Revisiting themes from his ABCDE address last year, Joseph E. Stiglitz, Chief Economist of the World Bank, urged development researchers and practitioners to move beyond the "neoliberal model" and remember that reforms, such as privatization, are a means, not an end.
He also stressed the links between financial markets and the real economy, noting the new classical and real business cycle models are rooted in, among other things, assumptions of perfect competition and market clearing, which are particularly inappropriate for developing countries.
Stiglitz focused on the profoundly important role of knowledge and information in development. "The grand ideological battles are over," he declared. Markets are now almost universally seen as the center of a vital economy, with government complementing them through competition policy, regulation, funding for education, and research and development. The debate continues, however, over such details as the appropriate response to economic crises, the components of financial reform, and the proper scope and sequencing of privatization. In these debates, Stiglitz hoped economic science would not fall victim to ideology.
Ideology holds, he said, that the benefits of financial market liberalization are as obvious and universal as the benefits of goods market liberalization. He urged more caution, noting that econometric analyses have indicated that mild financial restraints have positive or no adverse effects, while financial liberalization has been associated with a higher probability of crises. Ideology would also posit, he said, that privatization always works. But efficiency requires private property and competition. Turning a state monopoly into a private monopoly is unlikely to create a more dynamic market economy, he argued. It is also critical that policy advice be improved. This could be done, Stiglitz believed, by combining local and cross-country experience to improve policymaking capacity; recognizing advisor incentive problems; clearly stating the consequences of options; being explicit about the limitations of information, the role of values, and the impact of different interest groups; and eschewing secrecy.
In his keynote address, James Tobin of Yale University said a fixed exchange rate is intrinsically fragile, and it was hard to understand why developing countries still clung to fixed or pegged exchange rates. He scoffed at recurring nostalgia for a fixed rate system, countering that floating rates should be credited with accomplishing economically desirable revaluations without currency crises. A single global currency might offer a viable alternative to the floating rate-but not soon and not without its own problems, according to Tobin.
Globalization contributes significantly to the economic progress of developing and emerging economies, but it also erodes monetary sovereignty, he said. A currency board sacrifices real macroeconomic performance in production, income, growth, trade, saving, and investment to maintain the strength of the currency and indirectly prevent inflation. If countries are...