CAIRO: Joseph Stiglitz, a revered Nobel Prize-winning American economist and professor at Columbia University, spoke at the American University in Cairo on Jan. 13, where he outlined how developing countries and emerging markets can integrate into the international economy.
Stiglitz kicked off his speech, entitled “Creating a Learning Society: An agenda for dynamic societies in uncertain times,” by highlighting how the American economy will continue to play a pivotal role in driving the world’s economic engine — despite having suffered a nearly crippling economic crisis — thanks to the nation’s vibrant technology sector.
The technology sector, which he characterized as a “source of energy” for the US economy, is founded upon learning.
Learning & openness
That learning is the centerpiece of a robust economy, demonstrates that a country’s comparative advantage lies in endogenous factors that are increasingly determined by investment in infrastructure, technology and education, he argued.
“What really matters is what you do with those assets, which is a lesson for developing and emerging markets,” said Stiglitz.
To illustrate his argument, he pointed to the economic success that South Korea has witnessed since the end of the Korean War, noting that the country oriented its focus towards its “dynamic” comparative advantages rather than its “static” advantages.
Foreign economic advisors, he explained, had urged the war ravaged Asian country to focus on its comparative advantage as a rice producer.
However, the South Korean decision makers turned away from the Washington Consensus’ advice, instead opting to build an economy with a firm foundation in knowledge-based sectors like the automobile and microchip industries.
Thus, rather than being poor farmers that produce top quality rice, South Korea transformed itself into an unequivocal economic success story. In 2010, the country’s overall economy — based on its nominal GDP — was ranked 12th internationally, according to the International Monetary Fund.
To highlight the economic leaps and bounds South Korea managed to take, Stiglitz stated that before such economic policies had been launched, the country’s workforce had a paltry education level — four years of schooling — and a per capita income that, at the time, was lower than India’s.
The South Korean anecdote, in his view, clearly shows that it is “worth sacrificing static efficiency for dynamic gain.”
He added that those advocating Washington Consensus policies to developing countries largely hone in on static comparative advantages, which Stiglitz equated with being “short-term focused,” failing to create “learning-based societies with a comparative advantage.”
Taking the alternate path, Stiglitz said, will inexorably lead to a “higher income economy.”
To achieve such a goal, he outlined the most essential ingredients.
Emphasizing education — from the primary school level through the university level — that is available to all citizens and sexes is a major cornerstone, he said.
On this particular point, he noted that even in car manufacturing plants in China, a university level education is a prerequisite for its employees, owing largely to the complexity of the machines used as well as the rapid rate at which the demands of the job can change.
Such an image runs contrary to the perceptions some hold that assume all Chinese factory workers are woefully uneducated.
Stiglitz also noted that “openness to ideas” is critical towards fostering a learning-based society, as well as competition, sound industrial policies and creating innovation systems.
Regarding competition, he stated that while economists are known to constantly disagree, they are unanimous in propounding the importance of incentives towards maintaining healthy competition in an economy — an issue emerging markets consistently struggle to promote.
To support his contention, he underscored how Mexico — a North America Free Trade Agreement signatory that is bestowed with unrestrained access to the American consumer market — has not been able to capitalize on its position to the same degree as China, which has no free trade agreement (FTA) with the US.
As a result of an economy that is “largely dominated by monopolies,” he stated, Mexico has suffered while China has come to dominate the American consumer landscape with its products.
Thus, Stiglitz concluded, trade barriers are not as important as other issues, adding that there “is too much [of a] focus on FTAs” in general.
Stiglitz also expanded his justification for advocating strong industrial policies, underscoring the importance of properly managing currency exchange rates as well as access to credit.
On the first point, he noted the wide and rapid fluctuations in exchange rates between different currencies, against which decision makers are no longer able to modify policies to keep pace.
The consequences include the inability of an export-based country to compete with local products in a foreign country if its currency is too high, leaving its exports at a comparative disadvantage.
As such, he concluded that monetary policy makers would be wise to focus on other issues besides simply managing the exchange rate of their currency.
In regards to credit access, Stiglitz stressed the importance of banks opening their funds to small- and medium-sized enterprises (SMEs). To this end, the government should step in to oblige banks to be more supportive of SMEs.
He added that “creating an innovation system” for developing emerging markets refers to moving to the frontier, while for advanced countries it means moving the frontier out even further.
Stiglitz capped off his speech by stating that the economic crisis — despite being patently painful for many — has provided economists and policy makers with an opportunity to re-think economics as both a science and a profession.