This crisis raises fundamental questions about globalization, which was supposed to help diffuse risk. Instead, it has enabled thr US’ failures to spread around the world, like a contagious disease. Still, the worry at Davos was that there would be a retreat from even our flawed globalization, and that poor countries would suffer the most.
But the playing field has always been unlevel. How could developing countries compete with the US’ subsidies and guarantees? So how could any developing country defend to its citizens the idea of opening itself even more to the US’ highly subsidized banks? At least for the moment, financial market liberalization seems to be dead.
The inequities are obvious. Even if poor countries were willing to guarantee their deposits, the guarantee would mean less than that from the US. This partly explains the curious flow of funds from developing countries to the US — from whence the world’s problems originated. Moreover, developing countries lack the resources to engage in the massive stimulus policies of the advanced countries.
Making matters worse, the IMF still forces most countries that turn to it for help to raise interest rates and lower spending, worsening the downturns. And, to add insult to injury, banks in advanced countries, especially those receiving aid from their governments, seem to be pulling back from lending in developing countries, including through branches and subsidiaries. So the prospects for most developing countries — including those that had done everything “right” — are bleak.
As if all this were not enough, as the Davos meeting opened, the US House of Representatives passed a bill requiring US steel to be used in stimulus spending, despite the G20’s call to avoid protectionism in response to the crisis.
To this litany of concerns we can add the fear that borrowers, wary of massive US deficits, and holders of US dollar reserves, worried that the US may be tempted to inflate away its debt, might respond by draining the supply of global savings. At Davos, those who trusted the US not to inflate away its debt intentionally worried that it might happen unintentionally. There was little confidence in the none-too-deft hand of the US Federal Reserve — its reputation marred by massive monetary-policy failures in recent years — to manage the massive buildup of debt and liquidity.
Obama seems to be offering a needed boost to US leadership after the dark days of Bush; but the mood in Davos suggests that optimism and confidence may be short-lived. The US led the world in globalization. With US-style capitalism and the US’ financial markets in disrepute, will the US now lead the world into a new era of protectionism, as it did once before, during the Great Depression?
Joseph Stiglitz is professor of economics at Columbia University and recipient of the 2001 Nobel Prize in Economics. COPYRIGHT: PROJECT SYNDICATE
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