact of strong Euro on exports may not be felt for months Large changes in exchange rates can leave both Europe and America the loser –Weaker dollar may lead investors to pull money out, leaving a weaker U.S. stock market, U.S. economy –Stronger Euro will make exports harder, imports from countries tied to dollar (like China) easier

12. I. STATE OF THE GLOBAL ECONOMY Japan mired in structural problems, political stalemate

13. I.STATE OF THE GLOBAL ECONOMY: Emerging markets mixed picture LATIN AMERICA CHINA RUSSIA ELSEWHERE

14. Emerging markets mixed picture Major recessions, depressions in Latin America –Brazil weathered storm, but at what cost? And how stable? –Argentina on road to recovery, without the IMF

15. Emerging markets mixed picture China has had robust growth, but –Weak dollar has contributed to China’s competitive advantage –Widespread blame on China for U.S. trade deficit (as in earlier disputes with Japan) –Widespread blame on China by developing countries (Mexico, and seeming failure of NAFTA) –Will China’s position be sustainable? –But low (competitive) exchange has been important for China’s growth and employment creation—important for political stability

16. Emerging markets mixed picture Russia: slower growth as effect of earlier devaluation wears off and oil prices decline, continued problems in establishing market economy India: impressive growth, worrisome fiscal deficits Korea: impressive recovery, redirection of economy

17. Weak state of global economy Consequences High level of global uncertainty Marked slowdown in capital flows to emerging markets And even in FDI There are normal restorative forces, they move slowly, government is not doing as much as it could

18. II. THE RUN-UP TO THE WAR EXPOSED FURTHER WEAKNESSES IN THE GLOBAL GEO-POLITICAL SYSTEM

19. Economic globalization outpaced political globalization Rules, institutions governing globalization largely set by advanced industrial countries, special interests in those countries, for their own advantage –Inequitable: developing countries not only have not reaped “fair share” of benefits, in some cases worse off

20. Economic globalization outpaced political globalization Failure to address problems of global financial architecture –Still succession of crises, one after another –Developing countries still have to bear risk –Bankruptcy reform moved into deep freeze

21. Economic globalization outpaced political globalization And new worries about those that countries that have been left by the side –In Africa, middle east –Bypassed by globalization –Growing poverty, despair –In Africa—devastation of AIDS

22. Economic globalization outpaced political globalization American unilateralism –Evidenced earlier in response to global warming, strategic arms, international criminal court

23. Economic globalization outpaced political globalization Impending breakdown of Doha round of trade negotiations? –Key role of agriculture for developing countries –Intellectual property—drugs, biopiracy –New issues—competition, investment

24. Economic globalization outpaced political globalization New impediments to globalization –Iraq War did not solve problem of global terrorism –New visa requirements and security precautions –Backlash against globalization?

25. III. THE END OF THE WAR HAS NOT RESOLVED TENSIONS IN THE MIDDLE EAST AND BROUGHT TO THE FORE CERTAIN LONG STANDING PROBLEMS –CREDIBILITY OF POLITICAL LEADERSHIP –PROBLEMS OF DEBT

26. PROBLEMS POST WAR Iraq Reconstruction Challenge: Creating a viable market economy with –Large debt overhang –War destruction –Movement from socialism to a market economy

27. PROBLEMS POST WAR Movement from socialism to a market economy –Badly managed elsewhere –Major advantage over Russia: existence of entrepreneurial class –Major disadvantage: lack of human capital –Risks: American ideological approach, rapid privatization Low receipts to government Asset stripping Viewed as illegitimate

28. PROBLEMS POST WAR Debt overhang –U.S. position: Russia and France should foregive debts Earlier contracts not “legitimate,” can be abrogated America has made its “contribution”: $80 Billion spent on war But U.S. –opposes systematic procedure for bank restructuring –Elsewhere has insisted on contracts being honored

29. Debt overhang –Fundamental questions raised Should there be an international “rule of law”— or should such questions be decided on an ad hoc basis? Odiose debts and illegitimate contracts: Are there principles which should guide such judgments, or should such questions be decided on an ad hoc basis? Lack of clear answers contributes to market uncertainty

30. NEW OPTIMISM Growing recognition of the importance of, need for, international rule of law

31. NEW OPTIMISM Growing recognition of the importance of, need for, international rule of law

32. NEW OPTIMISM Growing recognition of special problems confronting Africa

33. NEW OPTIMISM In many emerging markets, new popular leadership, trying to avoid extremes of earlier generations, a balance between government and the market