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ECONOMIC SECURITY FOR LESS DEVELOPED
COUNTRIES: Implications for Bangladesh
Joseph Stiglitz
Dhaka
13 August 2003
MULTIPLE ASPECTS OF SECURITY
• SECURITY FOR MACRO ECONOMY
• SECURITY FOR FIRMS
• SECURITY FOR INDIVIDUALS – INCOME SECURITY– FOOD SECURITY– HEALTH SECURITY– PHYSICAL SECURITY– OLD AGE SECURITY
IMPORTANCE OF SECURITY
• WORLD BANK STUDY IDENTIFIED LACK OF SECURITY ONE OF WORSE ASPECTS OF POVERTY
CHANGING NATURE OF INSECURITY
• ENORMOUS GLOBAL VOLATILITY– 100 CRISES IN LAST 30 YEARS
• WIDESPREAD CIVIL STRIFE– ONE OF MAJOR SCOURGES IN AFRICA
• GLOBAL PANDEMICS– AIDS
INSECURITY EVEN PROBLEM IN DEVELOPED COUNTRIES
• JOB SECURITY
• HEALTH INSURANCE
• LACK OF CONFIDENCE IN PENSION SYSTEMS
INSECURITY
• IMPOSES HUGE COSTS– DIRECT LOSS OF WELFARE– LOSS OF WELFARE IN ATTEMPTS TO AMELIORATE
INSECURITY
• LIMITED ABILITY OF PRIVATE MARKETS TO ADDRESS MANY ASPECTS OF INSECURITY– LIMITED SCOPE FOR PRIVATE INSURANCE, LARGE
MARKET FAILURES– IMPORTANCE OF SOCIAL INSURANCE
• BUT INCREASINGLY AWARE OF LIMITATIONS OF SOCIAL INSURANCE
• IMPORTANT TO ADDRESS SOURCES OF INSECURITY DIRECTLY
EXPLAINING CRISES:
• Economic
• Political
• Other
• DISTINGUISH BETWEEN INTERNAL DISTURBANCES AND EXTERNAL
ECONOMIC SOURCES OF INSECURITY/INSTABILITY
• INTERNAL– Banking failures
• Sweden, Finland, Norway
• EXTERNAL– Exchange rate volatility– Interest rate volatility
• Latin America 1980s
– Commodity price volatility• Oil price shocks
POLITICAL SOURCES OF INSTABILITY
• INTERNAL
CHANGES IN GOVERNMENT
CIVIL STRIFE• EXTERNAL
– WARS– CHANGES IN INTERNATIONAL RULES
• END OF MULTIFIBER AGREEMENT
OTHER SOURCES OF INSECURITY/INSTABILITY
• INTERNAL– Famines– Natural disasters
• EXTERNAL– Change in technology
MULTIPLE SOURCES OF INSTABILITY
• KOREA– WEAK BANKS– CAPITAL MARKET LIBERALIZATION– CHANGE IN SENTIMENT TOWARDS
EMERGING MARKETS, ESPECIALLY IN EAST ASIA
– DOWNTURNS IN NEIGHBORING COUNTRIES
– REDUCED DEMAND FOR CHIPS
INDONESIA
• WEAK BANKS• CAPITAL MARKET LIBERALIZATION• CHANGE IN SENTIMENT TOWARDS
EMERGING MARKETS, ESPECIALLY IN EAST ASIA
• DOWNTURNS IN NEIGHBORING COUNTRIES– FACTORS SIMILAR TO THOSE IN KOREA
• EL NINO—CROP FAILURES
CONSEQUENCES EXACERBATED BY
• LACK OF TRANSPARENCY
• IMF MACRO-ECONOMIC POLICIES
• IMF POLICIES TOWARDS FINANCIAL INSTITUTIONS– CLOSING DOWN BANKS– LACK OF FORBEARANCE
DIVERSIFICATION
– PRODUCT DIVERSIFICATION– MARKET DIVERSIFICATION– KOREA:
• SHIFTING TOWARDS CHINA, AWAY FROM AMERICA• LESS DEPENDENCE ON CHIPS
– ROLE FOR GOVERNMENT• INDUSTRIAL POLICIES• NEED TO BE BETTER DESIGNED, LESS CORRUPT THAN
INDUSTRIAL POLICIES OF PAST
REDUCING EXPOSURE
• RESTRICTING SPECULATIVE CAPITAL MOVEMENTS• STRONG SUPERVISION OF BANKING SYSTEM
– ENFORCING CREDIT CONTRACTS– LIMITING SPECULATIVE REAL ESTATE SPECULATION
• LIMITING INDEBTEDNESS, ESPECIALLY FOREIGN INDEBTEDNESS, AND MANAGING COMPOSITION OF DEBT– REDUCES EXPOSURE TO INTEREST RATE VOLATILITY– REDUCES EXPOSURE TO EXCHANGE RATE VOLATILITY
LIMITING DEBT
• MEANS BALANCING EXPENDITURES WITH TAX REVENUES OVER THE BUSINESS CYCLE
• DEVELOPING RAINY DAY FUND IN GOOD YEARS
• TO BE DRAWN UPON IN BAD
MACROSTABILITY
• SHOCKS TO ECONOMY ARE INEVITABLE
• NEED TO USE COUNTERCYCLICAL MONETARY AND FISCAL POLICIES
• AND NOT TO EMPLOY PRO-CYCLICAL FINANCIAL REGULATORY POLICIES
MOST LDCS ENGAGE IN PROCYCLICAL POLICIES
• WHY: NOT LACK OF UNDERSTANDING OF ECONOMICS
• FORCED TO BY IMF• DEPENDENCE OF COUNTRIES ON IMF• LACK OF OUTSIDE FUNDS TO USE AS BASIS
OF COUNTERCYCLICAL FISCAL POLICIES• CAPITAL MARKET LIBERALIZATION LEADS
TO PROCYCLICAL PRIVATE LENDING
OBVIOUS IMPLICATIONS
• AVOID CONDITIONS THAT REQUIRE TURNING TO IMF
• MANAGE CAPITAL MARKETS TO EXTENT POSSIBLE– EVEN IMF NOW RECOGNIZES THAT FULL
CML INCREASES RISK WITHOUT INCREASING GROWTH
• CYCLICALLY ADJUSTED CAPITAL REQUIREMENTS
AMERLIORATING CONSEQUENCES
• SAFETY NETS
• BUT EVEN IN DEVELOPED COUNTRIES, SAFETY NETS FOR RURAL SECTOR, UNINCORPORATED BUSINESSES WEAK
• MAKES RESPONSIBILITY FOR GOOD MACRO MANAGEMENT EVEN GREATER
IMPORTANT NOT TO FORGET OTHER ASPECTS OF SECURITY• HEALTH SECURITY
– AIDS– SAFE WATER
• PHYSICAL SECURITY
• HUMAN RIGHTS
RESPONDING TO NATURAL DISASTERS
• BANGLADESH HAS FACED SEVERE CHALLENGE
• IMPRESSIVE IN ITS RESPONSE
• BUT NEW CHALLENGES REQUIRE NEW STRATEGIES– SAFE WATER– AIDS