“We need to create an economic framework outside the framework of special interests”

The Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System held a meeting at IPU Headquarters in March 2009 to discuss the economic crisis. On that occasion, its Chairman, Joseph Stiglitz, 2001 Nobel Prize laureate in Economics, gave The World of Parliaments his views.

Q: You said that globalization should be better controlled, and that there should be a balance between the market and State intervention. How is that possible given that many people are reluctant to have the State interfere in the economic sector, with the exception of the banks?
Prof. Joseph Stiglitz: That debate is over. Everybody recognizes now that the State is absolutely essential. States have saved economies. Once you recognize that you need the State to save jobs, the economy and banks, you also have to recognize that you need the State to regulate. You cannot provide the insurance against failure without taking action against the recurrence of failure. The banks are going to take actions which can put at risk trillions of US taxpayers' dollars, so we have to make sure that they don't do it again. That was our mistake. We allowed banks to take actions or risk our money because we thought they would act responsibly. We know now that they did not. Never can we let that happen again.

Q: Do you think that this commitment will really be implemented, in say one year, when the crisis will be more or less over?
J.S.: The crisis will not be over in one year! But there will be a debate. There are too many people who have been hurt badly to let this simply go on as if nothing happened. Most Americans want a change.

Q: What about the regulation mechanism? How do you explain the fact that nobody sounded the alarm?
J.S.: The people who were running the banks were too politically powerful. Many people sounded the alarm. But people who were making money were making too much money and too many campaign contributions. Unfortunately, they managed to make sure that they were not constrained in putting at risk trillions of dollars of American taxpayers' money.

Q: Is this the positive result of the crisis, hoping that it will not happen again?
J.S.: I think so. But remember that our political system is still an imperfect democracy and many of these people still have a lot of money. And they will use this money to try to influence politics to allow them to get even more money. It is not going to be an easy battle.

Q: Would you say that developing countries resisted better the financial crisis?
T.T.: Many of the developing countries had much better regulators, much better central banks, partly because they have had financial crises before and have seen the cost. They worked with their previous experience, but they were under tremendous pressure from American financial institutions and some of the better ones, like India, resisted this pressure. But others have suffered.

Q: Do you agree with those who advocate a reform of the IMF and the World Bank?
J.S.: They are there. We have to work with them, but I think that we have also to work to create new institutions. There has to be more competition among these institutions.

Q: In the movie “The world according to Stiglitz”, you mention the need for cross-border accountability. What exactly do you mean by this?
J.S.: We need to have cross-border accountability, because if you commit a crime in one State, under one jurisdiction, you can go across the border and escape accountability. We have recognized the basic principle: provisions for extradition, but in too many cases you cannot get extradition for environmental crimes, for example. It is a serious crime, which can be tantamount to murder because people can die of environmental crimes. There is also a lack of accountability for “economic” crimes. Countries have legal frameworks so if you do damage to somebody else, they can sue you for compensation. But internationally, if a company in country X does damage in country Y, it is very difficult to recover by law. We may need to be working towards international courts for environmental crimes, for corporate crimes or for accountability. The reason is that firms in country A believe that a court in country B will treat them unfairly. People worry about getting fair treatment in another jurisdiction, but that is not an excuse for lack of accountability. We have to create international legal systems inwhich we have confidence. We have been doing that in areas of jurisprudence, hence the International Criminal Court, but we have not yet done that in the commercial field. A parallel to this is that in the United States we have 50 states and each state has his own Commercial Code. If you commit a crime in one state, you can get away and go to another state, but we have federal courts, and there is confidence in the federal court system.

Q: Should the same logic apply to the globalized economy?
J.S.: We have so much international and commercial activity that we will naturally have to have an international commercial court.

Q: How could parliamentarians and the IPU make a difference?
J.S.: The IPU and parliamentarians are typically much closer to the people and to democratic processes. First, they could try to change the political framework to make campaign contributions less important and more transparent. The second thing is to ensure that there is greater transparency. One of the problems in the United States is the lack of transparency. What is happening is outrageous. There was a huge amount of money but we do not know where the money went. Parliamentarians, as representatives of the people, have the power to demand accountability. The third thing is to recognize that markets do not work by themselves. There is a need for governments to act - although governments often also fail - and we have to think of systems of checks and balances, of making markets work better and also making governments work better.

Q: The whole world expects President Obama to save the world economy from this crisis. What can he really do?
J.S.: The problems are too big for any single person or any single country to solve. What is very clear is that he is managing the situation much better than President Bush. The problems are very serious and the political environment is very serious. He did not get a single Republican vote from the House of Representatives, for instance, and the fact that the country is so polarized on a matter such as this emergency is amazing for an economist.

Q: What can you and the Commission you are presiding over do to help solve the crisis?
J.S.: We are trying to outline what needs to be done, to create an economic framework outside the framework of political pressures of special interests.